10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_______________

FORM 10-K
_______________

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended June 30, 2008
	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.(Exact name of registrant as specified in its charter)

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
(Address and zip code of principal executive offices)

(615) 665-6000
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:   None
Securities Registered Pursuant to Section 12(g) of the Act:   None

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.oYes ýNo

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ýYes oNo

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ýYes oNo

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ý

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)	Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes ýNo

     There were 749,550 shares of registrant’s common stock outstanding as of September 15, 2008 (all of which are privately owned and not traded on a public market).

     Documents incorporated by reference:  None

VANGUARD HEALTH SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

PART I		Page
Item 1.	Business.....................................................................................................................................................	1
Item 1A.	Risk Factors...............................................................................................................................................	30
Item 1B.	Unresolved Staff Comments....................................................................................................................	47
Item 2.	Properties...................................................................................................................................................	47
Item 3.	Legal Proceedings.....................................................................................................................................	48
Item 4.	Submission of Matters to a Vote of Security Holders.........................................................................	49
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities...................................................................................................	50
Item 6.	Selected Financial Data............................................................................................................................	50
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.....	53
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk..........................................................	76
Item 8.	Financial Statements and Supplementary Data....................................................................................	78
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....	123
Item 9A(T).	Controls and Procedures.........................................................................................................................	123
Item 9B.	Other Information......................................................................................................................................	124
PART III
Item 10.	Directors, Executive Officers and Corporate Governance..................................................................	125
Item 11.	Executive Compensation..........................................................................................................................	129
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...................................................................................................................	146
Item 13.	Certain Relationships and Related Transactions, and Director Independence...............................	148
Item 14.	Principal Accounting Fees and Services...............................................................................................	151
PART IV
Item 15.	Exhibits and Financial Statement Schedules.........................................................................................	152
SIGNATURES	.....................................................................................................................................................................	153

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VANGUARD HEALTH SYSTEMS, INC.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

                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 the Company’s 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.

                These factors, risks and uncertainties include, among other things, statements relating to:

•	Our high degree of leverage
•	Our ability to incur substantially more debt
•	Operating and financial restrictions in our debt agreements
•	Our ability to successfully implement our business strategies
•	Our ability to successfully integrate our recent and any future acquisitions
•	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
•	Potential federal or state reform of healthcare
•	Future governmental investigations
•	Potential management information systems failures and the significant costs of systems integrations
•	The availability of capital to fund our corporate growth strategy
•	Potential lawsuits or other claims asserted against us
•	Our ability to maintain or increase patient membership and control costs of our managed healthcare plans
•	Changes in general economic conditions including risks associated with investments we may hold from time to time
•	Our exposure to the increased amounts of and collection risks associated with uninsured accounts and the co-pay and deductible portions of insured accounts
•	Cost of professional and general liability insurance 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
•	Our failure to comply, or allegations of our failure to comply, with applicable laws and regulations
•	The geographic concentration of our operations
•	Technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, healthcare services
•	Potential substantial liabilities arising from unfavorable retrospective reviews by governmental or other payers of the medical necessity of medical procedures performed at our hospitals
•	Lost future revenues from payer contract terminations resulting from their unfavorable retrospective
	reviews of the medical necessity of medical procedures performed at our hospitals

                See “Item 1A – Risk Factors” for further discussion.  We assume no obligation to update any forward-looking statements.

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PART I

Item 1.    Business.

Company Overview

                We own and operate acute care hospitals and complementary outpatient facilities principally located in urban and suburban markets. We currently operate 15 acute care hospitals which, as of June 30, 2008, had a total of 4,181 beds in the following four locations:

                •  San Antonio, Texas

                •  metropolitan Phoenix, Arizona

                •  metropolitan Chicago, Illinois

                •  Massachusetts

                Historically, we have concentrated our operations in markets with high population growth and median income in excess of the national average. Our objective is to provide high-quality, cost effective healthcare services through an integrated delivery platform serving the needs of the communities in which we operate. During the year ended June 30, 2008, we generated revenues from continuing operations of $2,790.7 million. During this period 83.9% of our total revenues were derived from acute care hospitals and complementary outpatient facilities.

                Our general acute care hospitals offer a variety of medical and surgical services including emergency services, general surgery, internal medicine, cardiology, obstetrics, orthopedics and neurology. In addition, certain of our facilities provide on-campus and off-campus services including outpatient surgery, physical therapy, radiation therapy, diagnostic imaging and laboratory services. We also own three strategically important managed care health plans: a Medicaid managed health plan, Phoenix Health Plan, that served approximately 103,400 members as of June 30, 2008 in Arizona; Abrazo Advantage Health Plan, a managed Medicare and dual-eligible health plan that served approximately 3,200 members as of June 30, 2008 in Arizona; and MacNeal Health Providers a preferred provider network that served approximately 43,000 member lives in metropolitan Chicago as of June 30, 2008 under capitated contracts covering only outpatient and physician services.

                We are a Delaware corporation formed in July 1997.  Our principal executive offices are located at 20 Burton Hills Boulevard, Suite 100, Nashville, Tennessee, 37215 and our telephone number at that address is (615) 665-6000.  Our corporate website address is www.vanguardhealth.com.  Information contained on our website does not constitute part of this Annual Report on Form 10-K.  The terms “we”, “our”, “the Company”, “us”, “registrant” and “Vanguard” as used in this report refer to Vanguard Health Systems, Inc. and its subsidiaries as a consolidated entity, except where it is clear from the context that such terms mean only Vanguard Health Systems, Inc.  “Subsidiaries” means direct and indirect corporate subsidiaries of Vanguard Health Systems, Inc. and partnerships, joint ventures and limited liability companies in which such subsidiaries are partners or members.

The Merger

                On July 23, 2004, Vanguard executed an agreement and plan of merger (the “Merger Agreement”) with VHS Holdings LLC (“Holdings”) and Health Systems Acquisition Corp., a newly formed Delaware corporation (“Acquisition Corp.”), pursuant to which on September 23, 2004 Acquisition Corp. merged with and into Vanguard, with Vanguard being the surviving corporation (the “Merger”). In the Merger, holders of the outstanding Vanguard capital stock, options to acquire Vanguard common stock and other securities convertible into Vanguard common stock received aggregate consideration of approximately $1,248.6 million.

                The Blackstone Group, together with its affiliates (collectively, “Blackstone”), funded the Merger in part by subscribing for and purchasing approximately $494.9 million aggregate amount of (1) Class A membership units in Holdings and (2) common stock of Acquisition Corp. (merged with and into Vanguard), in an amount equal to $125.0 million of such common stock. In addition, Morgan Stanley Capital Partners, together with its affiliates

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(collectively, “MSCP”), subscribed for and purchased Class A membership units in Holdings by contributing to Holdings a number of shares of Vanguard common stock equal to (1) $130.0 million divided by (2) the per share consideration payable for each share of Vanguard common stock in connection with the Merger.  Certain senior members of management and certain other stockholders of Vanguard (the “Rollover Management Investors”) subscribed for and purchased Class A membership units in Holdings, having an aggregate purchase price of approximately $119.1 million, by (a) paying cash using the proceeds of consideration received in connection with the Merger and/or (b) contributing shares of Vanguard common stock in the same manner as MSCP. Baptist Health Services (“Baptist”), the former owner of our division, Baptist Health System of San Antonio, also purchased $5.0 million of Class A membership units in Holdings. Immediately after completion of the Merger in September 2004, Blackstone, MSCP (together with Baptist) and the Rollover Management Investors held approximately 66.1%, 18.0% and 15.9%, respectively, of the common equity of Vanguard (most of which is indirectly held through the ownership of the Class A membership units in Holdings). Certain members of senior management also purchased $5.7 million of the equity incentive units in Holdings.

Our Competitive Strengths

       Concentrated Local Market Positions in Attractive Markets

                We believe that our markets are attractive because of their favorable demographics, competitive landscape, payer mix and opportunities for expansion. Ten of our 15 hospitals are located in markets with population growth rates in excess of the national average and all of our acute care hospitals are located in markets in which the median household income is above the national average. For the fiscal year ended June 30, 2008, we derived approximately 65% of our total revenues from the high-growth markets of San Antonio and metropolitan Phoenix, in which we own five hospitals each. Our facilities in these markets primarily serve Bexar County, Texas, which encompasses most of the metropolitan San Antonio area and Maricopa County, Arizona, which encompasses most of the metropolitan Phoenix area. Our strong market positions provide us with opportunities to offer integrated services to patients, receive more favorable reimbursement terms from a broader range of third party payers and realize regional operating efficiencies. The U.S. Census Bureau projects that the number of individuals aged 65 and older will increase by an average of 3.0% each year during the years 2010 to 2020 so that those individuals aged 65 and older would represent approximately 18.6% of the total U.S. population by 2020. Our presence in high growth markets combined with the general aging of the United States population and expected longer life expectancies should result in higher demand for healthcare services and provide growth opportunities for us well into the future.

       Strong Management Team with Significant Equity Investment

                Our senior management has an average of more than 20 years of experience in the healthcare industry at various organizations, including OrNda Healthcorp, HCA Inc. and HealthTrust, Inc. Many of our senior managers have been with Vanguard since its founding in 1997, and 12 of our 18 members of senior management have worked together managing healthcare companies for up to 20 years, either continuously or from time to time. In connection with consummation of the Merger, the Rollover Management Investors purchased Class A membership units in Holdings having an aggregate purchase price of approximately $119.1 million which then represented approximately 15.9% of our equity interests.

       Proven Ability to Complete and Integrate Acquisitions

                Including our first acquisition in 1998, we have selectively acquired 18 hospitals, 12 of which were formerly not-for-profit hospitals. We have subsequently sold 3 of these hospitals and ceased acute care operations in another. We believe our success in completing acquisitions is due in large part to our disciplined approach to making acquisitions. Prior to completing an acquisition, we carefully review the operations of the target facility and develop a strategic plan to improve performance. We have routinely rejected acquisition candidates that did not meet our financial and operational criteria.

                We believe our historical performance demonstrates our ability to identify underperforming facilities and improve the operations of acquired facilities. When we acquire a hospital, we generally implement a number of measures to lower costs, and we often make significant investments in the facility to expand existing services and introduce new services, strengthen the medical staff and improve our overall market position. We expect to continue

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to grow revenues and profitability in the markets in which we operate by improving quality of care, increasing the depth and breadth of services provided and through the implementation of additional operational enhancements.

Our Business Strategy

                The key elements of our business strategy include the following:

       Continue our Commitment to Quality of Care

                We have implemented and continue to implement various programs to improve the quality of care we provide. Our quality of care initiatives focus on engaging all of the stakeholders in the healthcare delivery process – the physicians, nurses, payers and most importantly the patients themselves. Establishing a commitment to quality of care that starts at the top and spreads down through the entire hospital organization is the first step in achieving a culture of quality. This culture fosters successful outcomes through continuous communication with physicians, discussing treatment plans with patients and reporting quality measurements with payers.

                We have invested significant resources to develop clinical information systems to allow us to standardize compliance reporting of multiple quality indicators across our facilities, and we currently conduct a monthly review of 30 quality indicators set forth by CMS. We have developed training programs for our staff and share information among our hospital management teams to implement best practices and assist in complying with regulatory requirements. Corporate support is provided to each hospital to assist with accreditation reviews.

                All hospitals conduct patient, physician and staff satisfaction surveys to help identify methods of improving the quality of care. We have appointed licensed physicians in each of our markets to the position of chief medical officer charged with driving best practices and clinical quality to improve the level of satisfaction among physicians and patients and promote cost-efficient provision of care. We have established rapid response teams and hourly nursing rounds in all of our hospitals to improve patient care. By the end of our fiscal year 2008, we had established Physician Advisory Councils at most of our hospitals to align the quality goals of our hospitals with the physicians who practice at our hospitals.

                We believe quality of care has become an increasingly important factor in governmental and managed care reimbursement. We continuously review patient care evaluations and maintain other quality assurance programs to support and monitor quality of care standards and to meet and exceed Medicare and Medicaid accreditation and regulatory requirements. 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 from 30 during federal fiscal year 2008 and from 21 during federal fiscal year 2007. These measures include risk-adjusted outcomes measures such as 30-day mortality measures for patients who suffered a heart attack, heart failure or pneumonia; additional measures related to patients who undergo surgical procedures such as hospital-acquired infections data; and several patient satisfaction indicators. Many large managed care organizations have developed quality measurement criteria that are similar to or even more stringent than these Medicare requirements.  We have invested and will continue to invest significant capital to upgrade our clinical information systems to enable us to report these quality measures.

                We believe that pay for performance reimbursement will continue to evolve, and that the quality measures themselves will determine reimbursement as evidenced by CMS’ new reforms effective October 1, 2008 that would take the first steps toward preventing Medicare from making additional payments to hospitals for treating patients that acquire one of eleven identified hospital-acquired conditions during a hospital stay. Our ability to meet our quality goals requires not only information systems to monitor compliance with quality indicators, but more importantly requires clinical programs and physician integration to improve quality.

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       Expand Services to Increase Revenues and Profitability

                We will continue to invest in our facilities to expand the range and improve the quality of services provided based on our understanding of the needs of the communities we serve. Our local management teams work closely with patients, payers, physicians and other medical personnel to identify and prioritize the healthcare needs of individual communities. We intend to increase our revenues and profitability by expanding the range of services we offer at certain of our hospitals. We plan to:

                •  expand emergency room and operating room capacity;
                •  improve the convenience, quality and breadth of our outpatient services;
                •  upgrade and expand select specialty services, including cardiology, oncology, neurosurgery, orthopedics,
                   and women’s services;
                •  update our medical equipment technology, including diagnostic and imaging equipment and robotics; and
                •  continue evaluating the construction of new facilities in underserved areas of the community.

                We believe that our disciplined expansion strategy will grow volumes, increase acuity mix, improve managed care pricing and enhance operating margins at our existing facilities, and at the same time reduce patient out-migration and satisfy unmet demand within our existing markets.

       Improve Operating Margins and Efficiency

                We seek to position ourselves as a cost effective provider of healthcare services in each of our markets. We intend to generate operational efficiencies and improve operating margins by:

                •  implementing more efficient care management, supply utilization and inventory management
                •  improving our billing and collection processes;
                •  capitalizing on purchasing efficiencies;
                •  targeting our capital expenditures on high demand service lines that will achieve higher returns; and
                •  implementing programs to reduce nurse turnover to minimize utilization of contract labor.

       Recruit New Physicians and Maintain Strong Relationships with Existing Physicians

                We recruit both primary care and specialty physicians who can provide services that we believe are currently underserved and in demand in the communities we serve. A core group of primary care physicians serves as the initial contact point for members of those communities. Having a quality group of specialty physicians available to provide such services as general surgery, cardiovascular services, orthopedics and obstetrics/gynecology, among others, enables members of the community to obtain necessary healthcare services locally without traveling to other communities. We increased the number of employed physicians at our hospitals by more than 50 during fiscal 2008, primarily through our physician recruiting initiatives. During fiscal 2009, we plan to further increase the number of primary care and specialty physicians who practice in our communities by more than 140 physicians through both employment and non-employment initiatives. We added significant corporate resources during fiscal 2008 in order to implement our physician recruiting strategies and to manage the practices of our employed physicians. We believe our hospitals provide an attractive setting for physicians to practice based on the following strategies and initiatives we have in place:

                •  continually seeking to improve quality of care and engaging physicians in these programs;
                •  providing physicians with access to efficiently designed facilities and modern technologies;
                •  providing a broad array of services within the integrated health network;
                •  offering quality training programs;
                •  obtaining physician support for the long-term vision of our hospitals;
                •  providing remote access to clinical information; and
                •  arranging for convenient medical office space adjacent to our facilities.

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       Continue to Develop Favorable Managed Care Relationships

                We plan to increase the number of patients at our facilities and improve our profitability by negotiating more favorable terms with managed care plans. We believe that we are attractive to managed care plans because of the geographic and demographic coverage of our facilities in their respective markets, the quality and breadth of our services and the expertise of our physicians. Further, we believe that as we increase our presence and improve our competitive position in our markets, particularly as we develop our networks of hospitals, we will be even better positioned to negotiate more favorable managed care contracts.

       Grow Through Selective Acquisitions

                We will continue to pursue acquisitions and enter into partnerships or affiliations with other healthcare service providers that either expand our network and presence in our existing markets or allow us to enter new urban and suburban markets. We intend to selectively pursue acquisitions of networks of hospitals and other complementary facilities or single-well positioned facilities where we believe we can improve operating performance and profitability and increase market share. We maintain a disciplined approach whereby we ensure that potential acquisition targets fit within our corporate mission and long-term strategic goals while also providing benefit in the short-term. We believe that we will continue to have substantial acquisition opportunities as other healthcare providers choose to divest facilities and as independent hospitals, particularly not-for-profit hospitals, seek to capitalize on the benefits of becoming part of a larger hospital company.

The Markets We Serve

       San Antonio, Texas

                In the San Antonio market, as of June 30, 2008, we owned and operated 5 hospitals with a total of 1,741 licensed beds and related outpatient service locations complementary to the hospitals. We acquired these hospitals in January 2003 from the non-profit Baptist Health Services (formerly known as Baptist Health System) and continue to operate the hospitals as the Baptist Health System. The acquisition followed our strategy of acquiring a significant market share in a growing market, San Antonio, Texas. Our facilities primarily serve the residents of Bexar County which encompasses most of the metropolitan San Antonio area. According to estimates by the U.S. Census Bureau, the population in Bexar County grew by 11.7% from 2000 to 2006 and is expected to grow by another 13.9% by 2020.  These growth rates are well above the national average.

                During the years ended June 30, 2007 and 2008, we generated approximately 31.2% and 32.1% of our total revenues, respectively, in this market. In our acquisition agreement for the Baptist Health System we committed to fund not less than $200.0 million in capital expenditures in respect of the acquired businesses in the San Antonio metropolitan area during the first six years of our ownership, with $75.0 million of such expenditures being required in the first two years. By the end of our fiscal year ended June 30, 2005, we had funded or committed to fund all $200.0 million of this capital commitment.

       Metropolitan Phoenix, Arizona

                In the Phoenix market, as of June 30, 2008, we owned and operated 5 hospitals with a total of 996 licensed beds and related outpatient service locations complementary to the hospitals, a prepaid Medicaid managed health plan, Phoenix Health Plan (“PHP”), and a managed Medicare and dual-eligible health plan, Abrazo Advantage Health Plan (“AAHP”). Phoenix is the fifth largest city in the U.S. and has been one of the fastest growing major metropolitan areas in recent years. Our facilities primarily serve the residents of Maricopa County, which encompasses most of the metropolitan Phoenix area. According to estimates by the U.S. Census Bureau, the population in Maricopa County grew by 22.7% from 2000 to 2006 and is expected to grow by another 38.3% by 2020.  These growth rates are also well above the national average.

                During the years ended June 30, 2007 and 2008, exclusive of PHP and AAHP, we generated approximately 19.5% and 18.8% of our total revenues, respectively, in this market. Three of our hospitals in this market were formerly not-for-profit hospitals. We believe that payers will choose to contract with us in order to give their enrollees a comprehensive choice of providers in the western and northern Phoenix areas. Recently, we have

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negotiated improvements in our payer rates at our Phoenix hospitals generally, and Arizona’s state Medicaid program remains strong. We believe our network strategy will position us to continue to negotiate favorable rate increases with managed care payers and to build upon our network’s comprehensive range of integrated services. In addition, our ownership of PHP and AAHP will allow us to enroll eligible patients, who would not otherwise be able to pay for healthcare services, into our health plan or into other state-approved plans.

       Metropolitan Chicago, Illinois

                In the Chicago metropolitan area, as of June 30, 2008, we owned and operated 2 hospitals with 784 licensed beds, and related outpatient service locations complementary to the hospitals. These hospitals, MacNeal Hospital and Weiss Hospital, are located in areas serving relatively well-insured populations. Weiss Hospital is operated by us in a consolidated joint venture corporation in which we own 80.1% and the University of Chicago Hospitals owns 19.9% of the equity interests. During the years ended June 30, 2007 and 2008, we generated approximately 15.6% and 14.9%, respectively, of our total revenues in this market.

                We chose MacNeal and Weiss Hospitals, both former not-for-profit facilities, as our first two entries into the largely not-for-profit metropolitan Chicago area. Both MacNeal and Weiss Hospitals are large, well-equipped, university-affiliated hospitals with strong reputations and medical staffs. We believe we have captured a large share of the patients in MacNeal Hospital’s immediate surrounding service area, which encompasses the cities of Berwyn and Cicero, Illinois. MacNeal offers tertiary services such as open heart surgery that patients would otherwise have to travel outside the local community to receive. We have also established a fully-integrated healthcare system at MacNeal and Weiss Hospitals by operating free-standing primary care and occupational medicine centers and a large commercial reference laboratory and by employing 68 physicians on our medical staffs there, including 30 primary care physicians. Our network of 17 primary care and occupational medicine centers allows us to draw patients to MacNeal and Weiss Hospital from around the metropolitan Chicago area. Both hospitals partner with various medical schools, the most significant being the University of Chicago Medical School and the University of Illinois Medical School, to provide medical training through residency programs in multiple specialties. In addition, MacNeal Hospital runs a successful free-standing program in family practice, one of the oldest such programs in the state of Illinois, and Weiss Hospital also runs a successful free-standing residency program in internal medicine. Our medical education programs help us to attract quality physicians to both the hospitals and our network of primary care and occupational medicine centers.

       Massachusetts

                In Massachusetts, as of June 30, 2008, we owned and operated 3 hospitals with a total of 660 licensed beds and related healthcare services complementary to the hospitals. These hospitals include Saint Vincent Hospital located in Worcester and MetroWest Medical Center, a two-campus hospital system comprised of Framingham Union Hospital in Framingham and Leonard Morse Hospital in Natick. These hospitals were acquired by us on December 31, 2004. We believe that opportunities for growth through increased market share exist in the Massachusetts area through the possible addition of new services, partnerships and the implementation of a strong primary care physician strategy. During the years ended June 30, 2007 and 2008, the Massachusetts facilities represented 19.8% and 19.7% of our total revenues, respectively.

                Saint Vincent Hospital, located in Worcester, is a 321-bed teaching hospital with a strong residency program. Worcester is located in central Massachusetts and is the second largest city in Massachusetts. The service area is characterized by a patient base that is older, more affluent and well-insured. Saint Vincent Hospital is focused on strengthening its payer relationships, developing its primary care physician base and expanding its offerings in cardiology, orthopedics, radiology and minimally-invasive surgery capabilities.

                MetroWest Medical Center’s two campus system has a combined total of 339 licensed beds with locations in Framingham and Natick, in the suburbs west of Boston. These facilities serve communities that are generally well-insured. We are seeking to develop strong ambulatory care capabilities in these service areas, as well as expansion of oncology, radiology, women’s services and cardiology services.

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Our Facilities

                We owned and operated 15 acute care hospitals as of June 30, 2008. The following table contains information concerning our hospitals:

Hospital	City	Licensed Beds	Date Acquired
Texas
Baptist Medical Center	San Antonio	636	January 1, 2003
Northeast Baptist Hospital	San Antonio	367	January 1, 2003
North Central Baptist Hospital	San Antonio	268	January 1, 2003
Southeast Baptist Hospital	San Antonio	175	January 1, 2003
St. Luke’s Baptist Hospital	San Antonio	295	January 1, 2003
Arizona
Maryvale Hospital	Phoenix	232	June 1, 1998
Arrowhead Hospital	Glendale	220	June 1, 2000
Phoenix Baptist Hospital	Phoenix	236	June 1, 2000
Paradise Valley Hospital	Phoenix	151	November 1, 2001
West Valley Hospital (1)	Goodyear	157	September 4, 2003
Illinois
MacNeal Hospital	Berwyn	427	February 1, 2000
Louis A. Weiss Memorial Hospital (2)	Chicago	357	June 1, 2002
Massachusetts
MetroWest Medical Center – Leonard Morse Hospital	Natick	141	December 31, 2004
MetroWest Medical Center  - Framingham Union Hospital	Framingham	198	December 31, 2004
Saint Vincent Hospital at Worcester Medical Center	Worcester	321	December 31, 2004
Total Licensed Beds		4,181

____________________
(1)	This hospital was constructed, not acquired.
(2)	This hospital is operated by us in a consolidated joint venture corporation in which we own 80.1% of the equity interests and the University of Chicago Hospitals owns 19.9% of the equity interests.

                In addition to the hospitals listed in the table above, as of June 30, 2008, we owned certain outpatient service locations complementary to our hospitals and two surgery centers in California. We also own and operate a limited number of medical office buildings in conjunction with our hospitals which are primarily occupied by physicians practicing at our hospitals.

Our Hospital Operations

       Acute Care Services

                Our hospitals typically provide the full range of services commonly available in acute care hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics, obstetrics, diagnostic and emergency services, as well as select tertiary services such as open-heart surgery and level II and III neonatal intensive care. Our hospitals also generally provide outpatient and ancillary healthcare services such as outpatient surgery, laboratory, radiology, respiratory therapy and physical therapy. We also provide outpatient services at our

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imaging centers and ambulatory surgery centers. Certain of our hospitals have a limited number of psychiatric, skilled nursing and rehabilitation beds.

       Management and Oversight

                Our senior management team has extensive experience in operating multi-facility hospital networks and focuses on strategic planning for our facilities. A hospital’s local management team is generally comprised of a chief executive officer, chief operating officer, chief financial officer and chief nursing officer. Local management teams, in consultation with our corporate staff, develop annual operating plans setting forth revenue growth strategies through the expansion of offered services and the recruitment of physicians in each community, as well as plans to improve operating efficiencies and reduce costs. We believe that the ability of each local management team to identify and meet the needs of our patients, medical staffs and the community as a whole is critical to the success of our hospitals. We base the compensation for each local management team in part on its ability to achieve the goals set forth in the annual operating plan, including both quality of care and financial measures.

                Boards of trustees at each hospital, consisting of local community leaders, members of the medical staff and the hospital administrator, advise the local management teams. Members of each board of trustees are identified and recommended by our local management teams and serve three-year staggered terms. The boards of trustees establish policies concerning medical, professional and ethical practices, monitor these practices and ensure that they conform to our high standards. We have recently formed Physician Advisory Councils at each of our hospitals that focus on quality of care and other issues important to physicians and make recommendations to the boards of trustees as necessary. We maintain company-wide compliance and quality assurance programs and use patient care evaluations and other assessment methods to support and monitor quality of care standards and to meet accreditation and regulatory requirements.

                We also provide support to the local management teams through our corporate resources including areas such as revenue cycle, business office, legal, managed care, case management, physician services and other administrative functions. These resources also allow for sharing best practices and standardization of policies and processes among all of our hospitals.

       Attracting Patients

                We believe that the most important factors affecting a patient’s choice in hospitals are the reputation of the hospital’s nursing staff for delivering quality care, the availability and expertise of physicians caring for patients at the facility and the location and convenience of the hospital. Other factors that affect utilization include local demographics and population growth, local economic conditions and the hospital’s success in contracting with a wide range of local payers.

       Operating Statistics

                The following table sets forth certain operating statistics from continuing operations for the periods indicated. Acute care hospital operations are subject to fluctuations due to seasonal cycles of illness and weather, including increased patient utilization during the cold weather months and decreases during holiday periods.

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		Year Ended June 30,
		2004		2005		2006		2007		2008
Number of hospitals at end of period (a)		12		15		15		15		15
Number of licensed beds at end of period (b)		3,133		3,907		3,937		4,143		4,181
Discharges (c)		126,356		147,798		162,446		166,873		169,668
Adjusted discharges - hospitals (d)		186,464		231,322		261,056		264,698		270,076
Average length of stay (days) (e)		4.1		4.2		4.3		4.3		4.3
Average daily census (f)		1,420		1,708		1,921		1,978		2,008
Net patient revenue per adjusted hospital discharge (g)	$	6,455	$	6,859	$	7,319	$	7,766	$	8,110
Total surgeries (h)		83,996		101,368		113,043		113,833		110,877
Member lives (i)		142,200		146,700		146,200		145,600		149,600

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(a)	The number of hospitals at the end of each period represents hospitals included in continuing operations.
(b)	Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(c)	Represents the total number of patients discharged (in the facility for an overnight stay) from our hospitals and is used by management and certain investors as a general measure of inpatient volumes.
(d)	Adjusted discharges-hospitals is used by management and certain investors as a general measure of combined inpatient and outpatient volumes and is computed by multiplying discharges by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues. This computation enables management to assess hospital volumes by a combined measure of inpatient and outpatient volumes.
(e)	Average length of stay represents the average number of days admitted patients stay in our hospitals.
(f)	Average daily census represents the average number of patients in our hospitals each day during our ownership.
(g)	Net revenue per adjusted hospital discharge is calculated by dividing hospital net patient revenues by hospital adjusted discharges and measures the average net payment expected to be received for a patient’s hospital stay.
(h)	Total surgeries represent the sum of inpatient surgeries and outpatient surgeries performed at our hospitals or ambulatory surgery centers.
(i)	Member lives represents the total number of enrollees in our Arizona prepaid managed health plans and our Chicago capitated health plan as of the end of the respective period.

       Outpatient Services

                The healthcare industry has experienced a general shift during the past few years from inpatient services to outpatient services as Medicare, Medicaid and managed care payers have sought to reduce costs by shifting lower-acuity cases to an outpatient setting. Advances in medical equipment technology and pharmacology have supported the shift to outpatient utilization, which has resulted in an increase in the acuity of inpatient admissions. However, we expect inpatient admissions to recover over the long-term as the baby boomer population reaches ages where inpatient admissions become more prevalent. We have responded to the shift to outpatient services through our ambulatory surgery centers in Orange County, California, our interests in diagnostic imaging centers in San Antonio, Texas, our outpatient diagnostic imaging centers in metropolitan Phoenix, Arizona and our network of primary care and occupational medicine centers in metropolitan Chicago, Illinois, along with continued expansion of emergency and outpatient services at our acute hospitals. We continually upgrade our resources, including quality physicians and nursing staff and technologically advanced equipment, to support our comprehensive service offerings to capture inpatient volumes from the baby boomers and have focused on core services including cardiology, neurology, oncology, orthopedics and women’s services. We also operate sub-acute units such as rehabilitation, skilled nursing facilities and psychiatric services, where appropriate, to meet the needs of our patients while increasing volumes and increasing care management efficiencies.

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Our Health Plan Operations

       Phoenix Health Plan

                In addition to our hospital operations, we own three health plans. PHP is a prepaid Medicaid managed health plan that currently serves Maricopa, Pinal and Gila counties in the Phoenix, Arizona area. We acquired PHP in May 2001. We are able to enroll eligible patients in our hospitals into PHP or other local Medicaid managed health plans who otherwise would not be able to pay for their hospital expenses. We believe the volume of patients generated through our health plans will help attract quality physicians to the communities our hospitals serve.

                For the year ended June 30, 2008, we derived approximately $353.3 million of our total revenues from PHP. PHP had approximately 103,400 enrollees as of June 30, 2008, and derives substantially all of its revenues through a contract with the Arizona Health Care Cost Containment System (“AHCCCS”), which is Arizona’s state Medicaid program. The contract requires PHP to arrange for healthcare services for enrolled Medicaid patients in exchange for monthly capitation payments and supplemental payments from AHCCCS. PHP subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. These services are provided regardless of the actual costs incurred to provide these services. We receive reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds.

                As part of its contract with AHCCCS, PHP is required to maintain a performance guarantee in the amount of $22.0 million. Vanguard maintains this performance guarantee on behalf of PHP in the form of surety bonds totaling $22.0 million with independent third party insurers that expire on October 1, 2008. We were also required to arrange for $2.9 million in letters of credit to collateralize our $22.0 million in surety bonds with the third party insurers. The amount of the performance guaranty that AHCCCS requires is based upon the membership in the health plan and the related capitation amounts paid to us. As a result of PHP’s new AHCCCS contract which commences on October 1, 2008, as discussed below, we currently expect a significant increase in the amount of the performance guarantee during our fiscal year ending June 30, 2009.

                Our current contract with AHCCCS commenced on October 1, 2003 and covers members in three Arizona counties: Gila, Maricopa and Pinal. In September 2007, AHCCCS executed its final one-year renewal option that effectively extended the contract through September 30, 2008. In May 2008, PHP was awarded a new contract with AHCCCS effective for the three-year period beginning October 1, 2008 and ending September 30, 2011. AHCCCS has the option to renew the new contract, in whole or in part, for two additional one-year periods commencing on October 1, 2011 and on October 1, 2012. The new contract will cover the existing three counties under the current contract plus an additional six Arizona counties: Apache, Coconino, Mohave, Navajo, Pima and Yavapai. We expect a significant increase in PHP membership under the new contract but are unable to determine the impact of the new contract on our future operations and cash flows at this time.

       Abrazo Advantage Health Plan

                Effective January 1, 2006, AAHP became a Medicare Advantage Prescription Drug Special Needs Plan provider under a contract with the Centers for Medicare & Medicaid Services (“CMS”). This allows AAHP to offer Medicare and Part D drug benefit coverage for Medicare members and dual-eligible members (those that are eligible for Medicare and Medicaid). PHP has historically served dual-eligible members through its AHCCCS contract. As of June 30, 2008, approximately 3,200 members were enrolled in AAHP, most of whom were previously enrolled in PHP. For the year ended June 30, 2008, we derived approximately $39.2 million of our total revenues from AAHP.

       MacNeal Health Providers

                The operations of MHP are somewhat integrated with our MacNeal Hospital in Berwyn, Illinois. For the year ended June 30, 2008, we derived approximately $57.7 million of our total revenues from MHP. MHP generates revenues from its contracts with health maintenance organizations from whom it took assignment of capitated member lives as well as third party administration services for other providers. As of June 30, 2008, MHP had contracts in effect covering approximately 43,000 capitated member lives. Such capitation is limited to physician services and outpatient ancillary services and does not cover inpatient hospital services. We try to utilize MacNeal Hospital and its medical staff as much as possible for the physician and outpatient ancillary services that are

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required by such capitation arrangements. Revenues of MHP are dependent upon health maintenance organizations in the metropolitan Chicago area continuing to assign capitated-member lives to health plans like MHP as opposed to entering into direct fee-for-service arrangements with healthcare providers.

Competition

                The hospital industry is highly competitive. We currently face competition from established, not-for-profit healthcare companies, investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient service providers. In the future, we expect to encounter increased competition from companies, like ours, that consolidate hospitals and healthcare companies in specific geographic markets. Continued consolidation in the healthcare industry will be a leading factor contributing to increased competition in our current markets and markets we may enter in the future. Due to the shift to outpatient care and more stringent payer-imposed pre-authorization requirements during the past few years, most hospitals have significant unused capacity resulting in increased competition for patients. Many of our competitors are larger than us and have more financial resources available than we do. Other not-for-profit competitors have endowment and charitable contribution resources available to them and can purchase equipment and other assets on a tax-free basis.

                One of the most important factors in the competitive position of a hospital is its location, including its geographic coverage and access to patients. A location convenient to a large population of potential patients or a wide geographic coverage area through hospital networks can make a hospital significantly more competitive. Another important factor is the scope and quality of services a hospital offers, whether at a single facility or a network of facilities, compared to the services offered by its competitors. A hospital or network of hospitals that offers a broad range of services and has a strong local market presence is more likely to obtain favorable managed care contracts. We intend to evaluate changing circumstances in the geographic areas in which we operate on an ongoing basis to ensure that we offer the services and have the access to patients necessary to compete in these managed care markets and, as appropriate, to form our own, or join with others to form, local hospital networks.

                A hospital’s competitive position also depends in large measure on the quality and scope of the practices of physicians associated with the hospital. Physicians refer patients to a hospital primarily on the basis of the quality and scope of services provided by the hospital, the quality of the medical staff and employees affiliated with the hospital, the hospital’s location and the availability of modern equipment and facilities. Although physicians may terminate their affiliation with our hospitals, we seek to retain physicians of varied specialties on our medical staffs and to recruit other qualified physicians by maintaining and improving our level of care and providing quality facilities, equipment, employees and services for physicians and their patients.

                Another major factor in the competitive position of a hospital is the ability of its management to obtain contracts with managed care plans and other group payers. The importance of obtaining managed care contracts has increased in recent years due primarily to consolidations of health plans and is expected to continue to increase as private and government payers and others increasingly turn to managed care organizations to help control rising healthcare costs. Our markets have experienced significant managed care penetration. The revenues and operating results of our hospitals are significantly affected by our hospitals’ ability to negotiate favorable contracts with managed care plans. Health maintenance organizations and preferred provider organizations use managed care contracts to encourage patients to use certain hospitals in exchange for discounts from the hospitals’ established charges. Traditional health insurers and large employers also are interested in containing costs through similar contracts with hospitals.

                The hospital industry and our hospitals continue to have significant unused capacity. Inpatient utilization, average lengths of stay and average occupancy rates have historically been negatively affected by payer-required pre-admission authorization, utilization review and payer pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Admissions constraints, payer pressures and increased competition are expected to continue. We endeavor to meet these challenges by expanding many of our facilities to include outpatient centers, offering discounts to private payer groups, upgrading facilities and equipment and offering new or expanded programs and services.

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Employees and Medical Staff

                As of June 30, 2008, we had approximately 18,500 employees, including approximately 2,000 part-time employees. Approximately 1,600 of our full-time employees at our three Massachusetts hospitals are unionized.  Overall, we consider our employee relations to be good. While some of our non-unionized hospitals experience union organizing activity from time to time, we do not expect these efforts to materially affect our future operations. Our hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate.

                In the industry as a whole, and particularly in our Phoenix and San Antonio service areas, there is currently a shortage of nurses and other medical support personnel. Often these nursing shortages result in our using more contract labor resources to meet increased demand especially during the peak winter months. To address the nursing shortage, we have implemented comprehensive recruiting and retention plans for nurses. As part of this plan, we have expanded our nursing school in San Antonio to attract new students and to provide options for current nurses to advance their careers. We also increased our involvement with other colleges, participated in more job fairs and recruited nurses from abroad. Our recruiting and retention plan also focuses on mentoring, flexible work hours, performance leadership training, quality of care and patient safety and competitive pay and benefits. We anticipate that demand for nurses will continue to exceed supply especially as the baby boomer population reaches the ages where inpatient stays become more frequent. However, we expect our initiatives to help stabilize our nursing resources over time.

                Our hospitals grant staff privileges to licensed physicians who may serve on the medical staffs of multiple hospitals, including hospitals not owned by us. A physician who is not an employee can terminate his or her affiliation with our hospital at any time. Although we employ a limited number of physicians, a physician does not have to be an employee of ours to be a member of the medical staff of one of our hospitals. Any licensed physician may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by each hospital’s medical staff and board of trustees in accordance with established credentialing criteria.

Compliance Program

                We voluntarily maintain a company-wide compliance program designed to ensure that we maintain high standards of ethics and conduct in the operation of our business and implement policies and procedures so that all our employees act in compliance with all applicable laws, regulations and company policies. The organizational structure of our compliance program includes oversight by our board of directors and a high-level corporate management compliance committee. The board of directors and compliance committee are responsible for ensuring that the compliance program meets its stated goals and remains up-to-date to address the current regulatory environment and other issues affecting the healthcare industry. Our Senior Vice President of Compliance and Ethics reports jointly to our Chairman and Chief Executive Officer and to our board of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the day-to-day management of our compliance program. Other features of our compliance program include Regional Compliance Officers who report to our Chief Compliance Officer in all four of our operating regions, initial and periodic ethics and compliance training and effectiveness reviews, a toll-free hotline for employees to report, without fear of retaliation, any suspected legal or ethical violations, annual “fraud and abuse” audits to examine all of our payments to physicians and other referral sources and annual “coding audits” to make sure our hospitals bill the proper service codes for reimbursement from the Medicare program.

                Our compliance program also oversees the implementation and monitoring of the standards set forth by the Health Insurance Portability and Accountability Act (“HIPAA”) for privacy and security. To facilitate reporting of potential HIPAA compliance concerns by patients, family or employees, we established a second toll-free hotline dedicated to HIPAA and other privacy matters. Corporate HIPAA compliance staff monitors all reports to the privacy hotline and each phone call is responded to appropriately. Ongoing HIPAA compliance also includes self-monitoring of HIPAA policy and procedure implementation by each of our healthcare facilities and corporate compliance oversight.

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Our Information Systems

                We believe that our information systems must cost-effectively meet the needs of our hospital management, medical staff and nurses in the following areas of our business operations:

                •  patient accounting, including billing and collection of revenues;
                •  accounting, financial reporting and payroll;
                •  coding and compliance;
                •  laboratory, radiology and pharmacy systems;
                •  medical records and document storage;
                •  remote physician access to patient data;
                •  quality indicators;
                •  materials and asset management; and
                •  negotiating, pricing and administering our managed care contracts.

                Although we map the financial information systems from each of our hospitals to one centralized database, we do not automatically standardize our financial information systems among all of our hospitals. We carefully review existing systems at the hospitals we acquire and, if a particular information system is unable to cost-effectively meet the operational needs of the hospital, we will convert or upgrade the information system at that hospital to one of several standardized information systems that can cost-effectively meet these needs.

Professional and General Liability Insurance

                As is typical in the healthcare industry, we are subject to claims and legal actions by patients and others in the ordinary course of business. For claims incurred on or after June 1, 2002 through May 31, 2006, our wholly owned captive subsidiary insured our professional and general liability risks at a $10.0 million retention level. For professional and general liability claims incurred on or after June 1, 2006, we self-insure the first $9.0 million of each claim, and the captive subsidiary insures the next $1.0 million. We maintain excess coverage from independent third-party carriers for individual claims exceeding $10.0 million per occurrence up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate. The captive insurance subsidiary funds its portion of claims costs from proceeds of premium payments received from us.

                The malpractice insurance environment remains volatile. Some states in which we operate, including Texas and Illinois, have passed in recent years tort reform legislation to place limits on non-economic damages. However, in November 2007 a judge in the Illinois Cook County Circuit Court declared that these Illinois malpractice limits were unconstitutional under state law. While such ruling is being considered in an appeal to the Illinois Supreme Court, we understand that the trial courts are not enforcing the non-economic damages limits under that Illinois tort reform statute. Additionally, in Texas an action has been brought to declare its tort reform legislation unconstitutional under federal law. Thus, while we have taken multiple steps at our facilities to reduce our professional liability exposures, absent significant legislation (not later declared unconstitutional) to curb the size of malpractice judgments in the states in which we operate, our insurance costs may increase in the future.

Sources of Revenues

                Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or payment rates for such services. Charges and reimbursement rates for inpatient services vary significantly depending on the type of payer, the type of service (e.g., acute care, intensive care or subacute) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control.

                We receive payment for patient services from:

                •  the federal government, primarily under the Medicare program;
                •  state Medicaid programs; and
                •  health maintenance organizations, preferred provider organizations, managed Medicare providers,
                   managed Medicaid providers, other private insurers and individual patients.

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                The table below presents the approximate percentage of net patient revenues we received from the following sources for the periods indicated:

	Year ended June 30,
Payer Source	2006	2007	2008
Medicare	28%	26%	26%
Medicaid	7	9	8
Managed Medicare(1)	N/A	13	14
Managed Medicaid(1)	N/A	7	7
Other managed care plans(1)	52	32	35
Self-pay	9	10	9
Commercial	4	3	1
Total	100%	100%	100%

____________________
(1) For the year ended June 30, 2006, managed care revenues include revenues from managed Medicare, managed Medicaid and other governmental managed plans in addition to commercial managed care plans.

                Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a federal-state program, administered by the states, which provides hospital and medical benefits to qualifying individuals who are unable to afford health care. All of our general, acute care hospitals located in the United States are certified as health care services providers for persons covered under the Medicare and Medicaid programs. Amounts received under the Medicare and Medicaid programs are generally significantly less than established hospital gross charges for the services provided.

                Our hospitals offer discounts from established charges to certain group purchasers of healthcare services, including private insurance companies, employers, health maintenance organizations, preferred provider organizations and other managed care plans. These discount programs limit our ability to increase net revenues in response to increasing costs. Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, health maintenance organizations or preferred provider organizations, but are generally responsible for exclusions, deductibles and coinsurance features of their coverages. Due to rising healthcare costs, many payers have increased the number of excluded services and the levels of deductibles and coinsurance resulting in a higher portion of the contracted rate due from the individual patients. Collecting amounts due from individual patients is typically more difficult than collecting from governmental or private managed care plans.

       Medicare

                Inpatient Acute Care

                Under a prospective payment system, a hospital receives a fixed payment based on the patient’s assigned diagnosis related group (“DRG”) for acute care hospital inpatient services. The DRG classifies categories of illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. The DRG rates for acute care hospitals are based upon a statistically normal distribution of severity. When treatments for patients fall well outside the normal distribution, providers may receive additional payments known as outlier payments. The DRG payments do not consider a specific hospital’s actual costs but are adjusted for geographic area wage differentials. Inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on DRG weights multiplied by geographically adjusted federal weights.

                Pursuant to regulation, the DRG rates are supposed to be adjusted each federal fiscal year for inflation, but such adjustment has often been affected by new federal legislation. The index used to adjust the DRG rates, known as the “market basket index,” gives consideration to the inflation experienced by hospitals and entities outside of the healthcare industry in purchasing goods and services, but the percentage increases in the DRG rates have generally been lower than the actual projected increase in the cost of goods and services purchased by hospitals. Moreover,

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often federal legislation has lowered or potentially lowered the annual percentage increase to the DRG rates below the annual amount indicated by the “market basket index” for the year. Thus, while federal legislation provided for DRG rate increases for federal fiscal years 2007, 2008 and 2009 at the full market basket, the increases were or will be paid only if the facility has submitted data for 21 patient care quality indicators to the Secretary of Health and Human Services in federal fiscal year 2007, 30 in federal fiscal year 2008 and 42 in federal fiscal year 2009. We currently have the ability to monitor our compliance with the quality indicators and have submitted or intend to submit the quality data required to receive the full market basket pricing updates during federal fiscal years 2007, 2008 and 2009. Those hospitals not submitting data on the quality indicators received or will receive an increase equal to the market basket rate minus 2% in federal fiscal years 2007, 2008 or 2009. Consistent with federal law, CMS issued final rules in August 2006, 2007 and 2008 that increased the hospital DRG payment rates by the full market basket of 3.40% for federal fiscal year 2007, the full market basket of 3.30% for federal fiscal year 2008 and the full market basket of 3.60% for federal fiscal year 2009 for those hospitals submitting data on the required quality indicators. While we will endeavor to comply with all data submission requirements as additional requirements continue to be added, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals.

                In August 2006, CMS changed the methodology used to recalibrate the DRG weights from charge-based weights to cost relative weights under a three-year transition period beginning in federal fiscal year 2007. The adoption of the cost relative weights is not anticipated to have a material financial impact on us. On August 22, 2007, CMS published a final rule which adopts a two-year implementation of Medicare-Severity Diagnostic-Related Groups (“MS-DRGs”), a severity-adjusted DRG system. This change represents a refinement to the existing DRG system, and its impact on our revenues has not been significant. Additionally, CMS has imposed a documentation and coding adjustment to account for changes in payments under the new MS-DRG system that are not related to changes in case mix. Through legislative refinement, the documentation and coding adjustments for federal fiscal years 2008 and 2009 are reductions to the base payment rate of 0.6% and 0.9%, respectively. However, Congress has given CMS the ability to retrospectively determine if the documentation and coding adjustment levels for federal fiscal years 2008 and 2009 were adequate to account for changes in payments not related to changes in case mix. If the levels are found to have been inadequate, CMS can impose an adjustment to payments for federal fiscal years 2010, 2011 and 2012.

                Beginning in federal fiscal year 2009, Medicare will not pay hospitals additional amounts for the treatment of certain preventable adverse events, also know as hospital-acquired conditions. The Deficit Reduction Act of 2005 required CMS to select at least two hospital-acquired conditions for which hospitals will not receive additional payment unless the conditions were present on admission to the hospital. In a final rule published on August 22, 2007, CMS selected eight such hospital-acquired conditions, three of which are classified as “serious preventable events” or “never events.” Effective October 1, 2008, cases with any of these eight hospital-acquired conditions will not be paid at a higher DRG unless the condition was present at admission. The Act also provides that CMS may revise the list of conditions from time to time, and, thus, CMS sought comment in April 2008 on adding nine additional proposed conditions. In a final rule announced on July 31, 2008, CMS selected only three of the nine proposed additional hospital-acquired conditions to be added to the eight previously selected, bringing the total to 11 hospital-acquired conditions for which, effective October 1, 2008, it will not make additional payments to hospitals. Additionally, CMS has recently issued a report proposing a value-based purchasing system, which would phase out the current quality reporting system, making a portion of hospital payments contingent on actual performance against specified measures. It is uncertain whether such a program will be implemented.

                Further realignments in the DRG system could also reduce the payments we receive for certain specialties, including cardiology and orthopedics.  The greater proliferation of specialty hospitals in recent years has caused CMS to focus on payment levels for such specialties. Changes in the payments received for specialty services could have an adverse effect on our revenues.

                In addition to DRG inpatient payments, in certain high-cost situations CMS makes additional payments to acute care hospitals, commonly referred to as “outlier payments”, for those DRG cases where the cost of the case exceeds the total DRG payments plus a fixed threshold amount. Historically, the Medicare program has set aside 5.1% of Medicare inpatient payments to pay for outlier cases.  During federal fiscal years 2001, 2002 and 2003, the CMS payments for outlier cases far exceeded the 5.1% set aside. As a result CMS increased the threshold amount from $16,350 at the end of federal fiscal year 2001 to as high as $33,560 for 2003. Additionally, on June 9, 2003,

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CMS published a final rule substantially modifying the methodology for determining Medicare outlier payments in order to ensure that only the highest cost cases are entitled to receive additional payments under the inpatient prospective payment system. For discharges occurring on or after October 1, 2003, outlier payments are based on either a provider’s most recent tentatively settled cost report or the most recent settled cost report, whichever is from the latest cost reporting period. Previously, outlier payments had been based on the most recent settled cost report, resulting in excessive outlier payments for some hospitals. The final rule requires, in most cases, the use of hospital-specific cost to charge ratios instead of a statewide ratio. Further, outlier payments may be adjusted retroactively to recoup any past outlier overpayments plus interest or to return any underpayments plus interest. We believe that these 2003 changes to the outlier payment methodology have not and will not have a material adverse effect on our business, financial position or results of operations. Indeed, we believe that as a result of these 2003 changes to the outlier payment methodology, CMS has generally reduced the outlier threshold amounts in each year after 2003. Thus, CMS decreased the threshold in federal fiscal year 2008 to $22,650 and decreased it in federal fiscal year 2009 to $20,185. Decreasing the outlier threshold amounts has and will increase both the number of our cases that qualify for outlier payments and the amount of payments for qualifying outlier cases, compared to the “peak” year of federal fiscal year 2003 when the threshold amount was $33,560. The most recent cost reports filed for each of our facilities as of June 30, 2006, 2007 and 2008 reflected outlier payments of $5.9 million, $5.8 million and $4.3 million for those respective cost report periods.

                Outpatient

                CMS reimburses hospital outpatient services and certain Medicare Part B services furnished to hospital inpatients who have no Part A coverage on a prospective payment system basis. CMS has continued to use existing fee schedules to pay for physical, occupational and speech therapies, durable medical equipment, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics. Freestanding surgery centers and independent diagnostic testing facilities are also reimbursed on a fee schedule.

                All services paid under the prospective payment system for hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. Depending on the services provided, a hospital may be paid for more than one APC for a patient visit.  The APC payment rates were updated for calendar years 2006 and 2007 by the full market baskets of 3.70% and 3.40%, respectively. However, as a result of the expiration of additional payments for drugs that were being paid in calendar year 2005, for calendar year 2006 there was an effective 2.25% reduction to the market basket of 3.70%, resulting in a net market basket of 1.45%. This reduction was not applied in calendar years 2007 and 2008. In November 2007, CMS published a final rule to update outpatient prospective payment system payments for calendar year 2008 by 3.30%, which is the full market basket. In this final rule, CMS outlined the requirements for hospitals to submit quality data relating to outpatient care in order to receive the full market basket increase under the outpatient prospective payment system beginning in calendar year 2009. CMS requires that data on seven quality measures be submitted according to a data submission schedule. Hospitals that fail to submit such data will receive the market basket update minus two percentage points for the outpatient prospective payment system. We intend to submit the necessary quality data to qualify to receive the full market basket update in 2009.

                Disproportionate Share Payments

                Hospitals that treat a disproportionately large number of low-income patients (Medicare and Medicaid patients eligible to receive supplemental Social Security income) currently receive additional payments from the federal government in the form of disproportionate share payments. CMS has recommended changes to the present formula used to calculate these payments. One recommended change would give greater weight to the amount of uncompensated care provided by a hospital than it would to the number of low-income patients treated. During fiscal year 2008 all of our hospitals qualified for disproportionate share payments. During the year ended June 30, 2008, we recognized revenues of approximately $59.4 million or 2.1% of total revenues from Medicare disproportionate share reimbursement.

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                Rehabilitation Units

                CMS reimburses inpatient rehabilitation hospitals and designated units pursuant to a prospective payment system. Under this prospective payment system, patients are classified into case mix groups based upon impairment, age, comorbidities and functional capability. Inpatient rehabilitation facilities and units are paid a predetermined amount per discharge that reflects the patient’s case mix group and is adjusted for area wage levels, low-income patients, rural areas and high-cost outliers. For federal fiscal year 2008, CMS originally updated the payment rate for inpatient rehabilitation facilities and units by the full market basket rate of 3.2%. However, subsequently, Congress passed the Medicare, Medicaid, and SCHIP Extension Act of 2007 which set the inflation update for inpatient rehabilitation facilities and units at zero percent for federal fiscal years 2008 and 2009, effective for discharges beginning on or after April 1, 2008. As of June 30, 2008, we operated three inpatient rehabilitation units within our acute care hospitals.

                Skilled Nursing Units

                Medicare has established a prospective payment system for Medicare skilled nursing units, under which the units are paid a federal per diem rate for virtually all covered services. The effect of the new payment system generally has been to significantly reduce reimbursement for skilled nursing services, which has led many hospitals to close such units. We will monitor closely and evaluate the few remaining skilled nursing units in our hospitals and related facilities to determine whether it is feasible to continue to offer such services under this reimbursement system. For federal fiscal years 2008 and 2009, CMS updated the payment rate for skilled nursing units by the full market basket of 3.3% and 3.4%, respectively. As of June 30, 2008, we operated two skilled nursing units within our acute care hospitals.

                Psychiatric Units

                On November 15, 2004 CMS published a final regulation to implement a new Medicare prospective payment system for inpatient psychiatric hospitals and units. The new system replaced a cost-based payment system with a per diem prospective payment system for reporting periods beginning on or after January 1, 2005. The new system is a per diem prospective payment system with adjustments to account for certain patient and facility characteristics. The final rule included several provisions to ease the transition to the new payment system. For example, CMS phased in the new system over a three-year period so that full payment under the new system did not begin until cost report periods beginning on or after January 1, 2008. Additionally, CMS has included in the final rule a stop-loss provision, an “outlier” policy authorizing additional payments for extraordinarily costly cases and an adjustment to the base payment if the facility maintains a full-service emergency department which all of our units qualified for. CMS increased payments to our units by 3.2% for each of the psychiatric rate years of July 1, 2007 to June 30, 2008 and July 1, 2008 to June 30, 2009.

                At the current time we continue to believe that the new psychiatric payment system will not materially negatively impact our Medicare reimbursement in respect of our psychiatric units.  As of June 30, 2008, we operated seven psychiatric units within our acute care hospitals.

                Home Health

                CMS reimburses home health agencies through a prospective payment system. Home health payment rates have been historically updated annually by either the full home health market basket, or by the home health market basket as adjusted by Congress. The increase in payment rates for calendar year 2008 was the full home health market basket increase of 3.0%. The 2008 increase, however, provides for an adjustment to the payment rates for the non-reporting of certain quality data.  Home health agencies that submit the quality data as required will receive payments based on the full home health market basket update of 3.0% for calendar year 2008.  If a home health agency does not submit the required quality data, the home health market basket percentage increase will be reduced by 2.0% and the home health agency will only receive a 1.0% update during calendar year 2008. We currently submit, and plan to continue to submit, the necessary quality data to receive the full market basket update. As of June 30, 2008, we operated two entities providing home health services.

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                Contractor Reform

                CMS has a significant initiative underway that could affect the administration of the Medicare program and impact how hospitals bill and receive payment for covered Medicare services. In accordance with the Medicare Modernization Act, CMS has begun implementation of contractor reform whereby CMS will competitively bid the Medicare fiscal intermediary and Medicare carrier functions to 15 Medicare Administrative Contractors (“MACs”). Hospital management companies like Vanguard will have the option to work with the selected MAC in the jurisdiction where a given hospital is located or to use the MAC in the jurisdiction where our home office is located. For hospital management companies, either all hospitals in the system must choose to stay with the MAC chosen for their locality or all hospitals must opt to use the home office MAC. We have filed a request for our single home office MAC to serve all of our hospitals. CMS awarded one MAC contract in 2006, and from August 2007 to June 2008 CMS awarded seven MAC contracts.

                The remaining seven MAC contracts are expected to be awarded in the second half of calendar 2008 with all implementations occurring by July 2009. All of these changes could impact claims processing functions and the resulting cash flow; however, we are unable to predict the impact that these changes could have, if any, to our cash flows.

                Wage Index

                Under Medicare’s prospective payment system, the payment rates are adjusted for the area differences in wage levels by a factor (“wage index”) reflecting the relative wage level in the geographic area compared to the national average wage level. In federal fiscal years 2007 and 2008, CMS adjusted 100% of the wage index factor for occupational mix. The redistributive impact of wage index changes was not materially adverse to our results of operations in our fiscal year ended June 30, 2008.

                Recovery Audit Contractors

                In 2005, CMS began using recovery audit contractors (“RACs”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC program began as a demonstration project in 2005 in three states (New York, California and Florida) which was expanded into the three additional states of Arizona, Massachusetts and South Carolina in July 2007. No RAC audits, however, were initiated at our Arizona or Massachusetts hospitals during the demonstration project. The program was made permanent by the Tax Relief and Health Care Act of 2006 enacted in December 2006. CMS announced in March 2008 the end of the demonstration project and the commencement of the permanent program by the expansion of the RAC program to additional states beginning in the summer and fall 2008 and its plans to have RACs in place in all 50 states by 2010. Also, in March 2008 CMS initiated a process for selecting the four permanent RACs for the permanent program which are expected to be selected by CMS by September or October 2008.

                In a report issued in July 2008 CMS reported that the RACs corrected over $1 billion of Medicare improper payments from 2005 through March 2008. Roughly 96% of the improper payments ($992.7 million) were overpayments collected from providers, while the remaining 4% ($37.8 million) were underpayments repaid to providers. Of the overpayments, 85% were collected from inpatient hospital providers, and the other principal collections were 6% from inpatient rehabilitation facilities, and 4% from outpatient hospital providers.

                RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.

                RACs are paid a contingency fee based on the overpayments they identify and collect. Therefore, we expect that the RACs will look very closely at claims submitted by our facilities in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program by our facilities have been accurate, we cannot predict whether, once our facilities are subject to RAC audits in the future,

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what the result of such audits might be, but it is reasonably possible that the aggregate payments that our facilities are required to return to the Medicare program pursuant to these RAC audits may have a material adverse effect on our business, financial position, results of operations or cash flows.

       Managed Medicare

                Managed Medicare plans relate to situations where a private company contracts with CMS to provide members with Medicare benefits. Managed Medicare plans can be structured as health maintenance organizations, preferred provider organizations or private fee-for-service plans. The Medicare Modernization Act increased reimbursement to managed Medicare plans and included provisions limiting, to some extent, the financial risk to the companies offering the plans. Following these changes, the number of beneficiaries choosing to receive their Medicare benefits through such plans has increased significantly.

        Medicaid

                Medicaid programs are funded jointly by the federal government and the states and are administered by states under approved plans. Most state Medicaid program payments are made under a prospective payment system or are based on negotiated payment levels with individual hospitals. Medicaid reimbursement is less than Medicare reimbursement for the same services and is often less than a hospital’s cost of services. The federal government and many states have recently adopted or are currently considering reducing the level of Medicaid funding (including upper payment limits) or program eligibility that could adversely affect future levels of Medicaid reimbursement received by our hospitals. As permitted by law, certain states in which we operate have adopted broad-based provider taxes to fund their Medicaid programs. Since states must operate with balanced budgets and since the Medicaid program is often the state’s largest program, states can be expected to adopt or consider adopting legislation designed to reduce their Medicaid expenditures.

                As to recent federal action, the Deficit Reduction Act of 2005 included Medicaid cuts in federal funding of approximately $4.8 billion over five years. Additionally, on May 29, 2007, CMS published a final rule entitled “Medicaid Program; Cost Limit for Providers Operated by Units of Government and Provisions to Ensure the Integrity of Federal-State Financial Partnership” which is estimated to reduce federal Medicaid funding from $12 to $20 billion over five years. Congress has enacted two moratoria in respect of this rule. First, Congress delayed its implementation totally until May 2008. Secondly, in June 2008 Congress delayed six of seven proposed Medicaid regulations in this final CMS rule until April 1, 2009, with only the seventh regulation concerning certain outpatient services and imposing severe restrictions on states covering children with family income levels beyond 250% of the federal poverty level under the Children’s Health Insurance Program not being delayed by this second moratorium. As a result of the moratorium on implementing the final rule, the impact on us of the final rule has not been quantified.

                Certain states in which we operate provide disproportionate share payments to hospitals that treat a disproportionately large number of low-income patients as part of their state Medicaid programs, similar to disproportionate share payments received from Medicare. During the year ended June 30, 2008, we recognized revenues of approximately $20.2 million or 0.7% of total revenues related to Medicaid disproportionate share reimbursement. These states continually assess the level of expenditures for disproportionate share reimbursement and may reduce these payments or restructure this portion of their Medicaid programs.

                The states have also adopted, or are considering, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems.

                Future federal or state legislation or other changes in the administration or interpretation of government health programs by the federal government or by the states in which we operate could have a material, adverse effect on our financial position and results of operations.

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       Managed Medicaid

                Managed Medicaid programs relate to situations where states contract with one or more entities for patient enrollment, care management and claims adjudication. The states usually do not give up program responsibilities for financing, eligibility criteria and core benefit plan design. We generally contract directly with one of the designated entities, usually a managed care organization. The provisions of these programs are state-specific.

        Annual Cost Reports

                All hospitals participating in the Medicare and Medicaid programs are required to meet specific financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. Moreover, annual cost reports required under the Medicare and Medicaid programs are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. The audit process takes several years to reach the final determination of allowable amounts under the programs. Providers also have the right of appeal, and it is common to contest issues raised in audits of prior years’ reports.

                Many prior year cost reports of our facilities are still open. If any of our facilities are found to have been in violation of federal or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior to or after our ownership of these facilities, we and our facilities could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. If an allegation is lodged against one of our facilities for a violation occurring during the time period before we acquired the facility, we may have indemnification rights against the seller of the facility to us. In each of our acquisitions, we have negotiated customary indemnification and hold harmless provisions for any damages we may incur in these areas.

        Managed Care and Other Private Insurers

                Managed care providers, including health maintenance organizations, preferred provider organizations, other private insurance companies and employers, are organizations that provide insurance coverage and a network of healthcare providers to members for a fixed monthly premium. To attract additional volume, most of our hospitals offer discounts from established charges or prospective payment systems to these large group purchasers of healthcare services. These discount programs often limit our ability to increase charges in response to increasing costs. However, as part of our business strategy, we have been able to renegotiate payment rates on many of our managed care contracts to improve our operating margin. While we generally received annual average payment rate increases of 5 to 16 percent from non-governmental managed care payers during fiscal year 2008, there can be no assurance that we will continue to receive increases in the future and that patient volumes from these payers will not be adversely affected by rate negotiations. While the majority of our admissions and revenues are generated from patients covered by managed care plans, the percentage may decrease in the future due to increased Medicare utilization associated with the aging U.S. population. We experienced a slight increase in managed care utilization of inpatient days as a percentage of total inpatient days during the year ended June 30, 2008 compared to the year ended June 30, 2007.

       Self-Pay Patients

                Self-pay patients are patients who do not qualify for government programs payments, such as Medicare and Medicaid, and who do not have some form of private insurance, and are, therefore, responsible for their own medical bills. We also include in our self-pay accounts those unpaid coinsurance and deductible amounts for which payment has been received from the primary payer. A significant portion of our self-pay patients are admitted through our hospitals' emergency departments and often require high-acuity treatment. High-acuity treatment is more costly to provide and, therefore, results in higher billings, which are the least collectible of all accounts. We believe self-pay patient volumes and revenues have been impacted during the last two years due to a combination of broad economic factors, including reductions in state Medicaid budgets, increasing numbers of individuals and employers who choose not to purchase insurance and an increased burden of coinsurance and deductibles to be made by patients instead of insurers.

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                Self-pay accounts pose significant collectibility problems. At June 30, 2008, approximately 23.5% of our accounts receivable, prior to the allowance for doubtful accounts, contractual allowances and the charity care allowance, was comprised of self-pay accounts. The majority of our provision for doubtful accounts relates to self-pay patients. While our allowance for doubtful accounts and charity care allowance cover over 95% of our collecibility risks associated with self-pay receivables, we remain vulnerable to further increased self-pay utilization. We are taking multiple actions in an effort to mitigate the effect on us of the high number of uninsured patients and the related economic impact. These initiatives include conducting detailed reviews of intake procedures in hospitals facing the greatest pressures and enhancing and updating intake best practices for all of our hospitals. We developed hospital-specific reports detailing collection rates by type of patient to help the hospital management teams better identify areas of vulnerability and opportunities for improvement. Also, we completely redesigned our self-pay collection workflows, enhanced technology and improved staff training in an effort to increase collections.

                We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by the Department of Health and Human Services).  We exclude charity care accounts from revenues when we determine that the account meets our charity care guidelines.  We provide expanded discounts from billed charges and alternative payment structures for uninsured patients who do not qualify for charity care but meet certain other minimum income guidelines, primarily those uninsured patients with incomes between 200% and 500% of the federal poverty guidelines. During the fiscal years ended June 30, 2006, 2007 and 2008, we deducted $71.1 million, $86.1 million and $86.1 million of charity care from gross charges, respectively.

Government Regulation and Other Factors

        Overview

                All participants in the healthcare industry are required to comply with extensive government regulation at the federal, state and local levels. In addition, these laws, rules and regulations are extremely complex and the healthcare industry has had the benefit of little or no regulatory or judicial interpretation of many of them. Although we believe we are in compliance in all material respects with such laws, rules and regulations, if a determination is made that we were in material violation of such laws, rules or regulations, our business, financial condition or results of operations could be materially adversely affected. If we fail to comply with applicable laws and regulations, we can be subject to criminal penalties and civil sanctions, our hospitals can lose their licenses and their ability to participate in the Medicare and Medicaid programs.

       Licensing, Certification and Accreditation

                Healthcare facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that all of our operating healthcare facilities are properly licensed under appropriate state healthcare laws.

                All of our operating hospitals are certified under the Medicare program and are accredited by the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”), the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. If any facility loses its accreditation by JCAHO, or otherwise loses its certification under the Medicare program, then the facility will be unable to receive reimbursement from the Medicare and Medicaid programs. We intend to conduct our operations in compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, we may need to make changes in our facilities, equipment, personnel and services.

       Certificates of Need

                In some states, the construction of new facilities, acquisition of existing facilities or addition of new beds or services may be subject to review by state regulatory agencies under a Certificate of Need program. Illinois and

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Massachusetts are the only states in which we currently operate that require approval under a Certificate of Need program. These laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services or other capital expenditures. Failure to obtain necessary state approval can result in the inability to expand facilities, add services, acquire a facility or change ownership. Further, violation of such laws may result in the imposition of civil sanctions or the revocation of a facility’s license.

       Utilization Review

                Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by quality improvement organizations that analyze the appropriateness of Medicare and Medicaid patient admissions and discharges, quality of care provided, validity of diagnosis related group classifications and appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided, assess fines and recommend to the Department of Health and Human Services that a provider not in substantial compliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Most non-governmental managed care organizations also require utilization review.

       Federal Healthcare Program Statutes and Regulations

                Participation in any federal healthcare program, such as the Medicare and Medicaid programs, is regulated heavily by statute and regulation. If a hospital provider fails to substantially comply with the numerous conditions of participation in the Medicare or Medicaid program or performs specific prohibited acts, the hospital’s participation in the Medicare program may be terminated or civil or criminal penalties may be imposed upon it under provisions of the Social Security Act and other statutes.

                Anti-Kickback Statute

                A section of the Social Security Act known as the federal Anti-Kickback Statute prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program. Violation of this statute is a felony, including criminal penalties of imprisonment or criminal fines up to $25,000 for each violation, but it also includes civil money penalties of up to $50,000 per violation, damages up to three times the total amount of the improper payment to the referral source and exclusion from participation in Medicare, Medicaid or other federal healthcare programs.

                The Office of the Inspector General of the Department of Health and Human Services (the “OIG”) has published final safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the Anti-Kickback Statute. Currently there are safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personal services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, ambulatory surgery centers and referral agreements for specialty services.

                The fact that conduct or a business arrangement does not fall within a safe harbor does not automatically render the conduct or business arrangement illegal under the Anti-Kickback Statute. The conduct or business arrangement, however, does increase the risk of scrutiny by government enforcement authorities. We may be less willing than some of our competitors to take actions or enter into business arrangements that do not clearly satisfy the safe harbors. As a result, this unwillingness may put us at a competitive disadvantage.

                The OIG, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers, the OIG has from time to time issued “fraud alerts” that, although they do not have the force of law, identify features of a transaction that may indicate that the transaction could

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violate the Anti-Kickback Statute or other federal healthcare laws. The OIG has identified several incentive arrangements as potential violations, including:

               • payment of any incentive by the hospital when a physician refers a patient to the hospital;

               • use of free or significantly discounted office space or equipment for physicians in facilities usually located close to the hospital;

               • provision of free or significantly discounted billing, nursing or other staff services;

               • free training for a physician’s office staff, including management and laboratory techniques;

               • guarantees that provide that, if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder;

               • low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital;

               • payment of the costs of a physician’s travel and expenses for conferences or a physician’s continuing education courses;

               • coverage on the hospital’s group health insurance plans at an inappropriately low cost to the physician;

               • rental of space in physician offices, at other than fair market value terms, by persons or entities to which physicians refer;

               • payment of services which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered; or

               • “gain sharing,” the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts.

Also, the OIG has encouraged persons having information about hospitals who offer the above types of incentives to physicians to report such information to the OIG.

                The OIG also issues “Special Advisory Bulletins” as a means of providing guidance to healthcare providers. These bulletins, along with other “fraud alerts”, have focused on certain arrangements between physicians and providers that could be subject to heightened scrutiny by government enforcement authorities, including, “suspect” joint ventures where physicians may become investors with the provider in a newly formed joint venture entity where the investors refer their  patients to this new entity, and are paid by the entity in the form of “profit distributions.” These subject joint ventures may be intended not so much to raise investment capital legitimately to start a  business, but to lock up a stream of referrals from the physician  investors and to compensate them indirectly for these referrals.  Because physician investors can benefit financially from their referrals, unnecessary procedures and tests may be ordered or performed, resulting in unnecessary Medicare expenditures.

                Similarly, in a Special Advisory Bulletin issued in April 2003, the OIG focused on “questionable” contractual arrangements where a healthcare provider in one line of business (the “Owner”) expands into a related healthcare business by contracting with an existing provider of a related item or service (the “Manager/Supplier”) to provide the new item or service to the Owner’s existing patient population, including federal healthcare program patients (so called “suspect Contractual Joint Ventures”). The Manager/Supplier not only manages the new line of business, but may also supply it with inventory, employees, space, billing, and other services. In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager/Supplier – otherwise a potential competitor – receiving in return the profits of the business as remuneration for its federal program referrals. The Bulletin lists the following features of these “questionable” contractual relationships. First, the Owner expands into a related line of business, which is dependent on referrals from, or other business generated by, the Owner’s existing business. Second, the Owner neither operates the new business itself nor commits

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substantial financial, capital or human resources to the venture. Instead, it contracts out substantially all the operations of the new business. The Manager/Supplier typically agrees to provide not only management services, but also a range of other services, such as the inventory necessary to run the business, office and healthcare personnel, billing support, and space. Third, the Manager/Supplier is an established provider of the same services as the Owner’s new line of business. In other words, absent the contractual arrangement, the Manager/Supplier would be a competitor of the new line of business, providing items and services in its own right, billing insurers and patients in its own name, and collecting reimbursement. Fourth, the Owner and the Manager/Supplier share in the economic benefit of the Owner’s new business. The Manager/Supplier takes its share in the form of payments under the various contracts with the Owner; the Owner receives its share in the form of the residual profit from the new business. Fifth, aggregate payments to the Manager/Supplier typically vary with the value or volume of business generated for the new business by the Owner. We monitor carefully our contracts with other healthcare providers and attempt to not allow our facilities to enter into these suspect Contractual Joint Ventures.

                In addition to issuing fraud alerts and Special Advisory Bulletins, the OIG from time to time issues compliance program guidance for certain types of healthcare providers. In January 2005, the OIG published a Supplemental Compliance Guidance for Hospitals, supplementing its 1998 guidance for the hospital industry. In the supplemental guidance, the OIG identifies a number of risk areas under federal fraud and abuse statutes and regulations. These areas of risk include compensation arrangements with physicians, recruitment arrangements with physicians and joint venture relationships with physicians.

                We have a variety of financial relationships with physicians who refer patients to our hospitals. As of June 30, 2008, physicians owned interests in two of our free-standing surgery centers in California and seven of our diagnostic imaging centers in Texas. We may sell ownership interests in certain other of our facilities to physicians and other qualified investors in the future. We also have contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases and professional service agreements. We have provided financial incentives to recruit physicians to relocate to communities served by our hospitals, including income and collection guarantees and reimbursement of relocation costs, and will continue to provide recruitment packages in the future. Although we have established policies and procedures to ensure that our arrangements with physicians comply with current law and available interpretations, we cannot assure you that regulatory authorities that enforce these laws will not determine that some of these arrangements violate the Anti-Kickback Statute or other applicable laws. An adverse determination could subject us to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could have a material adverse effect in our business, financial condition or results of operations.

                Other Fraud and Abuse Provisions

                The Social Security Act also imposes criminal and civil penalties for submitting false claims to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report fraud. Like the Anti-Kickback Statute, these provisions are very broad. Further, the Social Security Act contains civil penalties for conduct including improper coding and billing for unnecessary goods and services. Careful and accurate preparation and submission of claims for reimbursement must be performed in order to avoid liability.

                The Health Insurance Portability and Accountability Act of 1996 broadened the scope of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. This act also created new enforcement mechanisms to combat fraud and abuse, including the Medicaid Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials now have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. Additionally, this Act establishes a violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner.

                Some of these provisions, including the federal Civil Monetary Penalty Law, require a lower burden of proof than other fraud and abuse laws, including the Anti-kickback Statute. Civil monetary penalties that may be

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imposed under the federal Civil Monetary Penalty Law range from $10,000 to $50,000 per act, and in some cases may result in penalties of up to three times the remuneration offered, paid, solicited or received. In addition, a violator may be subject to exclusion from federal and state healthcare programs. Federal and state governments increasingly use the federal Civil Monetary Penalty Law, especially where they believe they cannot meet the higher burden of proof requirements under the Anti-kickback Statute.

                The Stark Law

                The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and (to an extent) Medicaid patients to entities with which they or any of their immediate family members have a financial relationship for the provision of certain designated health services that are reimbursable by Medicare or Medicaid, including inpatient and outpatient hospital services. The law also prohibits the entity from billing the Medicare program for any items or services that stem from a prohibited referral. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil money penalties up to $15,000 per item or service improperly billed and exclusion from the federal healthcare programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme. There are a number of exceptions to the self-referral prohibition, including an exception for a physician’s ownership interest in an entire hospital as opposed to an ownership interest in a hospital department. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases, professional services agreements, non-cash gifts having an annual value of no more than $338 in calendar 2008 and recruitment agreements. Unlike safe harbors under the Anti-kickback Statute with which compliance is voluntary, an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.

                CMS has issued three phases of final regulations implementing the Stark Law, which became effective on January 4, 2002, July 26, 2004 and December 4, 2007, respectively, and which created several additional exceptions and many technical changes and nuanced details. Also, as part of its annual physician fee schedule update, on July 2, 2007, CMS released a number of proposed and potentially far-reaching changes to the Stark Law regulations apparently resulting from CMS’s frustration with what it perceived as a growing number of hospital/physician joint venture arrangements that permitted physicians to profit from their referrals of ancillary services, while side-stepping or working around existing Stark Law restrictions. On July 31, 2008, CMS issued the final hospital inpatient prospective payment system rule for federal fiscal year 2009 which, in part, finalized and responded to public comments regarding some of its July 2007 proposed major changes to the Stark Law regulations to undermine many common hospital/physician joint venture models. The most far-reaching of the changes made in this final July 2008 rule will effectively prohibit, as of a delayed effective date of October 1, 2009, both "under arrangements" ventures between a hospital and any of its physicians and unit-of-service-based "per click" compensation and percentage-based compensation in office space and equipment leases between a hospital and its physicians. Hospitals will need to examine all of their “under arrangements” ventures and their space and equipment leases with physicians to identify those arrangements which violate these new Stark regulations and restructure or terminate those arrangements so identified prior to October 1, 2009. In addition, in this July 2008 final rule CMS indicated that it will continue to enact further regulations tightening aspects of the Stark Law that it perceives allow for Medicare program abuse, especially those regulations that still permit physicians to profit from their referrals of ancillary services. There can be no assurance that the arrangements entered into by us and our facilities will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted.

                Similar State Laws, etc.

                Many of the states in which we operate also have adopted laws that prohibit payments to physicians in exchange for referrals similar to the federal Anti-Kickback Statute or that otherwise prohibit fraud and abuse activities. Many states also have passed self-referral legislation, similar to the Stark Law, prohibiting the referral of patients to entities with which the physician has a financial relationship. Often these state laws are broad in scope and they may apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties, as well as loss of licensure. Little precedent exists for the interpretation or enforcement of these state laws.

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                Certain Implications of these Fraud and Abuse Laws or New Laws

                Our operations could be adversely affected by the failure of our arrangements to comply with the Anti-Kickback Statute, the Stark Law, billing laws and regulations, current state laws or other legislation or regulations in these areas adopted in the future. We are unable to predict whether other legislation or regulations at the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take or how they may impact our operations. We are continuing to enter into new financial arrangements with physicians and other providers in a manner structured to comply in all material respects with these laws. We cannot assure you, however, that governmental officials responsible for enforcing these laws will not assert that we are in violation of them or that such statutes or regulations ultimately will be interpreted by the courts in a manner consistent with our interpretation.

       The Federal False Claims Act and Similar Laws

                Another trend affecting the healthcare industry today is the increased use of the federal False Claims Act, and, in particular, actions being brought by individuals on the government’s behalf under the False Claims Act’s “qui tam” or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. If the government intervenes in the action and prevails, the party filing the initial complaint may share in any settlement or judgment. If the government does not intervene in the action, the whistleblower plaintiff may pursue the action independently, and may receive a larger share of any settlement or judgment. When a private party brings a qui tam action under the False Claims Act, the defendant generally will not be made aware of the lawsuit until the government makes a determination whether it will intervene.

                When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to litigation usually involve a less severe calculation of damages. There are many potential bases for liability under the False Claims Act. Although liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government, the False Claims Act defines the term “knowingly” broadly. Thus, simple negligence will not give rise to liability under the False Claims Act, but submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim and result in liability. In some cases, whistleblowers or the federal government have taken the position that providers who allegedly have violated other statutes, such as the Anti-Kickback Statute or the Stark Law, have thereby submitted false claims under the False Claims Act.

                A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. From time to time, companies in the healthcare industry, including ours, may be subject to actions under the False Claims Act or similar state laws.

                Provisions in the Deficit Reduction Act of 2005 (“DRA”) that went into effect on January 1, 2007 give states significant financial incentives to enact false claims laws modeled on the federal False Claims Act. Additionally, the DRA requires every entity that receives annual payments of at least $5 million from a state Medicaid plan to establish written policies for its employees that provide detailed information about federal and state false claims statutes and the whistleblower protections that exist under those laws. Both provisions of the DRA are expected to result in increased false claims litigation against health care providers. We have complied with the written policy requirements.

       Corporate Practice of Medicine and Fee Splitting

                The states in which we operate have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. Although we exercise care to structure our arrangements

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with healthcare providers to comply with the relevant state law, and believe these arrangements comply with applicable laws in all material respects, we cannot assure you that governmental officials responsible for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.

       The Health Insurance Portability and Accountability Act of 1996

                The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. On August 17, 2000, the Department of Health and Human Services published final regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. Compliance with these standards became mandatory on October 16, 2003. However, the Department of Health and Human Services agreed to accept noncompliant Medicare claims until October 1, 2005 to assist providers that were not yet able to process compliant transactions. Thus, commencing on October 1, 2005, fee-for-service Medicare claims that did not meet the standards required by HIPAA were returned to the filer for resubmission as compliant claims and non-compliant claims were not processed by Medicare. As of October 1, 2005, all of our facilities were filing compliant Medicare claims and continue doing so as of the date of this report.

                HIPAA also requires the Department of Health and Human Services to adopt standards to protect the security and privacy of health-related information. The Department of Health and Human Services released final regulations containing privacy standards in December 2000 and published revisions to the final regulations in August 2002. Compliance with these regulations became mandatory on April 14, 2003. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The privacy regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. The Department of Health and Human Services released final security regulations on February 20, 2003. The security regulations became mandatory on April 20, 2005 and require healthcare providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is electronically maintained or transmitted.

                Violations of HIPAA could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. In addition, our facilities will continue to remain subject to any privacy-related federal or state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by jurisdiction and could impose additional penalties.

                Compliance with these standards has and will continue to require significant commitment and action by us. We have appointed members of our management team to direct our compliance with these standards. Implementation has and will continue to require us to engage in extensive preparation and make significant expenditures. At this time we have appointed a corporate privacy officer and a privacy officer at each of our facilities, prepared privacy policies, trained our workforce on these policies and entered into business associate agreements with the appropriate vendors. However, failure by us or third parties on which we rely, including payers, to resolve HIPAA-related implementation or operational issues could have a material adverse effect on our results of operations and our ability to provide healthcare services. Consequently, we can give you no assurance that issues related to the full implementation of, or our operations under, HIPAA will not have a material adverse effect on our financial condition or future results of operations.

       Conversion Legislation

                Many states have enacted laws affecting the conversion or sale of not-for-profit hospitals. These laws generally include provisions relating to attorney general approval, advance notification and community involvement. In addition, attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states, there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may increase the cost and difficulty or prevent the completion of transactions with or acquisitions of not-for-profit organizations in various states.

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       The Emergency Medical Treatment and Active Labor Act

                The Federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) was adopted by Congress in response to reports of a widespread hospital emergency room practice of “patient dumping.” At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient’s inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. Such requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. The government broadly interprets the law to cover situations in which patients do not actually present to a hospital’s emergency department, but present to a hospital-based clinic that treats emergency medical conditions on an urgent basis or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA does not generally apply to patients admitted for inpatient services. Sanctions for violations of this statute include termination of a hospital’s Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil monetary penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law, and a medical facility that suffers a financial loss as a direct result of another participating hospital’s violation of the law, to sue the offending hospital for damages and equitable relief. Although we believe that our practices are in substantial compliance with the law, we cannot assure you that governmental officials responsible for enforcing the law will not assert from time to time that our facilities are in violation of this statute.

       Antitrust Laws

                The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, agreements to fix wages, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the healthcare industry is currently a priority of the Federal Trade Commission. We believe we are in compliance with such federal and state laws, but there can be no assurance that a review of our practices by courts or regulatory authorities will not result in a determination that could adversely affect our operations.

       Healthcare Reform

                The healthcare industry, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Changes in Medicare, Medicaid and other programs, hospital cost-containment initiatives by public and private payers, proposals to limit payments and healthcare spending and industry-wide competitive factors are highly significant to the healthcare industry. In addition, a framework of extremely complex federal and state laws, rules and regulations governs the healthcare industry and, for many provisions, there is little history of regulatory or judicial interpretation on which to rely.

                Both the federal government and many states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and change private healthcare insurance. Most states, including the states in which we operate, have applied for and been granted federal waivers from current Medicaid regulations to allow them to serve some or all of their Medicaid participants through managed care providers. We are unable to predict the future course of federal, state or local healthcare legislation. Further changes in the law or regulatory framework that reduce our revenues or increase our costs could have a material adverse effect on our business, financial condition or results of operations.

       Healthcare Industry Investigations

                Significant media and public attention has focused in recent years on the hospital industry. In recent years, increased attention has been paid to hospitals with high Medicare outlier payments and to recruitment arrangements with physicians. Further, there are numerous ongoing federal and state investigations regarding multiple issues. These investigations have targeted hospital companies as well as their executives and managers. Like other hospital companies, we have substantial Medicare, Medicaid and other governmental billings and we engage in various

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arrangements with physicians, which could result in scrutiny of our operations. We continue to monitor these and all other aspects of our business and have developed a compliance program to assist us in gaining comfort that our business practices are consistent with both legal principles and current industry standards. However, because the law in this area is complex and constantly evolving, we cannot assure you that government investigations will not result in interpretations that are inconsistent with industry practices, including ours. In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations.

                Many current healthcare investigations are national initiatives in which federal agencies target an entire segment of the healthcare industry. One example is the federal government’s initiative regarding hospital providers’ improper requests for separate payments for services rendered to a patient on an outpatient basis within three days prior to the patient’s admission to the hospital, where reimbursement for such services is included as part of the reimbursement for services furnished during an inpatient stay. In particular, the government has targeted all hospital providers to ensure conformity with this reimbursement rule. The federal government also has undertaken a national investigative initiative targeting the billing of claims for inpatient services related to bacterial pneumonia, as the government has found that many hospital providers have attempted to bill for pneumonia cases under more complex and higher reimbursed diagnosis related groups codes. Further, the federal government continues to investigate Medicare overpayments to prospective payment hospitals that incorrectly report transfers of patients to other prospective payment system hospitals as discharges. We are aware that prior to our acquisition of them, several of our hospitals were contacted in relation to certain government investigations relating to their operations. Although we take the position that, under the terms of the acquisition agreements, the prior owners of these hospitals retained any liability resulting from these government investigations, we cannot assure you that the prior owners’ resolution of these matters or failure to resolve these matters, in the event that any resolution was deemed necessary, will not have a material adverse effect on our operations. Further, under the federal False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. Some states have adopted similar state whistleblower and false claims provisions.

                In addition to national enforcement initiatives, federal and state investigations commonly relate to a wide variety of routine healthcare operations such as: cost reporting and billing practices; financial arrangements with referral sources; physician recruitment activities; physician joint ventures; and hospital charges and collection practices for self-pay patients. We engage in many of these routine healthcare operations and other activities that could be the subject of governmental investigations or inquiries from time to time. For example, we have significant Medicare and Medicaid billings, we have numerous financial arrangements with physicians who are referral sources to our hospitals and we have joint venture arrangements involving physician investors.

                While we are not currently aware of any material investigation of us under federal or state health care laws or regulations, it is possible that governmental entities may conduct investigations at facilities operated by us and that such investigations could result in significant penalties to us, as well as adverse publicity. It is also possible that our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. The positions taken by authorities in any future investigations of us, our executives or managers or other healthcare providers and the liabilities or penalties that may be imposed could have a material adverse effect on our business, financial condition and results of operations.

       Health Plan Regulatory Matters

                Our health plans are subject to state and federal laws and regulations. CMS has the right to audit our health plans to determine the plans’ compliance with such standards. In addition, AHCCCS has the right to audit PHP to determine PHP’s compliance with such standards. Also, PHP is required to file periodic reports with AHCCCS, meet certain financial viability standards, provide its enrollees with certain mandated benefits and meet certain quality assurance and improvement requirements. Our health plans also have to comply with the standardized formats for electronic transmissions and privacy and security standards set forth in the Administrative

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Simplifications Provisions of HIPAA. Our health plans have implemented the necessary policies and procedures to comply with the final federal regulations on these matters and were in compliance with them by their deadlines.

                The Anti-Kickback Statute has been interpreted to prohibit the payment, solicitation, offering or receipt of any form of remuneration in return for the referral of federal health program patients or any item or service that is reimbursed, in whole or in part, by any federal healthcare program. Similar statutes have been adopted in Illinois and Arizona that apply regardless of the source of reimbursement. The Department of Health and Human Services has adopted safe harbor regulations specifying certain relationships and activities that are deemed not to violate the Anti-Kickback Statute which specifically relate to managed care including:

               • waivers by health maintenance organizations of Medicare and Medicaid beneficiaries’ obligations to pay cost-sharing amounts or to provide other incentives in order to attract Medicare and Medicaid enrollees;

               • certain discounts offered to prepaid health plans by contracting providers;

               • certain price reductions offered to eligible managed care organizations; and

               • certain price reductions offered by contractors with substantial financial risk to managed care organizations.

                We believe that the incentives offered by our health plans to their enrollees and the discounts they receive contracting with healthcare providers satisfy the requirements of the safe harbor regulations. However, the failure to satisfy each criterion of the applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather, the safe harbor regulations provide that an arrangement which does not fit within a safe harbor must be analyzed on the basis of its specific facts and circumstances. We believe that our health plans’ arrangements comply in all material respects with the federal Anti-Kickback Statute and similar state statutes.

       Environmental Matters

                We are subject to various federal, state and local laws and regulations relating to environmental protection. Our hospitals are not highly regulated under environmental laws because we do not engage in any industrial activities at those locations. The principal environmental requirements and concerns applicable to our operations relate to:

               • the proper handling and disposal of hazardous and low level medical radioactive waste;

               • ownership or historical use of underground and above-ground storage tanks;

               • management of impacts from leaks of hydraulic fluid or oil associated with elevators, chiller units or incinerators;

               • appropriate management of asbestos-containing materials present or likely to be present at some locations; and

               • the potential acquisition of, or maintenance of air emission permits for, boilers or other equipment.

                We do not expect our compliance with environmental laws and regulations to have a material effect on us. We may also be subject to requirements related to the remediation of substances that have been released into the environment at properties owned or operated by us or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault and whether or not we owned or operated the property at the time that the relevant releases or discharges occurred. Liability for environmental remediation can be substantial.

Item 1A. Risk Factors.

                If any of the following events discussed in the following risks were to occur, our business, results of operations, financial condition, cash flows or prospects could be materially adversely affected.  Additional risks and uncertainties not presently known, or currently deemed immaterial by us, may also constrain our business and operations.

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Risks Relating to our Capital Structure

                Our high level of debt and significant leverage may adversely affect our operations and our ability to grow and otherwise execute our business strategy.

                We have a substantial amount of debt. As of June 30, 2008, we had $1,537.5 million of outstanding debt, excluding letters of credit and guarantees. This represented 73.0% of our total capitalization as of June 30, 2008. The amount of our outstanding indebtedness is large compared to the net book value of our assets, and we have significant repayment obligations under our outstanding indebtedness.

                Our substantial indebtedness could:

               • limit our ability to obtain additional financing to fund future capital expenditures, working capital, acquisitions or other needs;

               • increase our vulnerability to general adverse economic, market and industry conditions and limit our flexibility in planning for, or reacting to, these conditions;

               • make us vulnerable to increases in interest rates since $324.1 million of our borrowings under our senior credit facilities as of September 1, 2008 are, and additional borrowings may be, at variable interest rates;

               • our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, and we may be more vulnerable to a downturn in general economic or industry conditions or be unable to carry out capital spending that is necessary or important to our growth strategy and our efforts to improve operating margins;

               • limit our ability to use operating cash in other areas of our business because we must use a substantial portion of these funds to make principal and interest payments; and

               • limit our ability to compete with others who are not as highly-leveraged.

                Our ability to make scheduled payments of principal and interest or to satisfy our other debt obligations, to refinance our indebtedness or to fund capital expenditures will depend on our future operating performance. Prevailing economic conditions (including interest rates) and financial, business and other factors, many of which are beyond our control, will also affect our ability to meet these needs. We may not be able to generate sufficient cash flows from operations or realize anticipated revenue growth or operating improvements, or obtain future borrowings in an amount sufficient to enable us to pay our debt, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt when needed on commercially reasonable terms or at all.

                Despite our current significant leverage, we may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face.

                We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indentures and the senior credit facilities do not fully prohibit us or our subsidiaries from doing so. Our revolving credit facility provides commitments of up to $250.0 million (not giving effect to any outstanding letters of credit, which would reduce the amount available under our revolving credit facility), of which $222.0 million was available for future borrowings as of September 1, 2008.  In addition, upon the occurrence of certain events, we may request an incremental term loan facility or facilities be added to our current senior credit facilities in an amount not to exceed $300.0 million in the aggregate, subject to receipt of commitments by existing lenders or other financing institutions and to the satisfaction of certain other conditions. We may in the future borrow all available amounts under the revolving credit facility, under the incremental term loan facility and in addition, we may borrow substantial additional indebtedness in the future under new debt agreements. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

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                Operating and financial restrictions in our debt agreements limit our operational and financial flexibility.

                The senior credit facilities and the indentures under which $575.0 million aggregate principal amount of our 9.0% senior subordinated notes due 2014 and $216.0 million aggregate principal amount of our 11.25% senior discount notes due 2015 were issued (collectively, the “Public Notes”) contain a number of significant covenants that, among other things, restrict our ability to:

               • incur additional indebtedness or issue preferred stock;

               • pay dividends on or make other distributions or repurchase our capital stock or make other restricted payments;

               • make investments;

               • enter into certain transactions with affiliates;

               • limit dividends or other payments by restricted subsidiaries to our restricted subsidiaries;

               • create liens on pari passu or subordinated indebtedness without securing the Public Notes;

               • designate our subsidiaries as unrestricted subsidiaries; and

               • sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of our assets.

                In addition, under the senior credit facilities, we are required to satisfy and maintain specified financial ratios and tests. Events beyond our control may affect our ability to comply with those provisions, and we may not be able to meet those ratios and tests. The breach of any of these covenants would result in a default under the senior credit facilities. In the event of default, the lenders could elect to declare all amounts borrowed under the senior credit facilities, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness. Borrowings under the senior credit facilities are senior in right of payment to the Public Notes. If any of our indebtedness were to be accelerated, our assets may not be sufficient to repay in full that indebtedness and the Public Notes.

                Our capital expenditure and acquisition strategies require substantial capital resources. The building of new hospitals and the operations of our existing hospitals and newly acquired hospitals require ongoing capital expenditures for construction, renovation, expansion and the addition of medical equipment and technology. More specifically, we may in the future be contractually obligated to make significant capital expenditures relating to the facilities we acquire. Also, construction costs to build new hospitals are substantial and continue to increase. Our debt agreements may restrict our ability to incur additional indebtedness to fund these expenditures.

                A breach of any of the restrictions or covenants in our debt agreements could cause a cross-default under other debt agreements. A significant portion of our indebtedness then may become immediately due and payable. We are not certain whether we would have, or be able to obtain, sufficient funds to make these accelerated payments. If any senior debt is accelerated, our assets may not be sufficient to repay in full such indebtedness and our other indebtedness.

                We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

                Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. In addition, the indentures governing the Public Notes allow us to make significant dividend payments, investments and other

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restricted payments. The making of these payments could decrease available cash and adversely affect our ability to make principal and interest payments on our indebtedness.

                If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The senior credit facilities and the indentures restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations then due.

                An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.

                A significant portion of the borrowings under our Senior Credit Facilities bear interest at variable rates. As a result, an increase in interest rates, whether because of an increase in market interest rates or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could materially reduce our profitability. The impact of such an increase would be more significant than it would be for some other companies because of our substantial debt. For a discussion of how we manage our exposure to changes in interest rates through the use of interest rate swap agreements on certain portions of our outstanding debt, see “Item 7A. – Quantitave and Qualitative Disclosure About Market Risks.”

                We are controlled by a small number of stockholders and they may have conflicts of interest with us in the future.

                We are controlled by our principal equity sponsors, and they have the ability to control our policies and operations. The interests of our principal equity sponsors may not in all cases be aligned with our interests. For example, our principal equity sponsors could cause us to make acquisitions, divestitures and other transactions that, in their judgment, could enhance their equity investment in us, even though such transactions might reduce cash flows or capital reserves available to fund our debt service obligations. Additionally, our controlling shareholders are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Accordingly, our principal equity sponsors may also pursue acquisitions that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our principal equity sponsors continue to own a significant amount of our equity interests, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions.

Risks Related to our Business

                If we are unable to enter into favorable contracts with managed care plans, our operating revenues may be reduced.

                Our ability to negotiate favorable contracts with health maintenance organizations, insurers offering preferred provider arrangements and other managed care plans significantly affects the revenues and operating results of our hospitals. Revenues derived from health maintenance organizations, insurers offering preferred provider arrangements and other managed care plans, including managed Medicare and managed Medicaid plans, accounted for approximately 57% of our net patient revenues for the year ended June 30, 2008. Managed care organizations offering prepaid and discounted medical services packages represent an increasing portion of our admissions, a general trend in the industry which has limited hospital revenue growth nationwide and a trend that may continue if the Medicare Modernization Act increases enrollment in Medicare managed care plans. In addition, private payers are increasingly attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review, including the use of hospitalists, and greater enrollment in managed care programs such as health maintenance organizations and preferred provider organizations. Additionally, the trend towards consolidation among private managed care payers tends to increase their bargaining prices over fee structures. In most cases, we negotiate our managed care contracts annually as they

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come up for renewal at various times during the year. Our future success will depend, in part, on our ability to renew existing managed care contracts and enter into new managed care contracts on terms favorable to us. Other healthcare companies, including some with greater financial resources, greater geographic coverage or a wider range of services, may compete with us for these opportunities. If we are unable to contain costs through increased operational efficiencies or to obtain higher reimbursements and payments from managed care payers, our results of operations and cash flows will be materially adversely affected.

                Our revenues may decline if federal or state programs reduce our Medicare or Medicaid payments or managed care companies reduce our reimbursements.

                Approximately 55% of our net patient revenues for the year ended June 30, 2008 came from the Medicare and Medicaid programs, including Medicare and Medicaid managed plans. In recent years, federal and state governments have made significant changes in the Medicare and Medicaid programs. Some of those changes adversely affect the reimbursement we receive for certain services. In addition, due to budget deficits in many states, significant decreases in state funding for Medicaid programs have occurred or are being proposed.

                On August 22, 2007, CMS issued a final rule for federal fiscal year 2008 for the hospital inpatient prospective payment system. This rule adopts a two-year implementation of MS-DRGs, a severity-adjusted DRG system. This change represents a refinement to the existing DRG system, and its impact on our revenues has not been significant. Realignments in the DRG system could impact the margins we receive for certain services. This rule provides for a 3.3% market basket update for hospitals that submit certain quality patient care indicators and a 1.3% update for hospitals that do not submit this data. While we will endeavor to comply with all quality data submission requirements, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all our hospitals. Medicare payments to hospitals in federal fiscal year 2008 will be reduced by 0.6% to eliminate what CMS estimates will be the effect of coding or classification changes as a result of hospitals implementing the MS-DRG system. This “documentation and coding adjustment” will increase to 0.9% for federal fiscal year 2009. However, Congress has given CMS the ability to retrospectively determine if the documentation and coding adjustment levels for federal fiscal years 2008 and 2009 were adequate to account for changes in payments not related to changes in case mix. If the levels are found to have been inadequate, CMS can impose an adjustment to payments for federal fiscal years 2010, 2011 and 2012. This evaluation of changes in case-mix based on actual claims data may yield a higher documentation and coding adjustment thereby potentially reducing our revenues and impacting our results of operations in ways that cannot be quantified at this time. Additionally, Medicare payments to hospitals are subject to a number of other adjustments, and the actual impact on payments to specific hospitals may vary. In some cases, commercial third-party payers and other payers such as some state Medicaid programs rely on all or portions of the Medicare DRG system to determine payment rates. The change from traditional Medicare DRGs to MS-DRGs could adversely impact those payment rates if any other payers adopt MS-DRGs.

                DRG rates are updated and DRG weights are recalibrated each federal fiscal year. The index used to update the market basket gives consideration to the inflation experienced by hospitals and entities outside the healthcare industry in purchasing goods and services. Congressional legislation provides for DRG increases using the full market basket if data for certain patient care quality indicators is submitted quarterly to CMS, and using the market basket minus two percentage points if such data is not submitted. While we will endeavor to comply with all data submission requirements, our submissions may not be deemed timely or sufficient to entitle us to the full market basket adjustment for all of our hospitals.

                The federal government and many states have recently adopted or are currently considering reducing the level of Medicaid funding (including upper payment limits) or program eligibility that could adversely affect future levels of Medicaid reimbursement received by our hospitals. Since states must operate with balanced budgets and since the Medicaid program is often a state’s largest program, a number of states have adopted, or are considering adopting, legislation designed to reduce their Medicaid expenditures. The Deficit Reduction Act of 2005 includes federal Medicaid cuts of approximately $4.8 billion over five years. Additionally, on May 29, 2007, CMS published a final rule entitled “Medicaid Program; Cost Limit for Providers Operated by Units of Government and Provisions to Ensure the Integrity of Federal-State Financial Partnership” which is estimated to reduce federal Medicaid funding from $12 to $20 billion over five years.  Congress has enacted two moratoria in respect of this rule. First, Congress delayed its implementation totally until May 2008. Secondly, in June 2008 Congress delayed six of seven

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proposed Medicaid regulations in this final CMS rule until April 1, 2009, with only the seventh regulation concerning certain outpatient services and imposing severe restrictions on states covering children with family income levels beyond 250% of the federal poverty level under the Children’s Health Insurance Program not being delayed by this second moratorium. As a result of the moratorium on implementing the final rule, the impact on us of the final rule has not been quantified. States have also adopted, or are considering adopting, legislation designed to reduce coverage and program eligibility, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Future legislation or other changes in the administration or interpretation of government health programs could have a material adverse effect on our financial position and results of operations.

                Our ability to negotiate favorable contracts with managed care plans significantly affects the revenues and operating results of most of our hospitals. Approximately, 56% of our net patient revenues for the year ended June 30, 2008 came from managed care plans including managed Medicare and managed Medicaid plans. Managed care payers increasingly are demanding discounted fee structures, and the trend toward consolidation among managed care plans tends to increase their bargaining power over fee structures. Reductions in price increases or the amounts received from managed care plans could have a material adverse effect on our financial position and results of operations.

                In recent years, both the Medicare program and several large managed care companies have changed our reimbursement to link some of their payments, especially their annual increases in payments, to performance of quality of care measures. We expect this trend to “pay-for-performance” to increase in the future. If we are unable to meet these performance measures, our results of operations and cash flow will be materially adversely affected.

                We conduct business in a heavily regulated industry, and changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our revenues and profitability.

                The healthcare industry is subject to extensive federal, state and local laws and regulations relating to licensing, the conduct of operations, the ownership of facilities, the addition of facilities and services, financial arrangements with physicians and other referral sources, confidentiality, maintenance and security issues associated with medical records, billing for services and prices for services. If a determination were made that we were in material violation of such laws or regulations, our operations and financial results could be materially adversely affected.

                In many instances, the industry does not have the benefit of significant regulatory or judicial interpretations of these laws and regulations. This is particularly true in the case of Medicare and Medicaid statute codified under section 1128B(b) of the Social Security Act and known as the “Anti-Kickback Statute.” This law prohibits providers and other person or entities from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent to generate referrals of orders for services or items reimbursable under Medicare, Medicaid and other federal healthcare programs. As authorized by Congress, the United States Department of Health and Human Services has issued regulations which describe some of the conduct and business relationships immune from prosecution under the Anti-Kickback Statute. The fact that a given business arrangement does not fall within one of these “safe harbor” provisions does not render the arrangement illegal, but business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria risk increased scrutiny by enforcement authorities.

                Some of the financial arrangements that our facilities maintain with physicians do not meet all of the requirements for safe harbor protection. The regulatory authorities that enforce the Anti-Kickback Statute may in the future determine that one or more of these arrangements violate the Anti-Kickback Statute or other federal or state laws. A determination that a facility has violated the Anti-Kickback Statute or other federal laws could subject us to liability under the Social Security Act, including criminal and civil penalties, as well as exclusion of the facility from participation in government programs such as Medicare and Medicaid or other federal healthcare programs.

                In addition, the portion of the Social Security Act commonly known as the “Stark Law” prohibits physicians from referring Medicare and (to an extent) Medicaid patients to providers of certain “designated health services” if the physician or a member of his or her immediate family has an ownership or investment interest in, or compensation arrangement with, that provider. In addition, the provider in such arrangements is prohibited from

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billing for all of the designated health services referred by the physician. Many of the services furnished by our facilities are “designated health services” for Stark Law purposes. There are multiple exceptions to the Stark Law, among others, for physicians maintaining an ownership interest in an entire hospital or having a compensation relationship with the facility as a result of employment agreements, leases, physician recruitment and certain other arrangements. However, each of these exceptions applies only if detailed conditions are met. An arrangement subject to the Stark Law must qualify for an exception in order for the services to be lawfully referred by the physician and billed by the provider.

                CMS has issued three phases of final regulations implementing the Stark Law. Phases I and II became effective in January 2002 and July 2004, respectively, and Phase III became effective in December 2007. While these regulations help clarify the requirements of the exceptions to the Stark Law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. In addition, in July 2007 CMS proposed far-reaching changes to the regulations implementing the Stark Law that would further restrict the types of arrangements that hospitals and physicians may enter, including additional restrictions on certain leases, percentage compensation arrangements, and agreements under which a hospital purchases services under arrangements. On July 31, 2008, CMS issued a final rule which, in part, finalized and responded to public comments regarding some of its July 2007 proposed major changes to the Stark Law regulations to undermine many common hospital/physician joint venture models. The most far-reaching of the changes made in this final July 2008 rule will effectively prohibit, as of a delayed effective date of October 1, 2009, both "under arrangements" ventures between a hospital and any of its physicians and unit-of-service-based "per click" compensation and percentage-based compensation in office space and equipment leases between a hospital and its physicians. Hospitals will need to examine all of their “under arrangements” ventures and their space and equipment leases with physicians to identify those arrangements which violate these new Stark regulations and restructure or terminate those arrangements so identified prior to October 1, 2009. In addition, in this July 2008 final rule CMS indicated that it will continue to enact further regulations tightening aspects of the Stark Law that it perceives allow for Medicare program abuse, especially those regulations that still permit physicians to profit from their referrals of ancillary services. We cannot assure you that the arrangements entered into by our hospitals will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted.

                Additionally, if we violate the Anti-kickback Statute or Stark Law, or if we improperly bill for our services, we may be found to violate the False Claims Act, either under a suit brought by the government or by a private person under a qui tam, or “whistleblower,” suit.

                If we fail to comply with the Anti-kickback Statute, the Stark Law, the False Claims Act or other applicable laws and regulations, or if we fail to maintain an effective corporate compliance program, we could be subjected to liabilities, including civil penalties (including the loss of our licenses to operate one or more facilities), exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state health care programs and, for violations of certain laws and regulations, criminal penalties. See Item 1, “Business — Governmental Regulation and Other Factors.”

                All of the states in which we operate have adopted or have considered adopting similar anti-kickback and physician self-referral legislation, some of which extends beyond the scope of the federal law to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals, regardless of the source of payment for the care. Little precedent exists for the interpretation or enforcement of these laws. Both federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts.

                Government officials responsible for enforcing healthcare laws could assert that one or more of our facilities, or any of the transactions in which we are involved, are in violation of the Anti-Kickback Statute or the Stark Law and related state law exceptions. It is also possible that the courts could ultimately interpret these laws in a manner that is different from our interpretations. Moreover, other healthcare companies, alleged to have violated these laws, have paid significant sums to settle such allegations and entered into “corporate integrity agreements” because of concern that the government might exercise its authority to exclude those providers from governmental payment programs (Medicare, Medicaid, TRICARE). A determination that one or more of our facilities has violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects, and our business reputation could suffer significantly.

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                Illinois and Massachusetts require governmental determinations of need (“Certificates of Need”) prior to the purchase of major medical equipment or the construction, expansion, closure, sale or change of control of healthcare facilities. We believe our facilities have obtained appropriate certificates wherever applicable. However, if a determination were made that we were in material violation of such laws, our operations and financial results could be materially adversely affected. The governmental determinations, embodied in Certificates of Need, can also affect our facilities’ ability to add bed capacity or important services. We cannot predict whether we will be able to obtain required Certificates of Need in the future. A failure to obtain any required Certificates of Need may impair our ability to operate the affected facility profitably.

                The laws, rules and regulations described above are complex and subject to interpretation. If we are in violation of any of these laws, rules or regulations, or if further changes in the regulatory framework occur, our results of operations could be significantly harmed. For a more detailed discussion of the laws, rules and regulations described above, see Item 1, “Business – Government Regulation and Other Factors.”

                Some of our hospitals will be required to submit to CMS information on their relationships with physicians and this submission could subject such hospitals and us to liability.

                CMS announced in 2007 that it intends to collect information on ownership, investment and compensation arrangements with physicians from 500 (pre-selected) hospitals by requiring these hospitals to submit to CMS Disclosure of Financial Relationship Reports (“DFRR”) from each selected hospital. CMS also indicated that at least 10 of our hospitals will be among these 500 hospitals required to submit a DFRR because these 10 hospitals did not respond to CMS’ voluntary survey instrument on this topic purportedly submitted to these hospitals via email by CMS in 2006. CMS intends to use this data to determine whether these hospitals were in compliance with the Stark Law and implementing regulations during the reporting period (currently expected to be the cost reporting periods of these hospitals ending in 2006), and CMS has indicated it may share this information with other government agencies and with Congressional committees.  Many of these agencies have not previously analyzed this information and have the authority to bring enforcement actions against the hospitals. However, in July 2008 CMS announced that, based on its further review and expected further public comments on this matter, CMS may decide in the future to decrease (but not increase) the number of hospitals to which it will send the DFRR below the 500 hospitals originally designated.

                Once a hospital receives this request for a DFRR, the hospital will have 60 days to compile a significant amount of information relating to its financial relationships with physicians. The hospital may be subject to civil monetary penalties of up to $10,000 per day if it is unable to assemble and report this information within the required timeframe or if CMS or any other government agency determines that the submission is inaccurate or incomplete. The hospital may be the subject of investigations or enforcement actions if a government agency determines that any of the information indicates a potential violation of law.

                Also, while in 2007 CMS had announced that it was contemplating proposing a regular financial disclosure process that would apply in the future to all Medicare participating hospitals, in July 2008 CMS announced that, based upon public comments previously received, it was not adopting a regular reporting or disclosure process at that time, and, thus, CMS said the DFRR will initially be used as a one-time collection effort. However, CMS also said in July 2008 that, depending on the information received from the initial DFRR process and other factors, it may propose future rulemaking to use the DFRR or some other instrument as a periodic or regular collection instrument. Thus, even if one of our hospitals does not receive the DFRR survey as part of the initial up to 500 selected hospitals, we expect that all of our hospitals will possibly have to report similar information to CMS in the future.

                Any governmental investigation or enforcement action which results from the DFRR process could materially adversely affect the results of our operations.

                Providers in the healthcare industry have been the subject of federal and state investigations, whistleblower lawsuits and class action litigation, and we may become subject to investigations, whistleblower lawsuits or class action litigation in the future.

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                Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of hospital companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including:

               • cost reporting and billing practices;                                                                                                               

               • laboratory and home healthcare services;

               • physician ownership of, and joint ventures with, hospitals;

               • physician recruitment activities; and

               • other financial arrangements with referral sources

                In addition, the federal False Claims Act permits private parties to bring qui tam, or whistleblower, lawsuits against companies. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware. Defendants determined to be liable under the False Claims Act may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Typically, each fraudulent bill submitted by a provider is considered a separate false claim, and thus the penalties under false claims may be substantial. Liability arises when an entity knowingly submits a false claim for reimbursement to the federal government. In some cases, whistleblowers or the federal government have taken the position that providers who allegedly have violated other statutes and have submitted claims to a governmental payer during the time period they allegedly violated these other statutes, have thereby submitted false claims under the False Claims Act. Some states have adopted similar whistleblower and false claims provisions.

                The Office of the Inspector General of the Department of Health and Human Services and the Department of Justice have, from time to time, established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Initiatives include a focus on hospital billing for outpatient charges associated with inpatient services, as well as hospital laboratory billing practices.  As a result of these regulations and initiatives, some of our activities could become the subject of governmental investigations or inquiries. For example, we have significant Medicare and Medicaid billings, we provide some durable medical equipment and home healthcare services, and we have joint venture arrangements involving physician investors. We also have a variety of other financial arrangements with physicians and other potential referral sources including recruitment arrangements and leases. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. We are aware that several of our hospitals or their related healthcare operations were and may still be under investigation in connection with activities conducted prior to our acquisition of them. Under the terms of our various acquisition agreements, the prior owners of our hospitals are responsible for any liabilities arising from pre-closing violations. The prior owners’ resolution of these matters or failure to resolve these matters, in the event that any resolution was deemed necessary, may have a material adverse effect on our business, financial condition or results of operations. Any investigations of us, our executives, managers, facilities or operations could result in significant liabilities or penalties to us, as well as adverse publicity.

                We maintain a voluntary compliance program to address health regulatory and other compliance requirements. This program includes initial and periodic ethics and compliance training and effectiveness reviews, a toll-free hotline for employees to report, without fear of retaliation, any suspected legal or ethical violations, annual “fraud and abuse” audits to look at all of our financial relationships with physicians and other referral sources and annual “coding audits” to make sure our hospitals bill the proper service codes in respect of obtaining payment from the Medicare and Medicaid programs.

                As an element of our corporate compliance program and our internal compliance audits, from time to time we make voluntary disclosures and repayments to the Medicare and Medicaid programs and/or to the federal and/or state regulators for these programs in the ordinary course of business. At the current time, we know of no active investigations by any of these programs or regulators in respect of our disclosures or repayments. All of these voluntary actions on our part could lead to an investigation by the regulators to determine whether any of our facilities have violated the Stark Law, the Anti-Kickback Statute, the False Claims Act or similar state law. Either an investigation or initiation of administrative or judicial actions could result in a public announcement of possible

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violations of the Stark Law, the Anti-Kickback Statute or the False Claims Act or similar state law. Such determination or announcements could have a material adverse effect on our business, financial condition, results of operations or prospects, and our business reputation could suffer significantly.

                Additionally, several hospital companies have in recent years been named defendants in class action litigation alleging, among other things, that their charge structures are fraudulent and, under state law, unfair or deceptive practices, insofar as those hospitals charge insurers lower rates than those charged to uninsured patients. We cannot assure you that we will not be named as a defendant in litigation of this type. Furthermore, the outcome of these suits may affect the industry standard for charity care policies and any response we take may have a material adverse effect on our financial results.

                In June 2006 we and two other hospital systems operating in San Antonio, Texas had a putative class action lawsuit brought against all of us alleging that we and the other defendants has conspired with each other and with other unidentified San Antonio area hospitals to depress the compensation levels of registered nurses employed at the competing hospitals within the San Antonio area by engaging in certain activities that violated the federal antitrust laws.  See  “Item 3- Legal Proceedings” for further discussion of this litigation. On the same day that this litigation was brought against us and two other hospital systems in San Antonio, substantially similar class action litigation was brought against multiple hospitals in three other cities.

                Competition from other hospitals or healthcare providers (especially specialty hospitals) may reduce our patient volumes and profitability.

                The healthcare business is highly competitive and competition among hospitals and other healthcare providers for patients has intensified in recent years. Generally, other hospitals in the local communities served by most of our hospitals provide services similar to those offered by our hospitals. In addition, we believe the number of freestanding specialty hospitals and surgery and diagnostic centers in the geographic areas in which we operate has increased significantly in recent years. As a result, most of our hospitals operate in an increasingly competitive environment. Some of the hospitals that compete with our hospitals are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. Increasingly, we are facing competition from physician-owned specialty hospitals and freestanding surgery centers that compete for market share in high margin services and for quality physicians and personnel. Also, we anticipate that the number of physician-owned specialty hospitals may increase as CMS has ended a moratorium on the Medicare enrollment of such hospitals. If ambulatory surgery centers are better able to compete in this environment than our hospitals, our hospitals may experience a decline in patient volume, and we may experience a decrease in margin, even if those patients use our ambulatory surgery centers. Further, if our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our hospitals and ambulatory surgery centers, we may experience an overall decline in patient volume. See Item 1, “Business - Competition.”

                In 2005, CMS began making public performance data related to 10 quality measures that hospitals submit in connection with their Medicare reimbursement. In February 2006, federal legislation was enacted to expand and provide for the future expansion of the number of quality measures that must be reported. For federal fiscal year 2008, CMS requires hospitals to report 30 measures of inpatient quality of care to avoid a 2% point reduction in their market basket update. For the federal fiscal year 2009 payment update, CMS will require hospitals to report 42 inpatient quality measures to avoid a 2% point reduction in their market basket update. CMS is also requiring that seven measures of outpatient quality of care be reported during federal fiscal year 2008 to receive the full market basket update for outpatient services in federal fiscal year 2009. If any of our hospitals achieve poor results (or results that are lower than our competitors) on these quality measures, patient volumes could decline. Also, the additional quality measures and future trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volumes.

                PHP also faces competition within the Arizona markets that it serves. As in the case of our hospitals, some of our competitors in these markets are owned by governmental agencies or not-for-profit corporations that have greater financial resources than we do. Other competitors have larger membership bases, are more established and have greater geographic coverage areas that give them an advantage in competing for a limited pool of eligible health plan members. The revenues we derive from PHP could significantly decrease if new plans operating under

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AHCCCS enter these markets or other existing AHCCCS plans increase their number of enrollees. Moreover, a failure to attract future enrollees may negatively impact our ability to maintain our profitability in these markets.

                We may be subject to liabilities from claims brought against our facilities.

                We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been instituted or asserted against us, including those outside of the ordinary course of business like class actions and those in the ordinary course of business like malpractice lawsuits. Some of these actions may involve large claims as well as significant defense costs. (See “Item 3, “Legal Proceedings.”)

                We maintain professional and general liability insurance in amounts we believe are sufficient to cover claims arising out of the operations of our facilities. Some of the claims could exceed the scope of the coverage in effect or coverage of particular claims or damages could be denied.

                The relatively high cost of professional liability insurance and, in some cases, the lack of availability of such insurance coverage, for physicians with privileges at our hospitals increases our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured physician are named as co-defendants. As a result, we are subject to greater self-insured risk and may be required to fund claims out of our operating cash flows to a greater extent than during fiscal year 2008. We cannot assure you that we will be able to continue to obtain insurance coverage in the future or that such insurance coverage, if it is available, will be available on acceptable terms.

                While we cannot predict the likelihood of future claims or inquiries, we expect that new matters may be initiated against us from time to time. Moreover, the results of current claims, lawsuits and investigations cannot be predicted, and it is possible that the ultimate resolution of these matters, individually or in the aggregate, may have a material adverse effect on our business (both in the near and long term), financial position, results of operations or cash flows.

                Our hospitals face a growth in uncompensated care as the result of the inability of uninsured patients to pay for healthcare services and difficulties in collecting patient portions of insured accounts. 

                Like others in the hospital industry, we have experienced an increase in uncompensated care. Our combined provision for doubtful accounts and charity care deductions as a percentage of patient service revenues increased from 11.2% during fiscal 2006 to 12.0% during fiscal 2007 and to 12.5% during fiscal 2008. Our self pay discharges as a percentage of total discharges have not fluctuated significantly during our past three fiscal years. Our hospitals remain at risk for increases in uncompensated care as a result of price increases, the continuing trend of increases in coinsurance and deductible portions of managed care accounts and increases in uninsured patients as a result of potential state Medicaid funding cuts or general economic weakness. Although we continue to seek ways of improving point of service collection efforts and implementing appropriate payment plans with our patients, if we continue to experience growth in self-pay volumes and revenues, our results of operations could be materially adversely affected. Further, our ability to improve collections for self-pay patients may be limited by regulatory and investigatory initiatives, including private lawsuits directed at hospital charges and collection practices for uninsured and underinsured patients.

                Our performance depends on our ability to recruit and retain quality physicians.

                Physicians generally direct the majority of hospital admissions. Thus, the success of our hospitals depends in part on the following factors:

               • the number and quality of the physicians on the medical staffs of our hospitals;                                         

               • the admitting practices of those physicians; and

               • the maintenance of good relations with those physicians.

                Most physicians at our hospitals also have admitting privileges at other hospitals. Our efforts to attract and retain physicians are affected by our managed care contracting relationships, national shortages in some specialties, such as anesthesiology and radiology, the adequacy of our support personnel, the condition of our facilities and

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medical equipment, the availability of suitable medical office space and federal and state laws and regulations prohibiting financial relationships that may have the effect of inducing patient referrals. If facilities are not staffed with adequate support personnel or technologically advanced equipment that meets the needs of patients, physicians may be discouraged from referring patients to our facilities, which could adversely affect our profitability.

                In an effort to meet community needs in the markets in which we operate, we have implemented a strategy to employ physicians both in primary care and in certain specialties. As of June 30, 2008, we employed 196 practicing  physicians.  The deployment of a physician employment strategy includes increased salary costs, physician integration risks and difficulties associated with physician practice management. While we believe this strategy is consistent with industry trends, we cannot be assured of the long-term success of such a strategy.

                We may be unable to achieve our acquisition and growth strategies and we may have difficulty acquiring not-for-profit hospitals due to regulatory scrutiny.

                An important element of our business strategy is expansion by acquiring hospitals in our existing and in new urban and suburban markets and by entering into partnerships or affiliations with other healthcare service providers. The competition to acquire hospitals is significant, including competition from healthcare companies with greater financial resources than ours, and we may not be able to make suitable acquisitions on favorable terms. We may have difficulty obtaining financing, if necessary, for such acquisitions on satisfactory terms. We sometimes agree not to sell an acquired hospital for some period of time (currently no longer than 10 years) after closing and/or grant the seller a right of first refusal to purchase the hospital if we agree to sell it to a third party. In addition, we may not be able to effectively integrate any acquired facilities with our operations. Even if we continue to acquire additional facilities and/or enter into partnerships or affiliations with other healthcare service providers, federal and state regulatory agencies may constrain our ability to grow.

                Additionally, many states, including some where we have hospitals and others where we may in the future attempt to acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the sale proceeds by the not-for-profit seller. These review and approval processes can add time to the consummation of an acquisition of a not-for profit hospital, and future actions on the state level could seriously delay or even prevent future acquisitions of not-for-profit hospitals. Furthermore, as a condition to approving an acquisition, the attorney general of the state in which the hospital is located may require us to maintain specific services, such as emergency departments, or to continue to provide specific levels of charity care, which may affect our decision to acquire or the terms upon which we acquire one of these hospitals.

                Difficulties with integrating our acquisitions may disrupt our ongoing operations.

                We may not be able to profitably or effectively integrate the operations of, or otherwise achieve the intended benefits from, any acquisitions we make or partnerships or affiliations we may form. The process of integrating acquired hospitals may require a disproportionate amount of management’s time and attention, potentially distracting management from its day-to-day responsibilities. This process may be even more difficult in the case of hospitals we may acquire out of bankruptcy or otherwise in financial distress. In addition, poor integration of acquired facilities could cause interruptions to our business activities, including those of the acquired facilities. As a result, we may incur significant costs related to acquiring or integrating these facilities and may not realize the anticipated benefits.

                Moreover, acquired businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. We could in the future become liable for past activities of acquired businesses and these liabilities could be material.

                Our hospitals face competition for staffing, which may increase our labor costs and reduce profitability.

                We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including nurses and other non-

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physician healthcare professionals. In the healthcare industry generally, including in our markets, the scarcity of nurses and other medical support personnel has become a significant operating issue. This shortage may require us to increase wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. We have raised on several occasions in the past, and expect to raise in the future, wages for our nurses and other medical support personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. In addition, to the extent that a significant additional portion of our employee base unionizes, or attempts to unionize, our labor costs could increase materially. If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because approximately 90% of our net patient revenues for the year ended June 30, 2008, consisted of payments based on fixed or negotiated rates, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs, could have a material adverse effect on our profitability.

                The cost of our malpractice insurance and the malpractice insurance of physicians who practice at our facilities remains volatile. Successful malpractice or tort claims asserted against us, our physicians or our employees could materially adversely affect our financial condition and profitability.

                Physicians, hospitals and other healthcare providers are subject to legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large monetary claims and significant defense costs. Hospitals and physicians have typically maintained a special type of insurance (commonly called malpractice or professional liability insurance) to protect against the costs of these types of legal actions. We created a captive insurance subsidiary on June 1, 2002, to assume a substantial portion of the professional and general liability risks of our facilities. For claims incurred during the period June 1, 2002 to May 31, 2006, we maintained all of our professional and general liability insurance through this captive insurance subsidiary in respect of losses up to $10.0 million per occurrence. For claims incurred subsequent to May 31, 2006, we self-insure the first $9.0 million per occurrence, and our captive subsidiary insures the next $1.0 million per occurrence. We have also purchased an umbrella excess policy for professional and general liability insurance for the period June 1, 2008 to May 31, 2009 with unrelated commercial carriers. This policy covers losses in excess of $10.0 million per occurrence up to $75.0 million, but is limited to total annual payments of $65.0 million in the aggregate. While our premium prices have declined during the past few years, the total cost of professional and general liability insurance remains sensitive to the volume and severity of cases reported.  There is no guarantee that excess insurance coverage will continue to be available in the future at a cost allowing us to maintain adequate levels of such insurance. Moreover, due to the increased retention limits insured by us and our captive subsidiary, if actual payments of claims materially exceed our projected estimates of malpractice claims, our financial condition could be materially adversely affected.

                Physicians’ professional liability insurance costs in certain markets have dramatically increased to the point where some physicians are either choosing to retire early or leave those markets. If physician professional liability insurance costs continue to escalate in markets in which we operate, some physicians may choose not to practice at our facilities, which could reduce our patient volumes and revenues. Our hospitals may also incur a greater percentage of the amounts paid to claimants if physicians are unable to obtain adequate malpractice coverage.

                We anticipate employing over 90 additional physicians during our fiscal year 2009. Such a significant increase in employed physicians could significantly increase our professional and general liability risks and related costs in future periods.

                We are subject to uncertainties regarding healthcare reform that could materially and adversely affect our business.

                In recent years, an increasing number of legislative initiatives have been introduced or proposed in Congress and in state legislatures that would result in major changes in the healthcare system, either nationally or at the state level. Among the proposals that have been introduced are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees and the creation of a government health insurance plan or plans that would cover all citizens and increase payments by beneficiaries. Increased regulations, mandated benefits and more oversight, audits and investigations and changes in laws allowing access to federal and state courts to

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challenge healthcare decisions may increase our administrative, litigation and healthcare costs. We cannot predict whether any of the above proposals or any other proposals will be adopted, and if adopted, we cannot assure you that the implementation of these reforms will not have a material adverse effect on our business, financial position or results of operations.

                Our facilities are concentrated in a small number of regions. If any one of the regions in which we operate experiences a regulatory change, economic downturn or other material change, our overall business results may suffer.

                Among our operations as of June 30, 2008, five hospitals and various related healthcare businesses were located in San Antonio, Texas; five hospitals and related healthcare businesses were located in metropolitan Phoenix, Arizona; two hospitals and related healthcare businesses were located in metropolitan Chicago, Illinois; and three hospitals and related healthcare businesses were located in Massachusetts. For the year ended June 30, 2008, our total revenues were generated as follows:

	Year Ended June 30, 2008
San Antonio	32.1	%
Massachusetts	19.7
Metropolitan Phoenix, excluding Phoenix Health Plan and Abrazo    Advantage Health Plan	18.8
Phoenix Health Plan and Abrazo Advantage Health Plan	14.1
Metropolitan Chicago (1)	14.9
Other	0.4
____________________	100.0	%
(1)   Includes MacNeal Health Providers.

                Any material change in the current demographic, economic, competitive or regulatory conditions in any of these regions could adversely affect our overall business results because of the significance of our operations in each of these regions to our overall operating performance. Moreover, due to the concentration of our revenues in only four regions, our business is less diversified and, accordingly, is subject to greater regional risk than that of some of our larger competitors.

                If we are unable to control our healthcare costs at Phoenix Health Plan and Abrazo Advantage Health Plan, if the health plans should lose their governmental contracts or if budgetary cuts reduce the scope of Medicaid or dual-eligibility coverage, our profitability may be adversely affected.

                For the year ended June 30, 2008, PHP generated approximately 12.7% of our total revenues. PHP derives substantially all of its revenues through a contract with AHCCCS. AHCCCS pays capitated rates to PHP, and PHP subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. If we fail to effectively manage our healthcare costs, these costs may exceed the payments we receive. Many factors can cause actual healthcare costs to exceed the capitated rates paid by AHCCCS, including:

               • our ability to contract with cost-effective healthcare providers;                                                                   

               • the increased cost of individual healthcare services;

               • the type and number of individual healthcare services delivered; and

               • the occurrence of catastrophes, epidemics or other unforeseen occurrences

                Our new contract with AHCCCS begins October 1, 2008 and expires September 30, 2011 and could result in significant membership growth in geographic areas in which we did not provide services under our previous AHCCCS contract that could increase our risk. The new contract is terminable without cause on 90 days’ written notice from AHCCCS or for cause upon written notice from AHCCCS if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. AHCCCS may also terminate the contract with PHP in the event of unavailability of state or federal funding. If our AHCCCS contract is terminated, our profitability would be adversely affected by the loss of these revenues and cash

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flows. Also, should the scope of the Medicaid program be reduced as a result of state budgetary cuts or other political factors, our results of operations could be adversely affected.

                For the year ended June 30, 2008, AAHP generated 1.4% of our total revenues. AAHP began providing healthcare coverage to Medicare and Medicaid dual-eligible enrollees on January 1, 2006. Most of AAHP’s members were formerly enrolled in PHP. AAHP’s contract with CMS went into effect on January 1, 2006, for a term of one year, with a provision for successive one year renewals, and has currently been renewed through December 31, 2008. If we fail to effectively manage AAHP’s healthcare costs, these costs may exceed the payments we receive.

                We are dependent on our senior management team and local management personnel, and the loss of the services of one or more of our senior management team or key local management personnel could have a material adverse effect on our business.

                The success of our business is largely dependent upon the services and management experience of our senior management team, which includes Charles N. Martin, Jr., our Chairman and Chief Executive Officer; Kent H. Wallace, our President and Chief Operating Officer; Keith B. Pitts, our Vice Chairman, Phillip W. Roe, our Executive Vice President, Chief Financial Officer and Treasurer; and Joseph D. Moore, Executive Vice President. In addition, we depend on our ability to attract and retain local managers at our hospitals and related facilities, on the ability of our senior officers and key employees to manage growth successfully and on our ability to attract and retain skilled employees. We do not maintain key man life insurance policies on any of our officers. If we were to lose any of our senior management team or members of our local management teams, or if we are unable to attract other necessary personnel in the future, it could have a material adverse effect on our business, financial condition and results of operations. If we were to lose the services of one or more members of our senior management team or a significant portion of our hospital management staff at one or more of our hospitals, we would likely experience a significant disruption in our operations and failure of the affected hospitals to adhere to their respective business plans.

                Changes in legislation may significantly reduce government healthcare spending and our revenues.

                Governmental healthcare programs, principally Medicare and Medicaid, accounted for 55% of our net patient revenues (including managed Medicare and managed Medicaid programs) for both the years ended June 30, 2007 and 2008. In recent years, legislative changes have resulted in limitations on and, in some cases, reductions in levels of, payments to healthcare providers for certain services under many of these government programs. Further, legislative changes have altered the method of payment for various services under the Medicare and Medicaid programs. We believe that hospital operating margins across the country, including ours, have been and may continue to be under pressure because of limited pricing flexibility and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. DRA 2005 passed in February 2006 reduces federal funding for Medicare and Medicaid by approximately $11 billion over the next five years. In addition, a number of states are experiencing budget problems and have adopted or are considering legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand states’ Medicaid systems.

                Controls designed to reduce inpatient services may reduce our revenues.

                Controls imposed by Medicare and commercial third-party payers designed to reduce admissions and lengths of stay, commonly referred to as “utilization review,” have affected and are expected to continue to affect our facilities. Utilization review entails the review of the admission and course of treatment of a patient by managed care plans. Inpatient utilization, average lengths of stay and occupancy rates continue to be negatively affected by payer-required preadmission authorization and utilization review and by payer pressures to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. Efforts to impose more stringent cost controls are expected to continue. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material, adverse effect on our business, financial position and results of operations.

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                If we fail to continually enhance our hospitals with the most recent technological advances in diagnostic and surgical equipment, our ability to maintain and expand our markets will be adversely affected.

                Technological advances with respect to computed axial tomography (CT), magnetic resonance imaging (MRI) and positron emission tomography (PET) equipment, as well as other equipment used in our facilities, are continually evolving. In an effort to compete with other healthcare providers, we must constantly evaluate our equipment needs and upgrade equipment as a result of technological improvements. Such equipment costs typically range from $1.0 million to $3.0 million, exclusive of construction or build-out costs.

                Our hospitals face competition for staffing especially as a result of the national shortage of nurses and the increased imposition on us of nurse-staffing ratios, which has in the past and may in the future increase our labor costs and materially reduce our profitability.

                We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including most significantly nurses and other non-physician healthcare professionals. In the healthcare industry generally, including in our markets, the national shortage of nurses and other medical support personnel has become a significant operating issue. This shortage has caused us in the past and may require us in the future to increase wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. We have voluntarily raised on several occasions in the past, and expect to raise in the future, wages for our nurses and other medical support personnel.  In addition, union-mandated or state-mandated nurse-staffing ratios significantly affect not only labor costs, but may also cause us to limit patient admissions with a corresponding adverse effect on revenues if we are unable to hire the appropriate number of nurses to meet the required ratios. While we do not currently operate in any states with mandated nurse-staffing ratios, the states in which we operate could adopt mandatory nurse-staffing ratios at any time. In those instances where our nurses are unionized, it is our experience that new union contracts often impose significant new additional staffing ratios by contract on our hospitals. This was the case with the increased staffing ratios imposed on us in our union contract with our nurses at Saint Vincent Hospital in Worcester, Massachusetts negotiated in 2007. In addition, to the extent that a significant additional portion of our employee base unionizes, or attempts to unionize, our labor costs could increase materially, especially if the newly unionized employees are nurses. If our labor costs continue to increase, we may not be able to raise our payer reimbursement levels to offset these increased costs, including the significantly increased costs that we will incur for wage increases and nurse-staffing ratios under our new union contract with our nurses at Saint Vincent Hospital.  Because substantially all of our net patient revenues consist of payments based on fixed or negotiated rates, our ability to pass along increased labor costs is materially constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs, could have a material adverse effect on our profitability.

                Compliance with section 404 of the Sarbanes-Oxley Act may negatively impact our results of operations and failure to comply may subject us to regulatory scrutiny and a loss of investors’ confidence in our internal control over financial reporting.

                Section 404 of the Sarbanes-Oxley Act of 2002 (the “404 Act”) requires us to perform an evaluation of our internal control over financial reporting and file management’s attestation with our annual report beginning with our fiscal year ended June 30, 2008. The 404 Act also requires our independent auditors to opine on our internal control over financial reporting beginning with our fiscal year ending June 30, 2010. We have evaluated, tested and implemented internal controls over financial reporting to enable management to report on such internal controls under the 404 Act as of June 30, 2008. However, we can not assure you that the conclusions reached by management in its June 30, 2010 report will be the same as those reached by our independent auditors in its report. Failure on our part to comply with the 404 Act may subject us to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting.

                A failure of our information systems would adversely affect our ability to properly manage our operations.

                We rely on our advanced information systems and our ability to successfully use these systems in our operations. These systems are essential to the following areas of our business operations, among others:

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               • patient accounting, including billing and collection of patient service revenues;                                         

               • financial, accounting, reporting and payroll;

               • coding and compliance;

               • laboratory, radiology and pharmacy systems;

               • remote physician access to patient data;

               • negotiating, pricing and administering managed care contracts; and

               • monitoring quality of care.

                If we are unable to use these systems effectively, we may experience delays in collection of patient service revenues and may not be able to properly manage our operations or oversee the compliance with laws or regulations.

                Difficulties with current construction projects or new construction projects such as additional hospitals or major expansion projects may involve significant capital expenditures that could have an adverse impact on our liquidity.

                We may decide to construct an additional hospital or hospitals in the future or construct additional major expansion projects to existing hospitals in order to achieve our growth objectives. Our ability to complete construction of new hospitals or new expansion projects on budget and on schedule would depend on a number of factors, including, but not limited to:

               • our ability to control construction costs;                                                                                                       

               • the failure of general contractors or subcontractors to perform under their contracts;

               • adverse weather conditions;

               • shortages of labor or materials;

               • our ability to obtain necessary licensing and other required governmental authorizations; and

               • other unforeseen problems and delays.

                As a result of these and other factors, we cannot assure you that we will not experience increased construction costs on our construction projects or that we will be able to construct our current or any future construction projects as originally planned. In addition, our current and any future major construction projects has and would involve a significant commitment of capital with no revenues associated with the projects during construction, which also could have in the future an adverse impact on our liquidity.

                If the costs for construction materials and labor continue to rise, such increased costs could have an adverse impact on the return on investment relating to our expansion projects.

                The cost of construction materials and labor has significantly increased over the past year as a result of global and domestic events. We have experienced significant increases in the cost of steel due to the demand in China for such materials and an increase in the cost of lumber due to multiple factors. Increases in oil and gas prices have increased costs for oil-based products and for transporting materials to job sites. As we continue to invest in modern technologies, emergency rooms and operating room expansions, we expend large sums of cash generated from operating activities. We evaluate the financial viability of such projects based on whether the projected cash flow return on investment exceeds our cost of capital. Such returns may not be achieved if the cost of construction continues to rise significantly or anticipated volumes do not materialize.

                State efforts to regulate the construction or expansion of hospitals could impair our ability to operate and expand our operations.

                Some states require healthcare providers to obtain prior approval, known as certificates of need, for:

               • the purchase, construction or expansion of healthcare facilities;                                                                  

               • capital expenditures exceeding a prescribed amount; or

               • changes in services or bed capacity.

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                In giving approval, these states consider the need for additional or expanded healthcare facilities or services. Illinois and Massachusetts are the only states in which we currently own hospitals that have certificate of need laws. The failure to obtain any required certificate of need could impair our ability to operate or expand operations in these states.

                If the fair value of our reporting units declines, a material non-cash charge to earnings from impairment of our goodwill could result.

                Blackstone acquired our predecessor company during fiscal 2005. We recorded a significant portion of the purchase price as goodwill. At June 30, 2008, we had approximately $689.2 million of goodwill recorded on our financial statements. We expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing basis, we evaluate, based on the fair value of our reporting units, whether the carrying value of our goodwill is impaired. During fiscal 2007, we recorded a $123.8 million ($110.5 million, net of tax benefit) impairment charge to goodwill to reduce the carrying values of our Chicago hospitals to their fair values. If the carrying value of our goodwill is further impaired, we may incur an additional material non-cash charge to earnings.

Additional Risk Factors

                See the additional risks related to our business in “Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations – General Trends” which are incorporated by reference in this Item 1A as if fully set forth herein.

Available Information

                We currently voluntarily file certain reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K and quarterly reports on Form 10-Q. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports and other information we file electronically. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are also available free of charge on our internet website at www.vanguardhealth.com under “Investor Relations-SEC Filings-SEC Filings on the Edgar Database” as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. Please note that our website address is provided as an inactive textual reference only. Also, the information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.

Item 1B. Unresolved Staff Comments.

                Not applicable.

Item 2.    Properties.

                A listing of our owned acute hospitals is included in Item 1 of this report under the caption “Business-Our Facilities”. We also own or lease space for outpatient service facilities complementary to our hospitals and own and operate a limited number of medical office buildings (some of which are joint ventures) associated with our hospitals that are occupied primarily by physicians who practice at our hospitals. The most significant of these complementary outpatient healthcare facilities are two surgery centers in Orange County, California, five diagnostic imaging centers in metropolitan Phoenix, Arizona and a 50% interest in seven diagnostic imaging centers in San Antonio, Texas. Most of these outpatient facilities are in leased facilities, and the diagnostic imaging centers in San Antonio are owned and operated in joint ventures where we have minority partners.

                As of June 30, 2008, we leased approximately 53,200 square feet of office space at 20 Burton Hills Boulevard, Nashville, Tennessee, for our corporate headquarters.

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                Our headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for our present needs. Our obligations under our senior credit facilities are secured by a pledge of substantially all of our assets, including first priority mortgages on each of our hospitals. Also, our properties are subject to various federal, state and local statutes and ordinances regulating their operation. Management does not believe that compliance with such statutes and ordinances will materially affect our financial position or results from operations.

Item 3.    Legal Proceedings.

                We operate in a highly regulated and litigious industry. As a result, various lawsuits, claims and legal and regulatory proceedings have been instituted or asserted against us.  While we cannot predict the likelihood of future claims or inquiries, we expect that new matters may be initiated against us from time to time. The results of claims, lawsuits and investigations cannot be predicted, and it is possible that the ultimate resolution of these matters, individually or in the aggregate, may have a material adverse effect on our business (both in the near and long term), financial position, results of operations or cash flows. We recognize that, where appropriate, our interests may be best served by resolving certain matters without litigation. If non-litigated resolution is not possible or appropriate with respect to a particular matter, we will continue to defend ourselves vigorously.

                Currently pending and recently settled legal proceedings and investigations that are not in the ordinary course of business are set forth below. Where specific amounts are sought in any pending legal proceeding, those amounts are disclosed. For all other matters, where the possible loss or range of loss is reasonably estimable, an estimate is provided. Where no estimate is provided, the possible amount of loss is not reasonably estimable at this time. We record reserves for claims and lawsuits when they are probable and reasonably estimable. For matters where the likelihood or extent of a loss is not probable or cannot be reasonably estimated, we have not recognized in our consolidated financial statements all potential liabilities that may result. We undertake no obligation to update the following disclosures for any new developments.

                Sherman Act Antitrust Class Action Litigation – Maderazo, et al v. VHS San Antonio Partners, L.P. d/b/a Baptist Health Systems, et al, Case No. 5:06cv00535 (United States District Court, Western District of Texas, San Antonio Division, filed June 20, 2006 and amended August 29, 2006)

                On June 20, 2006, a federal antitrust class action suit was filed in San Antonio, Texas against our Baptist Health System subsidiary in San Antonio, Texas and two other large hospital systems in San Antonio. In the complaint, plaintiffs allege that the three hospital system defendants conspired with each other and with other unidentified San Antonio area hospitals to depress the compensation levels of registered nurses employed at the conspiring hospitals within the San Antonio area by engaging in certain activities that violated the federal antitrust laws. The complaint alleges two separate claims. The first count asserts that the defendant hospitals violated Section 1 of the federal Sherman Act, which prohibits agreements that unreasonably restrain competition, by conspiring to depress nurses’ compensation. The second count alleges that the defendant hospital systems also violated Section 1 of the Sherman Act by participating in wage, salary and benefits surveys for the purpose, and having the effect, of depressing registered nurses’ compensation or limiting competition for nurses based on their compensation. The class on whose behalf the plaintiffs filed the complaint is alleged to comprise all registered nurses employed by the defendant hospitals since June 20, 2002. The suit seeks unspecified damages, trebling of this damage amount pursuant to federal law, interest, costs and attorneys fees. Currently, the parties are producing documents relating to our efforts to defeat class certification in this suit. We believe that the allegations contained within this putative class action suit are without merit, and we intend to vigorously defend against the litigation.

                On the same date that this suit was filed against us in federal district court in San Antonio, the same attorneys filed three other substantially similar putative class action lawsuits in federal district courts in Chicago, Illinois, Albany, New York and Memphis, Tennessee against some of the hospitals in those cities (none of such hospitals being owned by us). The attorneys representing the plaintiffs in all four of these cases said in June 2006 that they may file similar complaints in other jurisdictions and in December 2006 they brought a substantially similar class action lawsuit against various hospitals in the Detroit, Michigan metropolitan area. Since representatives of the Service Employees International Union joined plaintiffs’ attorneys in announcing the filing of all four complaints on June 20, 2006, and as has been reported in the media, we believe that SEIU’s involvement in

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these actions appears to be part of a corporate campaign to attempt to organize nurses in these cities, including San Antonio. The nurses in our hospitals in San Antonio are currently not members of any union.

                Medicare Secondary Payor Act Litigation - Brockovich, on behalf of the United States of America v. Vanguard Health Systems, Inc., et al. Case No. SACV06-547 JVS(MLGx) (United States District Court, Central District of California, Southern Division, filed June 9, 2006)

                In June 2006, Plaintiff Erin Brockovich, purportedly on behalf of the United States of America, filed a civil complaint in United States District Court in California claiming our violation of the Medicare Secondary Payer Act. In the complaint plaintiff alleged that we have inappropriately received and retained reimbursement from Medicare for treatment given to certain unidentified patients of our facilities whose injuries were caused by us as a result of unidentified and unadjudicated incidents of medical malpractice. Also, in June 2006 this same plaintiff filed identical lawsuits against more than 20 other companies that own hospitals and convalescent homes in California. In the case against us, plaintiff is seeking damages of twice the amount that defendants were allegedly obligated to pay or reimburse Medicare in connection with the treatment in question under the Medicare Secondary Payor Act, plus interest, together with plaintiff’s costs and fees, including attorneys’ fees. On July 25, 2006, we filed with the court a motion to dismiss this litigation (1) for failure to state a claim in so far as plaintiff has no standing to bring this action since she alleges no injury to herself as a result of our alleged acts and (2) for failure to state a cause of action since no court has ever held that claims may be brought under the Medicare Secondary Payer Act based upon unadjudicated and unidentified tort claims. On October 24, 2006, the United States District Court granted our July 25, 2006 motion to dismiss this litigation on the grounds that plaintiff Erin Brockovich lacked constitutional standing to bring this action. The District Court dismissed the litigation with prejudice because the deficiencies could not be cured by amendment of plaintiff’s compliant. On November 17, 2006, plaintiff appealed the District Court’s order dismissing this litigation to the United States Court of Appeals for the Ninth Circuit. On June 10, 2008, the Ninth Circuit granted plaintiff’s motion for voluntary dismissal of this appeal which has terminated this litigation.

                Claims in the ordinary course of business.

                We are also subject to claims and lawsuits arising in the ordinary course of business, including potential claims related to care and treatment provided at our hospitals and outpatient services facilities.  Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these ordinary course claims and lawsuits will not have a material adverse effect on our business, financial condition or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders.

                No matters were submitted to a vote of stockholders during the fourth quarter ended June 30, 2008, except that the holders of 100% of our outstanding common stock approved Amendments 4 and 5 to our 2004 Stock Incentive Plan pursuant to a written consent dated May 6, 2008. These Amendments increased the total number of our shares which may be issued under the Plan from 98,120 to 101,117 and expanded participants in the Plan from solely our employees to also our non-employed directors and those natural persons who perform services for us like consultants.

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

                There is no established public trading market for our common stock.  At September 1, 2008, there were five holders of record of our common stock.  These holders are VHS Holdings LLC and four investment funds affiliated with Blackstone.

                We have not declared or paid any dividends on its common stock in its two most recent fiscal years.  We intend to retain all current and foreseeable future earnings to support operations and finance expansion.  Our senior secured credit facility and the indentures governing our long-term indebtedness restrict our ability to pay cash dividends on our common stock.

                There have been no unregistered sales of our equity securities during the quarter ended June 30, 2008.

                Information regarding our equity compensation plans is set forth in this report under “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Equity Compensation Plan Information”, which information is incorporated herein by reference.

Item 6.    Selected Financial Data.

                The following table sets forth our selected historical financial and operating data for, or as of the end of, each of the five years ended June 30, 2008 (including the predecessor and successor periods). The selected historical financial data as of and for the predecessor year ended June 30, 2004, the combined predecessor and successor year ended June 30, 2005 and the years ended June 30, 2006, 2007 and 2008 were derived from our audited consolidated financial statements that have been audited by Ernst & Young LLP, an independent registered public accounting firm. Comparability of the selected historical financial and operating data has been impacted by the timing of acquisitions completed during fiscal 2005. Dispositions completed during fiscal 2006 and 2007 have been excluded from all periods presented. See “Executive Overview” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This table should be read in conjunction with the consolidated financial statements and notes thereto.

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		Predecessor Year Ended June 30, 2004			Combined Basis Year Ended June 30, 2005				Year Ended June 30, 2006			Year ended June 30, 2007			Year ended June 30, 2008			Predecessor July 1, 2004 through September 22, 2004			Successor September 23, 2004 through June 30, 2005
		(Dollars in millions, except Operating Data)
Statement of Operations Data:
Total revenues	$	1,583.1		$		2,037.3		$	2,418.6		$	2,580.7		$	2,790.7		$	397.9		$	1,639.4
Costs and expenses:
Salaries and benefits (includes stock compensation       of $0.1, $97.4, $1.7, $1.2, $2.5, $96.7 and       $0.7, respectively)		633.5				909.2			991.4			1,067.9			1,152.7			248.2			661.0
Supplies		253.2				336.8			394.1			421.8			434.5			63.7			273.1
Medical claims expense		211.8				237.2			270.3			297.0			328.2			55.0			182.2
Provision for doubtful accounts		104.7				133.0			156.8			175.2			205.6			27.8			105.2
Other operating expenses		222.0				288.8			353.0			375.0			405.8			57.3			231.5
Depreciation and amortization		58.8				75.7			100.3			118.6			131.0			16.0			59.7
Interest, net		41.4				82.3			103.8			123.8			122.1			9.0			73.3
Debt extinguishment costs		4.9				62.2			0.1			—			—			62.2			—
Minority interests		(2.5	)			(0.3	)		2.6			2.6			3.0			(0.5	)		0.2
Merger expenses		—				23.3			—			—			—			23.1			0.2
Impairment loss		—				—			—			123.8			—			—			—
Other expenses		(2.3	)			3.6			6.5			0.2			6.5			0.4			3.2
Subtotal		1,525.5				2,151.8			2,378.9			2,705.9			2,789.4			562.2			1,589.6
Income (loss) from continuing operations       before income taxes		57.6				(114.5	)		39.7			(125.2	)		1.3			(164.3	)		49.8
Income tax expense (benefit)		21.9				(34.7	)		17.8			(11.6	)		1.7			(52.2	)		17.5
Income (loss) from continuing operations		35.7				(79.8	)		21.9			(113.6	)		(0.4	)		(112.1	)		32.3
Income (loss) from discontinued operations,       net of taxes		4.4				1.7			(9.0	)		(19.1	)		(0.3	)		1.4			0.3
Net income (loss)		40.1				(78.1	)		12.9			(132.7	)		(0.7	)		(110.7	)		32.6
Preferred dividends		(4.0	)			(1.0	)		—			—			—			(1.0	)		—
Net income (loss) attributable to common       stockholders	$	36.1		$		(79.1	)	$	12.9		$	(132.7	)	$	(0.7	)	$	(111.7	)	$	32.6
Balance Sheet Data:
Assets	$	1,427.8		$		2,471.7		$	2,650.5		$	2,538.1		$	2,582.3					$	2,471.7
Long-term debt, including current portion		623.5				1,357.1			1,519.2			1,528.7			1,537.5						1,357.1
Payable-in-Kind Preferred Stock		61.0				—			—			—			—						—
Working capital		162.7				77.7			193.0			156.4			217.8						77.7
Other Financial Data:
Capital expenditures	$	136.1		$		224.2		$	275.5		$	164.3		$	121.6		$	27.1		$	197.1
Cash provided by operating activities		109.0				201.8			149.3			123.3			173.1			78.8			123.0
Cash used in investing activities		(225.1	)			(324.3	)		(245.4	)		(118.5	)		(143.8	)		(50.0	)		(274.3	)
Cash provided by (used in) financing activities		139.0				151.6			140.5			(8.3	)		(7.8	)		(20.0	)		171.6
Operating Data-continuing operations: (unaudited)
Number of hospitals at end of period		12				15			15			15			15
Number of licensed beds at end of period (a)		3,133				3,907			3,937			4,143			4,181
Discharges (b)		126,356				147,798			162,446			166,873			169,668
Adjusted discharges - hospitals (c)		186,464				231,322			261,056			264,698			270,076
Net revenue per adjusted discharge – hospitals (d)	$	6,455		$		6,859		$	7,319		$	7,766		$	8,110
Patient days (e)		519,589				623,333			701,307			721,832			734,838
Adjusted patient days – hospitals (f)		766,760				975,593			1,127,024			1,144,989			1,169,710
Average length of stay (days) (g)		4.1				4.2			4.3			4.3			4.3
Inpatient surgeries (h)		29,816				33,424			36,606			37,227			37,538
Outpatient surgeries (i)		54,180				67,944			76,437			76,606			73,339
Emergency room visits (j)		430,794				504,172			554,250			572,946			588,491
Occupancy rate (k)		45.5%				48.5%			49.2%			48.2%			48.5%
Average daily census (l)		1,420				1,708			1,921			1,978			2,008
Member lives (m)		142,200				146,700			146,200			145,600			149,600
Medical claims expense percentage (n)		72.1%				71.1%			72.1%			74.0%			72.9%

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____________________
(a)	Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency.
(b)	Discharges represent the total number of patients discharged (in the facility for a period in excess of 23 hours) from our hospitals and is used by management and certain investors as a general measure of inpatient volumes.
(c)	Adjusted discharges-hospitals is used by management and certain investors as a general measure of combined inpatient and outpatient volumes. Adjusted discharges-hospitals is computed by multiplying discharges by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues. This computation enables management to assess hospital volumes by a combined measure of inpatient and outpatient utilization.
(d)	Net revenue per adjusted discharge-hospitals is calculated by dividing hospital net patient revenues by adjusted discharges-hospitals and measures the average net payment expected to be received for a patient’s stay in the hospital.
(e)	Patient days represent the number of days (calculated as overnight stays) our beds were occupied by patients during the periods.
(f)	Adjusted patient days-hospitals is calculated by multiplying patient days by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues. This computation is an indicator of combined inpatient and outpatient volumes.
(g)	Average length of stay represents the average number of days an admitted patient stays in our hospitals.
(h)	Inpatient surgeries represent the number of surgeries performed in our hospitals where overnight stays are necessary.
(i)	Outpatient surgeries represent the number of surgeries performed at hospitals or ambulatory surgery centers on an outpatient basis (patient overnight stay not necessary).
(j)	Emergency room visits represent the number of patient visits to a hospital or freestanding emergency room where treatment is received, regardless of whether an overnight stay is subsequently required.
(k)	Occupancy rate represents the percentage of hospital licensed beds occupied by patients. Occupancy rate provides a measure of the utilization of inpatient rooms.
(l)	Average daily census represents the average number of patients in our hospitals each day during our ownership.
(m)	Member lives represent the total number of enrollees in PHP, AAHP and MHP as of the end of the respective period.
(n)	Medical claims expense percentage is calculated by dividing medical claims expense by premium revenues.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

                You should read the following discussion together with our historical financial statements and related notes included elsewhere herein and the information set forth under “Item 6. Selected Financial Data.” The discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate, please read “Item 1A. - Risk Factors” included elsewhere herein. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

Executive Overview

                As of June 30, 2008, we owned and operated 15 hospitals with a total of 4,181 licensed beds, and related outpatient service facilities complementary to the hospitals in San Antonio, Texas, metropolitan Phoenix, Arizona, metropolitan Chicago, Illinois, and Massachusetts, and two surgery centers in Orange County, California. On October 1, 2006, we sold our three California hospitals with combined 491 licensed beds to subsidiaries of Prime Healthcare, Inc. for a base purchase price of $44.0 million, prior to adjustments for working capital items included in the sale and transaction expenses.  The operating results of the California hospitals are classified as discontinued operations in our consolidated statements of operations for all periods presented. In June 2007, we ceased providing acute care services at Phoenix Memorial Hospital (“PMH”) and began leasing certain floors of the building to various third party healthcare providers. As a result, the acute care operating results of PMH are also classified as discontinued operations in our consolidated statements of operations for all periods presented.

                As of June 30, 2008, we also owned three health plans as set forth in the following table.

Health Plan	Location	June 30, 2008 Membership
Phoenix Health Plan (“PHP”) – managed Medicaid	Arizona	103,400
Abrazo Advantage Health Plan (“AAHP”) – managed Medicare and Dual Eligible	Arizona	3,200
MacNeal Health Providers (“MHP”) – capitated outpatient and physician services	Illinois	43,000
		149,600

                Our objective is to provide high-quality, cost-effective healthcare services through an integrated delivery platform serving the needs of the communities in which we operate.  We focus our business development efforts and operations on hospitals and other related healthcare facilities where we see an opportunity to improve operating performance and profitability and increase market share.

Operating Environment

                We believe that the operating environment for hospital operators is currently undergoing a significant change that presents both challenges and opportunities for us.  In order to remain competitive in the markets we serve, we must adapt our operating strategies to not only accommodate changing environmental factors but to make them operating advantages for us relative to our peers.  These factors will require continued focus on quality of care initiatives.  As consumers become more involved in their healthcare decisions, we believe perceived quality of care will become an even greater factor in determining where physicians choose to practice and where patients choose to receive care. In the following paragraphs we discuss some of the challenges that we currently face and that we expect to become more prominent during the foreseeable future.

       Pay for Performance Reimbursement

                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

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federal fiscal year 2006. These measures include risk-adjusted outcomes measures such as 30-day mortality measures for patients who suffered a heart attack, heart failure or pneumonia; additional measures related to patients who undergo surgical procedures such as hospital-acquired infections data; and several patient satisfaction indicators. Many large managed care organizations have developed quality measurement criteria that are similar to or even more stringent than these Medicare requirements.  We have implemented clinical systems upgrades to enable us to report these measures and will continue to invest in further upgrades as necessary to comply with reporting requirements.

                While current payer guidelines are based upon the reporting of quality measures, we believe it is only a matter of time until the quality measures themselves determine reimbursement rates for hospital services. For example, on April 13, 2007, CMS proposed reforms in the hospital inpatient prospective payment system that would implement a provision of the Deficit ReductionAct of 2005 (“DRA”) that takes the first steps towardpreventing Medicare from giving hospitals higher payment for theadditional costs of treating a patient that acquires a medical condition(including an infection) during a hospital stay. The DRA required CMS to select at least two conditions that are (1) high cost, high volume or both; (2) assigned to a higher rate of reimbursement when present as a secondary diagnosis; and (3) are reasonablypreventable through application of evidence-based guidelines. These rules were adopted in August 2007. Under the rules, beginning in federal fiscal year 2009 (which commences October 1, 2008) cases with these conditions would not be paid at a higher reimbursement rate unless they were present on admission. The initial rules identified eight conditions, including three serious preventable events (sometimes called “never events”), that meet the statutory criteria. In April 2008, CMS proposed expanding the current list of eight hospital-acquired conditions to seventeen for federal fiscal year 2009. Thus, our ability to demonstrate quality of care in our hospitals could significantly impact our future operating results.

       Physician Integration

                Our ability to attract skilled physicians to our hospitals is critical to our success. We have adopted several significant physician recruitment goals with primary emphasis on recruiting physicians specializing in family practice, internal medicine, obstetrics and gynecology, cardiology, neurology, orthopedics and inpatient hospital care (hospitalists). To achieve our recruitment goals, we expect to recruit over 140 new physicians to the communities served by our hospitals during our fiscal year June 30, 2009 through employment agreements, relocation agreements or physician practice acquisitions. We have invested heavily in the infrastructure necessary to coordinate our physician recruitment strategies and manage our physician operations. The costs associated with recruiting, integrating and managing such a large number of new physicians will have a negative impact on our operating results and cash flows during our fiscal year ended June 30, 2009. However, we expect to realize improved clinical quality and service expansion capabilities from this initiative that will positively impact our operating results over the long-term. The perceived quality of care at our hospitals will be a key determining factor in whether these physicians agree to partner with us. Similar to hospital reimbursement, payers are developing plans to transform physician reimbursement to a pay for performance basis. In a hospital setting, many of the quality measures that apply to nursing care also apply to physician care. This interdependence aligns the quality of care focus of physicians and hospitals in order that both can receive equitable compensation for services provided.

                We also face the risk of heightened physician reimbursement pressures that could cause physicians to seek to increase revenues by competing with hospitals for inpatient business. Additional competition from physician-owned specialty hospitals could adversely impact our future operating results. Again, we expect to mitigate this risk by achieving a competitive advantage with our quality of care initiatives that new specialty hospitals might not be equipped to implement. These pressures may also result in our employing more physicians or pursuing additional opportunities to partner with physicians to provide healthcare services to the communities we serve.

       Nursing Salary Pressures

                In order to demonstrate high quality services, we must hire and retain nurses who share our ideals and beliefs and who have access to the training necessary to implement our clinical quality initiatives. Given the nationwide nursing shortage and the particular limited nursing availability in the Phoenix area, we expect continued pressures on nursing salaries and benefits. These pressures include higher than normal base wage increases, flexible working hours and other benefits and higher nurse to patient ratios necessary to improve quality of care. Our clinical quality initiatives also require additional nurse training programs that increase salaries and benefits costs. We have

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incurred and will continue to incur significant training costs as nurses learn to utilize our new information technology tools that allow us to monitor and report quality performance indicators. Becoming the employer of choice for nurses requires upfront human resource investments that could negatively affect operating results in the short-term. We may also be limited in our ability to adjust staffing levels in periods of lower than expected volumes. However, we expect that reducing turnover and improving the skill sets of our nurses will reduce our reliance on contract labor and result in improved quality of care and increased revenues in the long-term.

                We expect to increase our current level of trained nursing professionals by expanding our comprehensive nurse recruiting and retention program. This program includes the following key components, among others:

               • Nursing school in San Antonio                                                                                                                      

               • Foreign nurse recruiting initiatives

               • Tuition reimbursement and internal training to promote career advancement opportunities, including specialization qualification

               • Extern programs and campus events to network with students

               • Preceptor and other mentoring programs

               • Expansion of orientation programs and employee involvement initiatives

               • Performance leadership training for managers and directors

               • Flexible work hours for nurses

               • Employee safety initiatives

               • Competitive pay and benefits and nursing recognition programs

                We operate the Baptist Health System School of Health Professions (“SHP”) in San Antonio, which offers seven different healthcare educational programs with its greatest enrollment in its professional nursing program. The SHP trains approximately 450 students each year in San Antonio. The majority of these students have historically chosen permanent employment with our hospitals. SHP expects its enrollment to increase by approximately 10% for fall 2008 compared to fall 2007. We have begun the application process to transition SHP’s current diploma program to a degree granting program that we expect will be more attractive to potential students. Some of the students are provided with Vanguard-funded scholarships that cover tuition, books and fees in return for a commitment to work at one of our hospitals for a defined period of time. Should we be unsuccessful in our attempts to maintain adequate nursing staff for our present and future needs, our future operating results could be materially adversely impacted.

        Competition for Outpatient Services

                With advances in medical technologies and pharmaceuticals, many services once provided in an inpatient setting are now available in an outpatient setting. The redirection of services to outpatient settings is also influenced by pressures from payers to reduce costs and by patients who seek convenience. Our hospitals and many other acute hospitals have struggled to retain or increase outpatient business resulting from this inpatient to outpatient shift. Competition for outpatient services has increased significantly with the proliferation of surgery centers, outpatient imaging centers and outpatient laboratories that are often viewed as more convenient to physicians and patients. While we remain at risk for further migration of our hospital-based outpatient services to other facilities we do not own, we expect to mitigate these risks with our quality of care initiatives, physician integration strategies and capital projects to improve the design of and access to outpatient service areas in our hospitals.

        Implementation of our Clinical Quality Initiatives

                In the previous paragraphs we discuss the industry trends that are integral to our future success and how quality of care is the most important component in achieving success in those areas. While we are in the middle stages of implementing our expanded clinical quality initiatives, we believe that the following programs currently in place represent key building blocks to the implementation of a successful strategy.

               • Monthly review of the 30 quality indicators prescribed by CMS for federal fiscal year 2008 with further expansion for new quality indicators set forth by CMS for upcoming federal fiscal year 2009

               • Rapid response teams in place at all of our hospitals to provide more timely and efficient care

               • Hourly nursing rounds in place at most of our hospitals

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               • Engagement of an external group to conduct unannounced mock Joint Commission surveys

               • Alignment of hospital management incentive compensation with quality performance indicators

               • Additional staffing to collect and report quality information and to facilitate action plans to address areas for improvement

               • Common information system in place at all hospitals to report quality indicators

               • Common information system at departmental level to achieve efficiencies in delivering care and to feed data to the common reporting system (ancillary department and physician portal components implemented, with remaining patient care and advanced physician components to be implemented in stages during the next three years)

               • Formation of Physician Advisory Councils at each of our hospitals to align the quality goals of our hospitals with the physicians who practice in our hospitals

Revenue/Volume Trends

                Our revenues depend upon inpatient occupancy levels, outpatient procedures performed at our facilities, the ancillary services and therapy programs ordered by physicians and provided to patients and our ability to successfully negotiate appropriate payment rates for these services with third party payers.

       Sources of Revenues

                The primary sources of our revenues include various managed care payers including managed Medicare and Medicaid programs, the traditional Medicare program, various state Medicaid programs, commercial health plans and the patients themselves. We are typically paid much less than our gross charges regardless of the payer source. Revenues from governmental programs are based upon complex reimbursement methodologies that require us to extensively monitor compliance with regulations including billing, coding and cost reimbursement items. These regulations change frequently and require us to adjust our processes, procedures and information systems in order to ensure that we bill these programs correctly and record related revenues appropriately. Revenues from managed care programs are typically based on contractually-stated rates or discounts we have negotiated with the various managed care plans. The contracts often contain exclusions, carve-outs, performance criteria and other guidelines that also require our constant focus and attention. Private patients who are members of managed care plans are not required to pay us for their healthcare services other than the coinsurance and deductible portions of their plan coverage calculated after managed care discounts have been applied. A more detailed description of these revenue sources is set forth in Part I, Item I, “Business”, “Reimbursement for Services Provided” in this document.

                The following table sets forth the percentages of net patient revenues by payer for the years ended June 30, 2006, 2007 and 2008.

	Year ended June 30,
	2006	2007	2008
Medicare	28.2%	26.4%	26.2%
Medicaid	7.1%	8.6%	7.6%
Managed Medicare (1)	n/a	12.8%	14.0%
Managed Medicaid (1)	n/a	7.5%	7.5%
Managed care	51.2%	32.0%	35.0%
Self pay	9.2%	9.7%	8.6%
Other	4.3%	3.0%	1.1%
Total	100%	100.0%	100.0%

____________________
(1)  Managed Medicare and Managed Medicaid net patient revenues were not separately identifiable and are included in managed care net patient revenues for the year ended June 30, 2006.

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        Volumes by Payer

                During the years ended June 30, 2007 and 2008, we experienced a 2.7% and 1.7% increase in discharges from continuing operations and a 1.4% and 2.0% increase in hospital adjusted discharges from continuing operations, respectively. The following table provides details of discharges from continuing operations by payer for the years ended June 30, 2006, 2007 and 2008.

	Year  ended June 30,
	2006		2007		2008
Medicare	47,352	29.2%	46,452	27.8%	47,040	27.7%
Medicaid	20,514	12.6%	22,518	13.5%	20,195	11.9%
Managed Medicare (1)	n/a	n/a	23,339	14.0%	26,040	15.3%
Managed Medicaid (1)	n/a	n/a	18,579	11.1%	19,893	11.7%
Managed care	87,910	54.1%	48,481	29.1%	50,040	29.5%
Self pay	5,169	3.2%	6,181	3.7%	5,854	3.5%
Other	1,501	0.9%	1,323	0.8%	606	0.4%
Total	162,446	100.0%	166,873	100.0%	169,668	100.0%

____________________
(1)  Managed Medicare and Managed Medicaid discharges were not separately identifiable and are included in managed care discharges for the year ended June 30, 2006.

                We continue to experience limited volume growth due to stagnant demand for inpatient healthcare services and increased competition for available patients. Additionally, decreases in certain subacute services as a result of regulatory changes and reduced demand for elective procedures as a result of changes in patient insurance coverage continue to weaken our inpatient and outpatient volumes. We expect our volumes to improve more significantly over the long-term as a result of our quality of care and service expansion initiatives and other market-specific strategies.

                Traditional Medicare volumes have shifted to managed Medicare volumes during the current year period. These shifts have resulted in increased bad debts and increased exposure to collection risks for patient co-insurance and deductible amounts, which are subject to cost reimbursement under the traditional Medicare program but not under many managed Medicare plans. Our operating results were positively impacted by the lower combined Medicaid and managed Medicaid volumes and higher managed care volumes during the current year compared to the prior year.

        Payer Reimbursement Trends

                In addition to the volume factors described above, patient mix, acuity factors and pricing trends affect our patient service revenues. Net patient revenue per adjusted hospital discharge from continuing operations was $7,319, $7,766 and $8,110 for the years ended June 30, 2006, 2007 and 2008, respectively. Net patient revenue per adjusted hospital discharge would have been $7,718 for the year ended June 30, 2007 absent the Texas upper payment limit (“UPL”) revenues recorded during fiscal 2007 that were not recorded during fiscal 2008. The Texas UPL program is discussed further below. These increases reflect improved reimbursement for services provided under negotiated managed care contracts and improved Medicare reimbursements. However, due to consolidation of managed care plans and federal and state efforts to decrease Medicare and Medicaid spending, our ability to recognize improved reimbursement above or equal to rates recognized in previous periods is becoming more difficult. We cannot assure you that future reimbursement rates, even if improved, will sufficiently cover potential increases in the cost of providing healthcare services to our patients.

                During fiscal 2007 we were approved to receive payments under the Bexar County, Texas UPL Medicaid program. UPL programs allow private hospitals to enter into indigent care affiliation agreements with governmental

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entities. Within the parameters of these programs, private hospitals expand charity care services to indigent patients and alleviate expenses for the governmental entity. The governmental entity is then able to utilize its tax revenue to fund the Medicaid program for private hospitals. During fiscal 2007 we recorded UPL-related revenues and income from continuing operations before income taxes of $11.6 million and $6.0 million, respectively, that related to services provided during fiscal 2006 and prior. We received a total cash payment of $18.7 million in April 2007, representing amounts earned under the UPL program for all periods through March 31, 2007. Since the beginning of our participation with this Texas UPL program, we have recognized $25.6 million of revenues and $11.6 million of income from continuing operations before income taxes directly related to the program. CMS began reviewing the operations of this private hospital UPL program after the state of Texas made the first payments in April 2007. It is customary for CMS to review Medicaid UPL payment programs. In October 2007, the state of Texas halted all funding of its private hospital UPL programs due to the deferral by CMS of certain federal Medicaid payments to the State of Texas. In August 2008, the state lifted its moratorium on payments under this UPL program, and we received a payment of approximately $12.1 million. While the possible termination of future benefits under this UPL program is not material to our financial statements, should the federal, state or county governments require recoupment of the previous matching funds paid to us, our results of operations and cash flows could be materially adversely impacted.

       Premium Revenues

                We recognize premium revenues from our three health plans, PHP, AAHP and MHP. AAHP commenced operations on January 1, 2006 primarily to provide healthcare services (including Medicare Part D) to those individuals eligible for both Medicare and Medicaid benefits based on age and income levels. As of June 30, 2008, approximately 3,200 members were enrolled in this program, most of whom were previously enrolled in PHP. PHP’s membership increased to approximately 103,400 at June 30, 2008 compared to approximately 98,300 at June 30, 2007 and 96,700 at June 30, 2006. Premium revenues from these three plans increased by $48.8 million or 12.2% during fiscal 2008 compared to fiscal 2007 after an increase of $26.4 million or 7.0% from fiscal 2006 to 2007. These increases resulted primarily from the increased number of enrollees period over period. PHP also experienced period over period increases in per member per month reimbursement as a result of annual rate increases that went into effect on October 1, 2007 and 2006. In September 2007, the Arizona Health Care Cost Containment System (“AHCCCS”) exercised its final one-year renewal option under its contract with PHP that commenced on October 1, 2003, which extended the current contract through September 30, 2008. In May 2008, PHP was awarded a new contract with AHCCCS effective for the three-year period beginning October 1, 2008 and ending September 30, 2011. AHCCCS has the option to renew the new contract, in whole or in part, for two additional one-year periods commencing on October 1, 2011 and on October 1, 2012. The new contract will cover the existing three counties under the current contract plus an additional six Arizona counties: Apache, Coconino, Mohave, Navajo, Pima and Yavapai. We expect a significant increase in PHP membership and premium revenues under the new contract but are unable to determine the impact of the new contract on our future operating results and cash flows at this time. The Centers for Medicare and Medicaid Services (“CMS”) renewed its contract with AAHP for a one-year period effective January 1, 2008. If AHCCCS terminates PHP’s contract due to lack of funding or for other reasons, our future liquidity, operating results and cash flows would be materially reduced.

General Trends

                The following paragraphs discuss recent trends that we believe are significant factors in our current and/or future operating results and cash flows. While these trends may involve certain factors that are outside of our control, the extent to which these trends affect us and our ability to manage the impact of these trends play vital roles in our current and future success.  In many cases, we are unable to predict what impact these trends, if any, will have on us.

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       Accounts Receivable Collection Risks Leading to Increased Bad Debts

                Similar to other companies in the hospital industry, we face continued pressures in collecting outstanding accounts receivable primarily due to volatility in the uninsured and underinsured populations in the markets we serve. The following table provides a summary of our accounts receivable payer class mix as of each respective period presented.

June 30, 2006	0-90 days		91-180 days		Over 180 days		Total
Medicare		17.0%		1.0%		0.6%		18.6%
Medicaid		7.4%		2.1%		1.3%		10.8%
Managed Medicare		7.5%		1.0%		0.4%		8.9%
Managed Medicaid		5.9%		1.0%		0.6%		7.5%
Managed Care		24.3%		2.4%		1.2%		27.9%
Self Pay(1)		10.7%		9.4%		2.2%		22.3%
Other		2.7%		0.9%		0.4%		4.0%
Total		75.5%		17.8%		6.7%		100.0%
June 30, 2007	0-90 days		91-180 days		Over 180 days		Total
Medicare		15.0%		0.6%		0.6%		16.2%
Medicaid		7.5%		2.0%		1.0%		10.5%
Managed Medicare		7.6%		0.7%		0.6%		8.9%
Managed Medicaid		5.3%		0.6%		0.7%		6.6%
Managed Care		25.1%		2.7%		1.6%		29.4%
Self-Pay(2)		10.2%		8.0%		1.7%		19.9%
Self-Pay after primary(3)		1.8%		2.8%		1.1%		5.7%
Other		1.8%		0.6%		0.4%		2.8%
Total		74.3%		18.0%		7.7%		100.0%
June 30, 2008	0-90 days		91-180 days		Over 180 days		Total
Medicare		15.3%		0.6%		0.4%		16.3%
Medicaid		8.0%		2.2%		1.3%		11.5%
Managed Medicare		8.5%		0.6%		0.5%		9.6%
Managed Medicaid		5.6%		0.4%		0.3%		6.3%
Managed Care		25.8%		2.6%		1.9%		30.3%
Self-Pay(2)		9.3%		7.6%		1.1%		18.0%
Self-Pay after primary(3)		1.9%		2.6%		1.0%		5.5%
Other		1.6%		0.5%		0.4%		2.5%
Total		76.0%		17.1%		6.9%		100.0%

____________________
(1)  Includes uninsured patients and those patient co-insurance and deductible amounts for which payment has been received from the primary payer. If primary payment has not been received for an account, the patient co-insurance and deductible amounts remain classified in the primary payer category. The breakout between uninsured accounts and patient co-insurance and deductible amounts is not available for this period.
(2)  Includes uninsured patient accounts only.
(3)  Includes patient co-insurance and deductible amounts after payment has been received from the primary payer.

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                Our combined allowance for doubtful accounts and allowance for charity care on a consolidated basis covered 91.4% and 96.3% of self-pay accounts receivable as of June 30, 2007 and 2008, respectively. Our combined allowance for doubtful accounts and allowance for charity care from continuing operations covered 87.5% and 95.2% of self-pay accounts receivable from continuing operations as of June 30, 2007 and June 30, 2008, respectively.

                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.

       Charity Care and Self-Pay Discount Programs

We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by the Department of Health and Human Services). We exclude charity care accounts from revenues when we determine that the account meets our charity care guidelines. We deducted $71.1 million, $86.1 million and $86.1 million of charity care from total revenues during the years ended June 30, 2006, 2007 and 2008, respectively. Healthcare services provided to undocumented aliens that qualify for border funding reimbursement, net of payments received, represented $10.5 million, $19.4 million and $29.6 million of the charity care deductions during the years ended June 30, 2006, 2007 and 2008, respectively. Payments received for border funding claims were $0.9 million, $2.0 million and $3.8 million during the years ended June 30, 2006, 2007 and 2008, respectively. We expect that border funding qualification will end after December 31, 2008 and there is no assurance that additional funding will be available for these services.

       Medicaid Funding Cuts

                Many states, including certain states in which we operate, have periodically reported budget deficits as a result of increased costs and lower than expected tax collections.  Health and human service programs, including Medicaid and similar programs, represent a significant component of state spending. To address these budgetary concerns, certain states have decreased funding for these programs and other states may make similar funding cuts. These cuts may include tightened participant eligibility standards, reduction of benefits, enrollment caps or payment reductions. Additionally, pressure exists at the federal level to reduce Medicaid matching funds provided to states. CMS issued a final rule in May 2007 that was expected to reduce Medicaid funding by approximately $12 to $20 billion over five years. Congress has twice enacted bills that placed moratoriums on this rule until April 2009. However, if the second moratorium expires as scheduled in April 2009, this final rule would go into effect and could significantly negatively impact state Medicaid funding. We are unable to assess the financial impact on our business of state and federal funding cuts at this time.

       Volatility of Professional Liability Costs

                We maintained professional and general liability insurance coverage through a wholly-owned captive insurance subsidiary for individual claims incurred through May 31, 2006 up to $10.0 million. For claims incurred subsequent to May 31, 2006, we self-insure the first $9.0 million per occurrence, and the captive subsidiary insures the next $1.0 million per occurrence. We maintain excess insurance coverage with independent third party carriers on a claims-made basis for individual claims exceeding $10.0 million up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate. The total cost of our professional and general liability insurance is sensitive to the volume and severity of cases reported. Malpractice premiums have adversely affected the ability of physicians to obtain malpractice insurance at reasonable rates in certain of our markets, particularly in metropolitan Chicago, resulting in physicians relocating to different geographic areas. In the event physicians practicing in our

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hospitals are unable to obtain adequate malpractice insurance coverage, our hospitals are likely to incur a greater percentage of the amounts paid to claimants.  Our professional liability exposures also increase when we employ physicians. As a result of our current plans to employ more than 90 new physicians during our fiscal year ended June 30, 2009, our exposure to professional and general liability risks could increase significantly in future years. On the other hand, some states in which we operate, including Texas and Illinois, have passed in recent years tort reform legislation to place limits on non-economic damages. However, in November 2007 a judge in the Illinois Cook County Circuit Court declared that these Illinois malpractice limits were unconstitutional under state law. While such ruling is being considered in an appeal to the Illinois Supreme Court, we understand that the trial courts are not enforcing the non-economic damages limits under that Illinois tort reform statute. Additionally, in Texas an action has been brought to declare its tort reform legislation unconstitutional under federal law. Thus, while we have taken multiple steps at our facilities to reduce our professional liability exposures, without significant legislation (not later declared unconstitutional) to curb the size of malpractice judgments in the states in which we operate, our insurance costs may increase in the future.

       Increased Cost of Compliance in a Heavily Regulated Industry

                We conduct business in a heavily regulated industry. Accordingly, we maintain a comprehensive, company-wide compliance program to address healthcare regulatory and other compliance requirements. This compliance program includes, among other things, initial and periodic ethics and compliance training, a toll-free reporting hotline for employees, annual fraud and abuse audits and annual coding audits. The organizational structure of our compliance program includes oversight by our board of directors and a high-level corporate management compliance committee. Our Senior Vice President of Compliance and Ethics reports jointly to our Chairman and Chief Executive Officer and to our board of directors, serves as our Chief Compliance Officer and is charged with direct responsibility for the day-to-day management of our compliance program. We also have regional compliance officers in our markets that are 100% dedicated to compliance duties. The financial resources necessary for program oversight, internal enforcement and periodic improvements to our program continue to grow, especially when we add new features to our program or engage external resources to assist with these highly complex matters.

Critical Accounting Policies

                Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing these financial statements, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses included in the financial statements. Management bases its estimates on historical experience and other available information, the results of which form the basis of the estimates and assumptions. We consider the following accounting policies to be critical because they involve highly subjective and complex assumptions and assessments, are subject to a great degree of fluctuation period over period and are the most critical to our operating performance.

       Revenues and Revenue Deductions

                We recognize patient service revenues during the period the healthcare services are provided based upon estimated amounts due from payers. We record contractual adjustments to our gross charges to reflect expected reimbursement negotiated with or prescribed by third party payers. We estimate contractual adjustments and allowances based upon payment terms set forth in managed care health plan contracts and by federal and state regulations. For the majority of our patient service revenues, we apply contractual adjustments to patient accounts at the time of billing using specific payer contract terms entered into the accounts receivable systems, but in some cases we record an estimated allowance until payment is received. We derive most of our patient service revenues from healthcare services provided to patients with Medicare (including managed Medicare plans) or managed care insurance coverage.

                Services provided to Medicare patients are generally reimbursed at prospectively determined rates per diagnosis (“PPS”), while services provided to managed care patients are generally reimbursed based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Medicaid reimbursements vary by state. Other than Medicare and related Medicare managed plans, no individual payer represents more than 10% of our patient service revenues.

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                Medicare regulations and many of our managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities. To obtain reimbursement for certain services under the Medicare program, we must submit annual cost reports and record estimates of amounts owed to or receivable from Medicare. These cost reports include complex calculations and estimates related to indirect medical education, reimbursable Medicare bad debts, disproportionate share and other items that are often subject to interpretation that could result in payments that differ from recorded estimates. We estimate amounts owed to or receivable from the Medicare program using the best information available and our interpretation of the applicable Medicare regulations. We include differences between original estimates and subsequent revisions to those estimates (including final cost report settlements) in our consolidated statements of operations in the period in which the revisions are made. Net adjustments for final third party settlements increased patient service revenues and income from continuing operations before income taxes by $8.6 million, $6.3 million and $7.9 million during the years ended June 30, 2006, 2007 and 2008, respectively. Additionally, updated regulations and contract negotiations with payers occur frequently, which necessitates continual review of revenue estimation processes by management.  Management believes that future adjustments to its current third party settlement estimates will not materially impact our results of operations, cash flows or financial position.

                We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by the Department of Health and Human Services). We deduct charity care accounts from revenues when we determine that the account meets our charity care guidelines. We also provide discounts from billed charges and alternative payment structures for uninsured patients who do not qualify for charity care but meet certain other minimum income guidelines, primarily those uninsured patients with incomes between 200% and 500% of the federal poverty guidelines. During the years ended June 30, 2006, 2007 and 2008, we deducted $71.1 million, $86.1 million and $86.1 million of charity care from revenues, respectively.

                During our fiscal year ended June 30, 2007, we were approved to receive payments under the Bexar County, Texas upper payment limit (“UPL”) Medicaid payment program. UPL programs allow private hospitals to enter into indigent care affiliation agreements with governmental entities. Within the parameters of these programs, private hospitals expand charity care services to indigent patients and alleviate expenses for the governmental entity. The governmental entity is then able to utilize its tax revenue to fund the Medicaid program for private hospitals. We recognize revenues from the UPL program when we become entitled to the reimbursements, including a federal match portion, and such reimbursements are assured.

                We earned premium revenues of $375.0 million, $401.4 million and $450.2 million during the years ended June 30, 2006, 2007 and 2008, respectively, from our health plans. Our health plans, PHP, AAHP and MHP, have agreements with AHCCCS, CMS and various health maintenance organizations (“HMOs”), respectively, to contract to provide medical services to subscribing participants. Under these agreements, our health plans receive monthly payments based on the number of HMO participants in MHP or the number and coverage type of enrollees in PHP and AAHP. Our health plans recognize the payments as revenues in the month in which members are entitled to healthcare services with the exception of AAHP Medicare Part D reinsurance premiums and low income subsidy cost sharing premiums that are recorded as a liability to fund future healthcare costs or else repaid to the government.

       Allowance for Doubtful Accounts and Provision for Doubtful Accounts

                Our ability to collect the self-pay portions of our receivables is critical to our operating performance and cash flows. Our allowance for doubtful accounts was approximately 28.3% and 28.1% of accounts receivable, net of contractual discounts, as of June 30, 2007 and 2008, respectively. The primary collection risk relates to uninsured patient accounts and patient accounts for which primary insurance has paid but patient deductibles or co-insurance portions remain outstanding.

                Effective July 1, 2007, we began estimating the allowance for doubtful accounts using a standard policy that reserves 100% of all accounts aged greater than 365 days subsequent to discharge date plus 85% of uninsured accounts less than 365 days old plus 40% of self pay after insurance/Medicare less than 365 days old. Our previous policy reserved all accounts greater than 180 days plus a market-specific percentage of uninsured and self pay after insurance/Medicare balances. Effective June 30, 2008, we adjusted our policy to reserve for all accounts aged

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greater than 365 days subsequent to discharge date plus 92% of uninsured accounts less than 365 days old plus 45% of self-pay after insurance/Medicare less than 365 days old. These changes in our policy negatively impacted our provision for doubtful accounts during the year ended June 30, 2008. However, management believes the revised policy will adjust more quickly to payer mix shifts over time. We test our allowance for doubtful accounts policy quarterly using a hindsight calculation that utilizes write-off data for all payer classes duringthe previous twelve-month period to estimate the allowance for doubtful accounts at a point in time. We also supplement our analysis by comparing cash collections to net patient revenues and monitoring self-pay utilization. If our uninsured accounts receivable as of June 30, 2008 were 1% higher, our provision for doubtful accounts would have increased by $1.0 million. Significant changes in payer mix, business office operations, general economic conditions and healthcare coverage provided by federal or state governments or private insurers may have a significant impact on our estimates and significantly affect our liquidity, results of operations and cash flows.

                We classify accounts pending Medicaid approval as Medicaid accounts in our accounts receivable aging report and record a manual contractual allowance for these accounts equal to the average Medicaid reimbursement rate for that specific state until qualification is confirmed at which time the account is netted. We have historically been successful in qualifying approximately 40%-45% of submitted accounts for Medicaid coverage. As of June 30, 2008, we had approximately $13.0 million of Medicaid pending accounts receivable from continuing operations ($4.1 million of which was stated at gross charges with a manual contractual allowance and $8.9 million of which was stated net of contractual discounts). In the event an account is not successfully qualified for Medicaid coverage and does not meet our charity guidelines, the previously recorded Medicaid contractual adjustment remains a revenue deduction (similar to a self-pay discount), and the remaining net account balance is reclassified to uninsured status and subjected to our allowance for doubtful accounts policy. During the years ended June 30, 2007 and 2008, approximately $13.2 million and $25.1 million, respectively, of net accounts receivable from continuing operations was reclassified from Medicaid pending status to uninsured status. If accounts do not qualify for Medicaid coverage but do qualify as charity care, the contractual adjustments are reversed and the gross account balances are recorded as charity deductions. During the years ended June 30, 2007 and 2008, we recorded $6.4 million and $7.1 million, respectively, of charity deductions from continuing operations for the net balances of accounts previously classified as Medicaid pending that did not meet Medicaid eligibility requirements.

                Because we require patient verification of coverage at the time of admission, reclassifications of Medicare or managed care accounts to self-pay, other than patient coinsurance or deductible amounts, occur infrequently and are not material to our financial statements.  Additionally, the impact of these classification changes is further limited by our ability to identify any necessary classification changes prior to patient discharge or soon thereafter.  Due to information system limitations, we are unable to quantify patient deductible and co-insurance receivables that are included in the primary payer classification in the accounts receivable aging report at any given point in time. When classification changes occur, the account balance remains aged from the patient discharge date.

       Insurance Reserves

                Due to the nature of our operating environment, we are subject to professional and general liability and workers compensation claims and related lawsuits in the ordinary course of business.  For professional and general liability claims incurred from June 1, 2002 to May 31, 2006, our wholly owned captive subsidiary insured our professional and general liability risks at a $10.0 million retention level. For professional and general liability claims incurred subsequent to May 31, 2006, we self-insure the first $9.0 million per claim, and the captive subsidiary insures the next $1.0 million per claim. We maintain excess coverage from independent third party insurers on a claims-made basis for individual claims exceeding $10.0 million up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate.

                We insured our excess coverage under a retrospectively rated policy, and premiums under this policy are recorded based on our historical claims experience. We self-insure our workers compensation claims up to $1.0 million per claim and purchase excess insurance coverage for claims exceeding $1.0 million. 

                The following tables summarize our professional and general liability and workers compensation reserve balances as of June 30, 2007 and 2008 and our total provision for professional and general liability and workers compensation losses and related claims payments during the years ended June 30, 2006, 2007 and 2008.

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	Professional and General Liability		Workers Compensation
	(In millions)
Reserve balance:
June 30, 2007		$          64.6	$	18.5
June 30, 2008		$          74.3	$	18.8
Provision for claims losses:
Fiscal Year 2006		$          21.0	$	8.9
Fiscal Year 2007		$          20.2	$	9.4
Fiscal Year 2008		$          21.8	$	5.3
Claims paid:
Fiscal Year 2006		$          12.7	$	6.4
Fiscal Year 2007		$          14.4	$	6.2
Fiscal Year 2008		$          12.1	$	5.0

                In developing our estimates of our reserves for professional and general liability and workers compensation claims, we utilize actuarial information. Each reserve is comprised of estimated indemnity and expense payments related to:  1) reported events (“case reserves”) and 2) incurred but not reported (“IBNR”) events as of the end of the period. Management uses information from its risk managers and its best judgment to estimate case reserves. Actuarial IBNR estimates are dependent on multiple variables including our risk exposures, our self-insurance limits, geographic locations in which we operate, the severity of our historical losses compared to industry averages and the reporting pattern of our historical losses compared to industry averages, among others. Most of these variables require judgment, and changes in these variables could result in significant period over period fluctuations in our estimates. We discount our workers compensation reserve using actuarial estimates of projected cash payments in future periods. We adjust these reserves from time to time as we receive updated information. During our fiscal years ended June 30, 2006, 2007 and 2008, due to changes in historical loss trends, we decreased our professional and general liability reserve related to prior fiscal years by $6.9 million, $4.5 million and $0.6 million, respectively. Similarly, we decreased our workers compensation reserve related to prior fiscal years by $2.3 million during our fiscal year ended June 30, 2008. Adjustments to the workers compensation reserve related to prior years during fiscal years ended June 30, 2006 and 2007 were not significant. Additional adjustments to prior year estimates may be necessary in future periods as our reporting history and loss portfolio matures.

                Our best estimate of IBNR utilizes statistical confidence levels that are below 75%. Using a higher statistical confidence level, while not permitted under United States generally accepted accounting principles,  would increase the estimated reserve. The following table illustrates the sensitivity of the reserve estimates at 75% and 90% confidence levels.

	Professional and General Liability		Workers Compensation
	(In millions)
June 30, 2007 reserve:
As reported		$          64.6	$	18.5
With 75% Confidence Level		$          76.9	$	20.8
With 90% Confidence Level		$          88.9	$	22.6
June 30, 2008 reserve:
As reported		$          74.3	$	18.8
With 75% Confidence Level		$          85.7	$	21.5
With 90% Confidence Level		$          97.2	$	23.8

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       Medical Claims Reserves

                During the years ended June 30, 2006, 2007 and 2008, medical claims expense was $270.3 million, $297.0 million and $328.2 million, respectively, primarily representing medical claims of PHP. Vanguard estimates PHP’s reserve for medical claims using historical claims experience (including cost per member and payment lag time) and other actuarial data including number of enrollees and certain enrollee demographic information. The reserve for medical claims and related payer settlements, including incurred but not reported claims, for all of our health plans combined was approximately $61.4 million and $51.1 million as of June 30, 2007 and 2008, respectively. The year over year decrease was primarily due to the payment of settlement amounts due to AHCCCS and CMS. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from its estimates given changes in the healthcare cost structure or adverse experience. During the years ended June 30, 2006, 2007 and 2008, approximately $40.0 million, $34.2 million and $31.2 million, respectively, of accrued and paid claims for services provided to our health plan enrollees by our hospitals and our other healthcare facilities were eliminated in consolidation. Our operating results and cash flows could be materially affected by increased or decreased utilization of our healthcare facilities by enrollees in our health plans.

        Income Taxes

                We believe that our income tax provisions are accurate and supportable, but certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. To reflect the possibility that all of our tax positions may not be sustained, we maintain tax reserves that are subject to adjustment as updated information becomes available or as circumstances change. We record the impact of tax reserve changes to our income tax provision in the period in which the additional information, including the progress of tax audits, is obtained.

                We assess the realization of our 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, we determine 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:

                •  Cumulative losses in recent years
                •  Income/losses expected in future years
                •  Unsettled circumstances that, if favorably resolved, would adversely affect future operations
                •  Availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of
                   tax benefits
                •  Carryforward period associated with the deferred tax assets and liabilities
                •  Prudent and feasible tax planning strategies

In addition, financial forecasts used in determining the need for or amount of federal and state valuation allowances are subject to changes in underlying assumptions and fluctuations in market conditions that could significantly alter our recoverability analysis and thus have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

                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).

Reclassification from  income taxes payable	$	0.3
Increase to non-current deferred tax assets		2.7
Cumulative impact of change recorded to retained earnings		(2.6	)
	$	0.4

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                The provisions of FIN 48 allow for the classification election of interest on an underpayment of income taxes, when the tax law requires interest to be paid, and penalties, when a tax position does not meet the minimum statutory threshold to avoid payment of penalties, in income taxes, interest expense or another appropriate expense classification based on the accounting policy election of the entity. We elected to continue our historical practice of classifying interest and penalties as a component of income tax expense. Approximately $0.3 million of the $0.4 million of unrecognized tax benefits, if recognized, would impact the effective tax rate, while the remaining $0.1 million of unrecognized tax benefits, if recognized, would increase goodwill.

        Long-Lived Assets and Goodwill

                Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not expected to be recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Given the relatively few number of hospitals we own and the significant amounts of long-lived assets attributable to those hospitals, an impairment of the long-lived assets for even a single hospital could materially adversely impact our operating results or financial position.

                Goodwill also represents a significant portion of our total assets. We review goodwill for impairment annually during our fourth fiscal quarter or more frequently if certain impairment indicators arise under the provisions of SFAS 142, Goodwill and Other Intangible Assets. We review goodwill at the reporting level unit, which is one level below an operating segment. We review the carrying value of the net assets of each reporting unit  to the net present value of estimated discounted future cash flows of the reporting unit. If the carrying value exceeds the net present value of estimated discounted future cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position or results of operations. In December 2006, we recorded a goodwill impairment charge in the amount of $123.8 million ($110.5 million, net of tax benefit) related to our Chicago hospitals.

                We completed our annual goodwill impairment test during the fourth quarter of fiscal 2008 noting no impairment. However, we will continue to closely monitor the operations of our Chicago hospitals, with goodwill of approximately $40.6 million, due to the sensitivity of the projected operating results of this reporting unit to the goodwill impairment analysis. If projected future cash flows become less favorable than those projected by management, an additional impairment charge relating to our Chicago hospitals may become necessary that could have a material adverse impact on our financial position and results of operations.

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Selected Operating Statistics

                The following table sets forth certain operating statistics for the periods indicated below.

	Year Ended June 30,
		2006			2007			2008
Number of hospitals at end of period		15			15			15
Number of licensed beds at end of period		3,937			4,143			4,181
Discharges (a)		162,446			166,873			169,668
Adjusted discharges - hospitals (b)		261,056			264,698			270,076
Net revenue per adjusted discharge-hospitals (c)	$	7,319		$	7,766		$	8,110
Patient days (d)		701,307			721,832			734,838
Adjusted patient days-hospitals (e)		1,127,024			1,144,989			1,169,710
Average length of stay (days) (f)		4.3			4.3			4.3
Inpatient surgeries (g)		36,606			37,227			37,538
Outpatient surgeries (h)		76,437			76,606			73,339
Emergency room visits (i)		554,250			572,946			588,491
Occupancy rate (j)		49.2	%		48.2	%		48.5	%
Average daily census (k)		1,921			1,978			2,008
Member lives (l)		146,200			145,600			149,600
Medical claims expense percentage (m)		72.1	%		74.0	%		72.9	%

____________________
(a)	Discharges represent the total number of patients discharged (in the facility for a period in excess of 23 hours) from our hospitals and is used by management and certain investors as a general measure of inpatient volumes.
(b)	Adjusted discharges-hospitals is used by management and certain investors as a general measure of combined hospital inpatient and outpatient volumes. Adjusted discharges-hospitals is computed by multiplying discharges by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues.
(c)	Net revenue per adjusted discharge-hospitals is calculated by dividing net hospital patient revenues by adjusted discharge-hospitals and measures the average net payment expected to be received for a patient’s stay in the hospital.
(d)	Patient days represent the number of days (calculated as overnight stays) our beds were occupied by patients during the periods.
(e)	Adjusted patient days-hospitals is calculated by multiplying patient days by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues. This computation is an indicator of combined inpatient and outpatient volumes.
(f)	Average length of stay represents the average number of days an admitted patient stays in our hospitals.
(g)	Inpatient surgeries represent the number of surgeries performed in our hospitals where overnight stays are necessary.
(h)	Outpatient surgeries represent the number of surgeries performed at hospitals or ambulatory surgery centers on an outpatient basis (patient overnight stay not necessary).
(i)	Emergency room visits represent the number of patient visits to a hospital emergency room where treatment is received, regardless of whether an overnight stay is subsequently required.
(j)	Occupancy rate represents the percentage of hospital licensed beds occupied by patients. Occupancy rate provides a measure of the utilization of inpatient beds.
(k)	Average daily census represents the average number of patients in our hospitals each day during our ownership.
(l)	Member lives represent the total number of enrollees in PHP, AAHP and MHP as of the end of the respective period.
(m)	Medical claims expense percentage is calculated by dividing medical claims expense by premium revenues.

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Results of Operations

                The following tables present a summary of our operating results for the respective periods shown.

		Year Ended June 30,
		2006				2007						2008
		Amount		%			Amount		%			Amount		%
		(Dollars in millions)
Patient service revenues	$	2,043.6		84.5	%	$	2,179.3		84.4	%	$	2,340.5		83.9	%
Premium revenues		375.0		15.5			401.4		15.6			450.2		16.1
Total revenues		2,418.6		100.0			2,580.7		100.0			2,790.7		100.0
Salaries and benefits (includes stock compensation of    $1.7, $1.2 and $2.5 respectively)		991.4		41.0			1,067.9		41.4			1,152.7		41.3
Supplies		394.1		16.3			421.8		16.3			434.5		15.5
Medical claims expense		270.3		11.2			297.0		11.5			328.2		11.8
Provision for doubtful accounts		156.8		6.5			175.2		6.8			205.6		7.4
Other operating expenses		353.0		14.6			375.0		14.5			405.8		14.5
Depreciation and amortization		100.3		4.1			118.6		4.6			131.0		4.7
Interest, net		103.8		4.3			123.8		4.8			122.1		4.4
Debt extinguishment costs		0.1		0.0			–		0.0			–		0.0
Impairment loss		–		0.0			123.8		4.8			–		0.0
Other expenses		9.1		0.4			2.8		0.1			9.5		0.3
Income (loss) from continuing operations    before income taxes		39.7		1.6			(125.2	)	(4.8	)		1.3		0.1
Provision for income taxes		17.8		0.7			(11.6	)	(0.4	)		1.7		(0.1	)
Income (loss) from continuing operations		21.9		0.9			(113.6	)	(4.4	)		(0.4	)	(0.0	)
Loss from discounted operations, net of taxes		(9.0	)	(0.4	)		(19.1	)	(0.7	)		(0.3	)	(0.0	)
Net income (loss)	$	12.9		0.5	%	$	(132.7	)	(5.1	)%	$	(0.7	)	(0.0	)%

Year Ended June 30, 2008 Compared to the Year Ended June 30, 2007

                Revenues.  Patient service revenues increased 7.4% year over year primarily as a result of a 4.4% increase in patient revenues per adjusted hospital discharge and a 2.0% increase in adjusted hospital discharges. Total outpatient volumes increased year over year, including a 2.7% increase in emergency room visits, although outpatient surgeries decreased year over year. We experienced positive year over year payer mix shifts highlighted by an increase in combined Medicare and managed Medicare volumes compared to a decrease in combined Medicaid and managed Medicaid volumes. The acuity level of our patients also increased year over year. However, we continued to generate most of our inpatient stays from emergency room visits and struggled to improve our elective admissions. Patients often elect to defer elective procedures when general economic conditions are weak. We also face continued intense competition from other hospitals to recruit and retain the best physicians to practice in our facilities. In order to improve our operating results, we must increase our elective inpatient and outpatient business to maintain a favorable payer mix. We believe our quality initiatives will be the catalyst for long-term revenue growth especially given the forecasted population growth for most of the markets in which we operate. However, environmental factors outside our control, including patient demand, deterioration of general economic conditions, payer pressures and increased competition could limit our future revenue growth.

                Premium revenues increased 12.2% during fiscal 2008 primarily as a result of a 5.7% in year over year annual membership at PHP and a capitation rate increase that went into effect for PHP as of October 1, 2007. PHP’s membership increased as a result of a greater number of AHCCCS-eligible residents as a result of weakened general economic conditions and a greater allocation of the AHCCCS enrollees to PHP. PHP was awarded a new AHCCCS contract that commences on October 1, 2008 that adds six additional counties to the three counties already served by PHP. We expect PHP to experience a significant increase in membership during fiscal 2009, which would increase our premium revenues, but we are unable to estimate the impact to our future financial position, results of operations or cash flows at this time.

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                Costs and Expenses.  Total costs and expenses, exclusive of income taxes and discontinued operations, were $2,789.4 million or 99.9% of total revenues during fiscal 2008 compared to 104.9% during fiscal 2007. Fiscal 2007 costs and expenses were negatively impacted by the $123.8 million impairment loss related to our Chicago hospitals. Salaries and benefits, supplies, medical claims and provision for doubtful accounts represent our most significant individual costs and expenses or those subject to the greatest level of fluctuation period over period.

               • Salaries and benefits.  Salaries and benefits as a percentage of total revenues were relatively flat period over period. Excluding the growth in our health plan operations, salaries and benefits would have increased to 42.0% during fiscal 2008 compared to the 41.4% during the prior year. The national nursing shortage, which is particularly prevalent in Phoenix, continues to hinder our ability to fully manage salaries and benefits costs. Even with the nursing shortage in Phoenix, we made progress in stabilizing our nurse workforce in Phoenix to reduce contract labor utilization. We incurred a significant increase in period over period salaries and benefits costs in our Massachusetts hospitals primarily resulting from requirements set forth in our most recent collective bargaining agreement ratified with the nurses union at St. Vincent Hospital. We expect to face continued competition from other healthcare providers to obtain qualified nurses, which will increase our salaries and benefits costs, but we expect to mitigate a portion of this increase through implementation of expanded recruiting and retention initiatives, care management efficiency initiatives and our clinical quality programs.

               • Supplies.  Supplies as a percentage of total revenues decreased from 16.3% during fiscal 2007 to 15.5% during fiscal 2008. Supplies as a percentage of patient service revenues decreased to 18.6% during fiscal 2008 compared to 19.4% during fiscal 2007. Fiscal 2008 was the first full year that certain of our supply chain corporate initiatives were fully implemented. These initiatives included formulary refinements, standardization of commodities and supplies reprocessing and improved compliance with our group purchasing contract. Effective May 2008, we renewed our group purchasing contract with HealthTrust Purchasing Group for an additional five years. We expect to recognize only slight improvement in this ratio during fiscal 2009 as additional supply chain initiatives are implemented. However, because most of our growth strategies include expansion of high acuity services, we will continue to be exposed to increased pricing pressures for pharmaceuticals and expensive medical devices including those used in cardiac and orthopedic surgeries that could negate our cost containment initiatives.

               • Medical claims expense.  Medical claims expense as a percentage of premium revenues decreased from 74.0% during fiscal 2007 to 72.9% during fiscal 2008. Capitation revenues for our health plans increased at a greater rate year over year than did the utilization of medical services by our health plans’ enrollees. Medical claims expense represents the amounts paid by health plans for healthcare services provided to their members, including an estimate of incurred but not reported claims that is determined based upon lag data and other actuarial assumptions. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $31.2 million, or 8.7% of gross health plan medical claims expense, were eliminated in consolidation during fiscal 2008 compared to $34.2 million or 10.3% of gross health plan medical claims expense during fiscal 2007.

               • Provision for doubtful accounts.  During fiscal 2008, the provision for doubtful accounts as a percentage of patient service revenues increased to 8.8% from 8.0% during fiscal 2007. During fiscal 2008, our self-pay discharges as a percentage of total discharges decreased to 3.5% from 3.7% during fiscal 2007. However, price increases at our hospitals and increased levels of patient co-insurance and deductibles under managed care plans increased our exposure to uncollectible revenues. The previously discussed change in our allowance for doubtful accounts policy during fiscal 2008 resulted in a higher provision for doubtful accounts as a percentage of patient service revenues during fiscal 2008 compared to fiscal 2007. Our provision for doubtful accounts as a percentage of patient service revenues is reduced by our policy of deducting charity accounts from revenues at the time in which those accounts meet our charity care guidelines. On a combined basis, the provision for doubtful accounts and charity care deductions as a percentage of patient service revenues increased to 12.5% during fiscal 2008 compared to 12.0% during fiscal 2007. We do not expect these ratios to improve significantly in the near future given current trends in patient insurance coverage. However, we believe our upfront collection efforts and revenues growth initiatives will help mitigate future increases to these ratios.

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                Other operating expenses. Other operating expenses include, among others, purchased services, insurance, property taxes, rents and leases, repairs and maintenance and utilities.  Other operating expenses as a percentage of total revenues were flat year over year. We continue to incur increasing physician recruiting costs, higher repairs and maintenance costs related to the implementation of our clinical information systems in our hospitals and higher utilities costs.

                Other. Depreciation and amortization as a percentage of total revenues increased to 4.7% during fiscal 2008 compared to 4.6% during fiscal 2007 as a result of our capital improvement and expansion initiatives.  Portions of our clinical quality systems were placed into service during fiscal 2008, and fiscal 2008 was the first full year in which all of our previous significant expansion projects in Phoenix and San Antonio had been fully in service. The decrease in net interest as a percentage of total revenues to 4.4% during fiscal 2008 compared to 4.8% during fiscal 2007 resulted primarily from the increase in total revenues during fiscal 2008 compared to fiscal 2007 without additional debt borrowings.

                Income taxes.  Income taxes were not significant during fiscal 2008. The effective tax rate for fiscal 2007 was 9.3% due to the majority of the impairment loss being nondeductible for tax purposes.

                Discontinued operations. Our loss from discontinued operations was not significant during the fiscal year ended June 30, 2008 due to the winding down of operations at PMH compared to fiscal 2007 when PMH operated as an acute care hospital for the majority of the fiscal year.

                Net loss. The $132.0 million year over year decrease in net loss resulted primarily from the improved operating results during fiscal 2008 and the after tax impact of the impairment loss recorded during fiscal 2007.

Year Ended June 30, 2007 Compared to the Year Ended June 30, 2006

                Revenues.  Patient service revenues increased by 6.6% year over year primarily as a result of a 6.1% increase in patient revenues per adjusted hospital discharge and a 1.4% increase in adjusted hospital discharges. Outpatient volumes increased year over year with outpatient surgeries increasing 0.2% and emergency room visits increasing 3.4%. However, much of the year over year revenues improvement related to low acuity services provided to uninsured and Medicaid patients. Self-pay and Medicaid discharges increased 19.6% and 9.8%, respectively, year over year, while combined Medicare, managed care and commercial discharges were relatively flat year over year. We also continued to generate a lot of our inpatient stays from emergency room activity. We attribute this payer mix shift to the continued rising cost of healthcare insurance that has forced many people to go uninsured or else participate in a plan with higher deductibles and coinsurance.

                Premium revenues increased by 7.0% during fiscal 2007 primarily as a result of having AAHP operations for the full fiscal year. Per member per month reimbursement rates are significantly higher under AAHP than under the traditional AHCCCS Medicaid program. Per member per month reimbursement for PHP also increased effective October 1, 2006, and PHP supplemental revenues increased year over year. Total average membership in PHP and AAHP decreased slightly from approximately 100,300 during fiscal 2006 to approximately 99,500 during fiscal 2007.

                Costs and Expenses.  Total costs and expenses, exclusive of income taxes and discontinued operations, were $2,705.9 million or 104.8% of total revenues during fiscal 2007 compared to 98.4% during fiscal 2006. Fiscal 2007 costs and expenses were negatively impacted by the impairment loss related to our Chicago hospitals and significant increases in net interest and depreciation and amortization. Salaries and benefits, supplies, medical claims and provision for doubtful accounts represent our most significant individual costs and expenses or those subject to the greatest level of fluctuation period over period.

               • Salaries and benefits.  Salaries and benefits as a percentage of total revenues increased to 41.4% during fiscal 2007 from 41.0% during fiscal 2006 primarily as a result of salaries and benefits pressures in our Phoenix market. The national nursing shortage has been particularly challenging in Phoenix during the past few years. Our salaries and benefits at our Phoenix hospitals increased by 2.5% of patient service revenues year over year primarily due to a 6.5% year over year increase in total hospital employed and contract labor full-time equivalents and the limited revenue growth previously discussed. We were

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	successful in building our employed nurse workforce in Phoenix and decreasing our dependence on contract labor in light of the nursing shortage. We also successfully negotiated a new three-year union contract with a significant portion of our nurse workforce in Massachusetts during fiscal 2007.
•	Supplies.  Supplies as a percentage of total revenues remained flat at 16.3% year over year. Supplies as a percentage of patient service revenues increased slightly to 19.4% during fiscal 2007 compared to 19.3% during fiscal 2006. Advances in medical technologies and new medications continue to pressure our supplies costs. We added additional corporate resources and increased our focus on supply chain management and group purchasing organization compliance during fiscal 2007 to manage supplies utilization.
•	Medical claims expense.  Medical claims expense as a percentage of premium revenues increased from 72.1% during fiscal 2006 to 74.0% during fiscal 2007 primarily as a result of increased healthcare utilization by PHP enrollees during fiscal 2007. Inpatient days for PHP enrollees increased by 3.5% year over year. Medical claims expense represents the amounts paid by the health plans for healthcare services provided to their members, including an estimate of incurred but not reported claims that is determined based upon lag data and other actuarial assumptions. Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $34.2 million, or 10.3% of gross health plan medical claims expense, were eliminated in consolidation during fiscal 2007.
•	Provision for doubtful accounts.  During fiscal 2007, the provision for doubtful accounts as a percentage of patient service revenues increased to 8.0% from 7.7% during fiscal 2006. During fiscal 2007, self-pay revenues as a percentage of net patient revenues increased from 9.2% to 9.7%. Self-pay discharges as a percentage of total discharges increased from 3.2% during fiscal 2006 to 3.7% during fiscal 2007. Our provision for doubtful accounts as a percentage of patient service revenues is reduced by our policy of deducting charity accounts from revenues at the time in which those accounts meet our charity care guidelines. On a combined basis, the provision for doubtful accounts and charity care deductions as a percentage of patient service revenues increased to 12.0% during fiscal 2007 compared to 11.2% during fiscal 2006.

                Other operating expenses.  Other operating expenses include, among others, purchased services, insurance, property taxes, rents and leases, repairs and maintenance and utilities.  Other operating expenses as a percentage of total revenues were relatively flat year over year. We continue to incur increasing physician costs for coverage in our emergency rooms and other specialty programs. Our repairs and maintenance costs also increased year over year as we began to roll out portions of our quality information systems in our hospitals.

                Other.  Depreciation and amortization as a percentage of total revenues increased to 4.6% during fiscal 2007 compared to 4.1% during fiscal 2006 as a result of our capital improvement and expansion initiatives.  Four of our six significant expansion projects were placed into service during fiscal 2007 and portions of the other two were completed during fiscal 2007.  The increase in net interest as a percentage of total revenues to 4.8% during fiscal 2007 compared to 4.3% during fiscal 2006 resulted primarily from our incurring interest on the September 2005 $175.0 million delayed draw term loan borrowing for all 12 months of fiscal 2007 and increased LIBOR rates on our term loan borrowings. As previously discussed, we incurred a $123.8 million ($110.5 million, net of tax benefit) impairment loss during fiscal 2007 related to our Chicago hospitals.

                Income taxes.  The effective tax rate decreased from 44.8% in fiscal 2006 to 9.3% in fiscal 2007. The significant decrease is due to the majority of the Chicago impairment loss during fiscal 2007 being nondeductible for tax purposes.

                Discontinued operations.  The significant year over year increase in loss from discontinued operations, net of taxes, primarily relates to the deterioration in the operating results of PMH during fiscal 2007 that led to our decision to eliminate acute care services at PMH.

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                Net income.  The $145.6 million year over year decrease in net income resulted primarily from the after tax impact of the impairment loss recorded during fiscal 2007 and the significant increases in depreciation and amortization and net interest discussed above.

Liquidity and Capital Resources

       Operating Activities

                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.

       Investing Activities

                Cash used in investing activities increased from $118.5 million during fiscal 2007 to $143.8 million during fiscal 2008. We received $37.0 million of cash proceeds from the sale of the California hospitals during fiscal 2007. During fiscal 2008, capital expenditures were $121.6 million and decreased by $42.7 million from fiscal 2007 primarily due to the completion of our spending related to the significant expansion projects in Phoenix and San Antonio during fiscal 2007. During fiscal 2008, cash used in investing activities was negatively impacted by our inability to liquidate $26.3 million of investments in student loan-backed auction rate securities due to the global credit crisis that resulted in failed auctions of these securities.

                We anticipate spending a total of $170.0 million to $190.0 million in capital expenditures during fiscal 2009. This estimate includes the remaining expenditures for our clinical information systems upgrades necessary to support our quality initiatives and all other renovation projects and technology upgrades at our facilities. These capital expenditures will be funded by cash flows from operations and availability under our revolving credit facility. We believe our capital expenditure program is sufficient to service, expand and improve our existing facilities to meet our quality objectives and growth strategies.

       Financing Activities

                Cash used in financing activities decreased from $8.3 million during fiscal 2007 to $7.8 million during fiscal 2008.

                As of June 30, 2008, we had outstanding $1,537.5 million in aggregate indebtedness and $222.0 million of available borrowing capacity under our revolving credit facility ($250.0 million net of outstanding letters of credit of $28.0 million). Our liquidity requirements are significant, primarily due to debt service requirements. Our estimated remaining principal and interest due on our outstanding debt borrowings exceeds $2.0 billion through our fiscal year ending June 30, 2016. The 9.0% Notes require semi-annual interest payments. However, prior to October 1, 2009, the interest expense on the 11.25% Notes consists solely of non-cash accretions of principal.

                On September 26, 2005, we refinanced and repriced all $795.7 million of the then outstanding term loans under the initial term loan facility by borrowing $795.7 million of replacement term loans (the “2005 term loan facility”).

                The 2005 term loan facility borrowings bear interest at a rate equal to, at our option, a base rate plus 1.25% per annum or LIBOR plus 2.25% per annum. These rates reflect a savings of 1.0% per annum over the interest rate options for our previous initial term loan facility. The borrowings under the revolving credit facility currently bear interest at a rate equal to, at our option, a base rate plus 1.25% per annum or LIBOR plus 2.25% per annum. These rates are subject to increase by up to 0.25% per annum should our leverage ratio exceed certain designated levels.

                In April 2008, we entered into an interest rate swap agreement with Bank of America, N.A. that went into effect on June 30, 2008. We will continue to make our usual quarterly term debt interest payments at a rate equal to the 90-day LIBOR rate plus 2.25%. In addition, we will begin making quarterly fixed interest payments on

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September 30, 2008 at a rate equal to 2.785% on a notional $450.0 million of our term debt in exchange for payments to us from Bank of America, N.A. based upon the applicable variable 90-day LIBOR rate on the same notional amount. We account for this swap as a highly effective cash flow hedge with critical terms that substantially match the underlying term debt and will measure any ineffectiveness using the hypothetical derivative method. We will make quarterly adjustments to other comprehensive income equal to the change in the fair value of the swap from quarter to quarter until the maturity of the swap on March 31, 2010. As of June 30, 2008, the estimated fair value of the interest rate swap was an asset for Vanguard of approximately $2.8 million (net of taxes).

                We are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder at a rate equal to 0.50% per annum.  We also pay customary letter of credit fees.

                The 2005 term loan facility and the revolving credit facility contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to sell assets, incur additional indebtedness or issue preferred stock, repay other indebtedness (including the 9.0% Notes and 11.25% Notes), pay dividends and distributions or repurchase our capital stock, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certain material agreements governing our indebtedness, including the 9.0% Notes and 11.25% Notes, change the business conducted by our subsidiaries and enter into certain hedging agreements. In addition, the senior credit facilities require us to maintain the following financial covenants: a maximum total leverage ratio, a maximum senior leverage ratio, a minimum interest coverage ratio and a maximum capital expenditures limitation.

                As of June 30, 2008, our capital expenditures, as defined in the senior credit agreement, were in compliance with our capital expenditures covenant, and we were also in compliance with the other debt covenant ratios as defined in our senior secured credit agreement, as follows.

	Debt Covenant Ratio	Actual Ratio
Interest coverage ratio requirement	2.00x	2.85x
Total leverage ratio limit	5.75x	4.26x
Senior leverage ratio limit	3.50x	2.15x

                The table below summarizes our credit ratings as of the date of the filing of this report.

	Standard & Poor’s	Moody’s
Corporate credit rating	B	B2
9% Senior Subordinated Notes	CCC+	Caa1
11¼% Senior Discount Notes	CCC+	Caa1
Senior credit facilities	B+	Ba3

                We expect that cash generated from our operations and cash available under our revolving credit facility will be sufficient to meet our working capital needs, debt service requirements and planned capital expenditure programs that we consider necessary to continue our growth during the next twelve months and into the foreseeable future. However, we cannot assure you that our operations will generate sufficient cash or that future borrowings under our refinanced senior credit facilities will be available to enable us to meet these requirements and needs.

                We continually assess our capital structure to ensure the optimal mix of debt and equity. As market conditions warrant, we and our primary equity sponsors, including The Blackstone Group L.P. and its affiliates, may from time to time, at our or their sole discretion, purchase, repay, redeem or retire any of our outstanding 9.0% Notes, 11.25% Notes, term or revolving loan borrowings or equity securities (including any publicly issued securities) in privately negotiated or open market transactions, by tender offer or otherwise.

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                We also intend to continue to pursue acquisitions or partnering arrangements, either in existing markets or new markets, which fit our growth strategies. To finance such transactions, we may draw upon amounts available under our revolving credit facility or seek additional funding sources. However, if our operating results and borrowing capacities do not sufficiently support these capital projects or acquisition opportunities, our growth strategies may not be fully realized. Our future operating performance, ability to service or refinance our debt and ability to utilize other sources of capital will be subject to future economic conditions and other business factors, many of which are beyond our control.

Guarantees and Off Balance Sheet Arrangements

                We are a party to certain rent shortfall agreements with certain unconsolidated entities, physician income guarantees and service agreement guarantees and other guarantee arrangements, including parent-subsidiary guarantees, in the ordinary course of business. We have not engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to materially affect liquidity.

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Obligations and Commitments

                The following table reflects a summary of obligations and commitments outstanding, including both the principal and interest portions of long-term debt and capital leases, with payment dates as of June 30, 2008.

	Payments due by period
	Within 1 year		During Years 2-3			During Years 4-5			After 5 years				Total
Contractual Cash Obligations:	(In millions)
Long-term debt (1)	$	98.5		$	220.2		$	911.8		$	941.5	$			2,172.0
Operating leases (2)		33.6			53.6			37.0			55.8				180.0
Purchase obligations (2)		18.9			–			–			–				18.9
Health claims payable (3)		51.1			–			–			–				51.1
Estimated self-insurance liabilities (4)		20.5			44.4			22.2			7.4				94.5
Subtotal	$	222.6		$	318.2		$	971.0		$	1,004.7			$	2,516.5

	Within 1 year		During Years 2-3			During Years 4-5			After 5 years			Total
Other Commitments:	(In  millions)
Construction and capital improvements (5)	$	24.1		$	5.4		$	–		$	–		$	29.5
Guarantees of surety bonds (6)		22.0			–			–			–			22.0
Letters of credit (7)		–			28.0			–			–			28.0
Physician commitments (8)		5.3			–			–			–			5.3
FIN 48 net liability (9)		0.6			–			–			–			0.6
Subtotal	$	52.0		$	33.4		$	–		$	–		$	85.4
Total obligations and commitments	$	274.6		$	351.6		$	971.0		$	1,004.7		$	2,601.9

____________________
(1)	Includes both principal and interest portions of outstanding debt. The interest portion of our debt assumes an approximate 5.0% rate over the remaining term of the debt.
(2)	These obligations are not reflected in our consolidated balance sheets.
(3)	Represents estimated payments to be made in future periods for healthcare costs incurred by enrollees in PHP, AAHP and MHP and is separately stated on our 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 consolidated balance sheets.
(6)	Represents performance bonds we have purchased related to medical claims liabilities of PHP.
(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 consolidated balance sheets under the provisions of FSP 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners, and liabilities for other fixed expenses under physician relocation agreements not yet paid.
(9)	Represents expected future tax liabilities determined under the provisions of FIN 48.

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Healthcare Reform

                In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect the services provided by and reimbursement to healthcare providers in our markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to healthcare providers or by taxes levied on hospitals or other providers. While we are unable to predict which, if any, proposals for healthcare reform will be adopted, we cannot assure you that proposals adverse to our business will not be adopted.

Federal and State Regulation and Investigations

                The healthcare industry is subject to extensive federal, state and local laws and regulations relating to licensing, conduct of operations, ownership of facilities, addition of facilities and services, confidentiality and security issues associated with medical records, financial arrangements with physicians and other referral sources, and billing for services and prices for services. These laws and regulations are extremely complex and the penalties for violations are severe. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. As a result of these laws and regulations, some of our activities could become the subject of governmental investigations or inquiries. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of hospital companies. Several hospital companies have settled allegations raised during such investigations for substantial sums out of concern for the possible exclusion from the Medicare and Medicaid programs. In the event of a determination that we are in violation of any of these laws, rules or regulations, or if further changes in the regulatory framework occur, our results of operations could be adversely affected.

Effects of Inflation and Changing Prices

                Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase prices. Revenues for acute hospital services rendered to Medicare patients are established under the federal government’s prospective payment system. We believe that hospital industry operating margins have been, and may continue to be, under significant pressure because of changes in payer mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In addition, as a result of increasing regulatory and competitive pressures, our ability to maintain operating margins through price increases to non-Medicare patients is limited.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

                    We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. As of June 30, 2008, we had in place $1,024.1 million of senior credit facilities bearing interest at variable rates at specified margins above either the agent bank’s alternate base rate or its LIBOR rate. The senior credit facilities consist of $774.1 million in term loans maturing in September 2011 and a $250.0 million revolving credit facility maturing in September 2010 (of which $28.0 million of capacity was utilized by outstanding letters of credit as of June 30, 2008). Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates would not be material to our results of operations or cash flows. The variable interest rate risk is partially mitigated by the interest rate swap that became effective on June 30, 2008, as discussed below.

                Our $250.0 million revolving credit facility bears interest at the alternate base rate plus a margin ranging from 1.00%-1.50% per annum or the LIBOR rate plus a margin ranging from 2.00%-2.50% per annum, in each case dependent upon our leverage ratio. Our revolving credit facility matures in September 2010. Our $774.1 million in outstanding term loans bear interest at the alternate base rate plus a margin of 1.25% per annum or the LIBOR rate plus a margin of 2.25% per annum and mature in September 2011.  The interest rate related to the unhedged term loans was approximately 5.1% as of June 30, 2008.

                In April 2008, we entered into an interest rate swap agreement with Bank of America, N.A. that became effective on June 30, 2008. We continue to make our usual quarterly term debt interest payments at a rate equal to the 90-day LIBOR rate plus 2.25%. In addition, we will begin making quarterly fixed interest payments on

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September 30, 2008 at a rate equal to 2.785% on a notional $450.0 million of our term debt in exchange for payments to us from Bank of America, N.A. based upon the applicable variable 90-day LIBOR rate on the same notional amount. We account for this swap as a highly effective cash flow hedge with critical terms that substantially match the underlying term debt and will measure any ineffectiveness using the hypothetical derivative method. We will make quarterly adjustments to other comprehensive income equal to the change in the fair value of the swap from quarter to quarter until the maturity of the swap on March 31, 2010. As of June 30, 2008, the estimated fair value of the interest rate swap was an asset for Vanguard of approximately $2.8 million (net of taxes).

                We use derivatives such as interest rate swaps from time to time to manage our market risk associated with variable rate debt or similar derivatives for fixed rate debt. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage features.

                At June 30, 2008, we held $26.3 million par value investments in auction rate securities (“ARS”) backed by student loans. Our ARS have maturity dates ranging from 2039 to 2043. Despite the underlying long-term maturity of ARS, these securities have been priced and traded as short-term investments as a result of a Dutch auction process that resets the ARS interest rates at predetermined periods ranging from 7 to 35 days. Historically, the Dutch auction process has enabled us to liquidate our ARS prior to each fiscal quarter-end. However, due to liquidity issues affecting the global credit and capital markets, the auctions for our remaining ARS since February 2008 have “failed”, and we were unable to liquidate these ARS as of June 30, 2008. A failed auction does not result in default of the debt instrument. The ARS continue to accrue interest until a successful auction occurs, the issuer calls the securities or the securities mature. We accepted a par value tender of approximately $3.7 million of our previously outstanding ARS during May 2008. The ARS continue to accrue interest until a successful auction occurs, the issuer calls the securities or the securities mature.

                Our ARS were rated “AAA” by one or more major credit rating agencies at June 30, 2008 based on their most recent ratings update. The ratings take into account insurance policies guaranteeing both the principal and accrued interest of the investments. The U.S. government guarantees approximately 96%-98% of the principal and accrued interest on each investment in student loans under the Federal Family Education Loan Program or similar programs.

                Based upon the tender completed in May 2008 for a portion of our ARS and additional available market information, we believe that the remaining $26.3 million par value of our ARS will become liquid during the next 12 months. Thus, we classified the ARS as current marketable securities on our consolidated balance sheet as of June 30, 2008. We determined that the fair value of the ARS approximated par value due to their expected short-term liquidation with no expectation of liquidation discounts. We will continue to monitor market conditions for this type of ARS to ensure that our classification and fair value estimate remain appropriate. Should market conditions in future periods warrant a reclassification or other than temporary impairment of our ARS, we do not believe our financial position, results of operations, cash flows or compliance with debt covenants would be materially impacted. We believe that we currently have adequate working capital to fund operations during the near future based on access to cash and cash equivalents, expected operating cash flows and availability under our revolving credit facility. We do not expect that our holding of the ARS until market conditions improve will significantly adversely impact our operating cash flows.

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Item 8.    Financial Statements and Supplementary Data.

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Page
VANGUARD HEALTH SYSTEMS, INC.
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	79
Consolidated Balance Sheets as of June 30, 2007 and 2008	80
Consolidated Statements of Operations for the years ended June 30, 2006, 2007 and 2008	81
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2006, 2007 and 2008	82
Consolidated Statements of Cash Flows for the years ended June 30, 2006, 2007 and 2008	83
Notes to Consolidated Financial Statements	85

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Vanguard Health Systems, Inc.

                We have audited the accompanying consolidated balance sheets of Vanguard Health Systems, Inc. as of June 30, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

                We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures  that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

                In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vanguard Health Systems, Inc. at June 30, 2008 and 2007 and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2008, in conformity with U.S. generally accepted accounting principles.

                As discussed in Note 9 to the consolidated financial statements, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, effective July 1, 2007.

/s/ Ernst & Young LLP

Nashville, Tennessee
September 15, 2008

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VANGUARD HEALTH SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

	June 30, 2007					June 30, 2008
ASSETS	(In millions except share and per share amounts)
Current assets:
Cash and cash equivalents		$	120.1		$		141.6
Restricted cash			6.2				2.1
Marketable securities			–				26.3
Accounts receivable, net of allowance for doubtful accounts of       approximately $113.2 and $117.7 at June 30, 2007 and 2008, respectively			287.3				300.4
Inventories			46.8				49.2
Prepaid expenses and other current assets			64.4				80.3
Total current assets			524.8				599.9
Property, plant and equipment, net of accumulated depreciation			1,186.6				1,174.0
Goodwill			689.2				689.2
Intangible assets, net of accumulated amortization			68.0				61.4
Investments in and advances to affiliates			7.3				6.0
Other assets			62.2				51.8
Total assets		$	2,538.1		$		2,582.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	144.1		$		162.8
Accrued salaries and benefits			75.0				97.4
Accrued health claims			61.4				51.1
Accrued interest			13.4				13.2
Other accrued expenses and current liabilities			66.5				49.6
Current maturities of long-term debt			8.0				8.0
Total current liabilities			368.4				382.1
Minority interests in equity of consolidated entities			9.3				9.1
Other liabilities			82.3				97.0
Long-term debt, less current maturities			1,520.7				1,529.5
Commitments and contingencies
Stockholders’ equity:
Common Stock; $.01 par value, 1,000,000 shares authorized, 749,550 shares     issued and outstanding at June 30, 2007 and 2008, respectively			–				–
Additional paid-in capital			644.6				647.1
Accumulated other comprehensive income			–				2.8
Retained deficit			(87.2	)			(85.3	)
Total stockholders’ equity			557.4				564.6
Total liabilities and stockholders’ equity		$	2,538.1		$		2,582.3
See accompanying notes.

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VANGUARD HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Year Ended June 30,
		2006				2007				2008
		(In millions)
Patient service revenues	$		2,043.6		$		2,179.3		$		2,340.5
Premium revenues			375.0				401.4				450.2
Total revenues			2,418.6				2,580.7				2,790.7
Costs and expenses:
Salaries and benefits (includes stock compensation       of $1.7, $1.2 and $2.5, respectively)			991.4				1,067.9				1,152.7
Supplies			394.1				421.8				434.5
Medical claims expense			270.3				297.0				328.2
Purchased services			128.1				141.2				149.5
Provision for doubtful accounts			156.8				175.2				205.6
Other operating expenses			191.0				196.4				214.5
Rents and leases			33.9				37.4				41.8
Depreciation and amortization			100.3				118.6				131.0
Interest, net			103.8				123.8				122.1
Debt extinguishment costs			0.1				–				–
Impairment loss			–				123.8				–
Other expenses			9.1				2.8				9.5
Income (loss) from continuing operations before   income taxes			39.7				(125.2	)			1.3
Income tax expense (benefit)			17.8				(11.6	)			1.7
Income (loss) from continuing operations			21.9				(113.6	)			(0.4	)
Loss from discontinued operations, net of taxes			(9.0	)			(19.1	)			(0.3	)
Net income (loss)	$		12.9		$		(132.7	)	$		(0.7	)
See accompanying notes.

81

VANGUARD HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock					Additional Paid-In Capital			Accumulated Other Comprehensive Income		Retained Earnings (Deficit)			Total Stockholders' Equity
	Shares			Amount
	(In millions, except share amounts)
Balance at June 30, 2005	749,550		$	–	$	643.2		$	–	$	32.6		$	675.8
Stock compensation (non-cash)	–			–		1.7			–		–			1.7
Repurchase of equity incentive units	–			–		(1.5	)		–		–			(1.5	)
Issuance of common stock	141			–		0.1			–		–			0.1
Repurchase of common stock	(141	)		–		(0.1	)		–		–			(0.1	)
Adjustment to income tax effect of      options payouts in connection with      merger	–			–		0.3			–		–			0.3
Net income	–			–		–			–		12.9			12.9
Balance at June 30, 2006	749,550			–		643.7			–		45.5			689.2
Stock compensation (non-cash)	–			–		1.2			–		–			1.2
Repurchase of equity incentive units	–			–		(0.2	)		–		–			(0.2	)
Issuance of common stock	195			–		0.2			–		–			0.2
Repurchase of common stock	(195	)		–		(0.3	)		–		–			(0.3	)
Net loss	–			–		–			–		(132.7	)		(132.7	)
Balance at June 30, 2007	749,550			–		644.6			–		(87.2	)		557.4
Stock compensation (non-cash)	–			–		2.5			–		–			2.5
Issuance of common stock	168			–		0.2			–		–			0.2
Repurchase of common stock	(168	)		–		(0.2	)		–		–			(0.2	)
Cumulative effect  of adoption of      FIN 48	–			–		–			–		2.6			2.6
Comprehensive income:
Fair value of interest rate swap (net        of tax effect)	–			–		–			2.8		–			2.8
Net loss	–			–		–			–		(0.7	)		(0.7	)
Total comprehensive income	–			–		–			2.8		(0.7	)		2.1
Balance at June 30, 2008	749,550		$	–	$	647.1		$	2.8	$	(85.3	)	$	564.6

See accompanying notes

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VANGUARD HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Year Ended June 30,
		2006				2007				2008
		(In millions)
Operating activities:
Net income (loss)	$		12.9		$		(132.7	)	$		(0.7	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Loss from discontinued operations			9.0				19.1				0.3
Depreciation and amortization			100.3				118.6				131.0
Provision for doubtful accounts			156.8				175.2				205.6
Amortization of loan costs			4.0				4.5				4.9
Accretion of principal on senior discount notes			15.7				17.5				19.5
Debt extinguishment costs			0.1				–				–
Loss (gain) on disposal of assets			1.5				(4.1	)			0.9
Stock compensation			1.7				1.2				2.5
Deferred income taxes			10.1				(12.7	)			(2.2	)
Impairment loss			–				123.8				–
Changes in operating assets and liabilities, net of    effects of acquisitions and dispositions
Accounts receivable			(162.4	)			(204.0	)			(223.6	)
Inventories			(5.2	)			(1.9	)			(4.1	)
Prepaid expenses and other current assets			3.6				(30.0	)			(19.7	)
Accounts payable			2.4				7.4				19.9
Accrued expenses and other liabilities			(11.9	)			37.8				37.3
Net cash provided by operating activities – continuing operations			138.6				119.7				171.6
Net cash provided by operating activities – discontinued operations			10.7				3.6				1.5
Net cash provided by operating activities			149.3				123.3				173.1
Investing activities:
Acquisitions			(1.2	)			(0.2	)			(0.2	)
Capital expenditures			(275.5	)			(164.3	)			(121.6	)
Proceeds from asset dispositions			11.1				9.5				0.4
Purchases of marketable securities			(128.4	)			(120.0	)			(90.0	)
Sales of marketable securities			128.4				120.0				63.7
Other			0.6				2.0				1.1
Net cash used in investing activities – continuing operations			(265.0	)			(153.0	)			(146.6	)
Net cash provided by investing activities –    discontinued operations			19.6				34.5				2.8
Net cash used in investing activities			(245.4	)			(118.5	)			(143.8	)
Financing activities:
Proceeds from long-term debt			175.0				–				–
Payments of long-term debt and capital leases			(31.4	)			(8.0	)			(7.8	)
Payments of loan costs and debt termination fees			(0.7	)			–				–
Payments to retire stock, equity incentive units and stock options			(2.5	)			(0.5	)			(0.2	)
Proceeds from the exercise of stock options			0.1				0.2				0.2
Net cash provided by (used in) financing activities			140.5				(8.3	)			(7.8	)
Increase (decrease) in cash and cash equivalents			44.4				(3.5	)			21.5
Cash and cash equivalents at beginning of year			79.2				123.6				120.1
Cash and cash equivalents at end of year	$		123.6		$		120.1		$		141.6

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VANGUARD HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)

		For the Year Ended June 30,
		2006				2007				2008
		(In millions)
Supplemental cash flow information:
Net interest paid	$		101.3		$		107.8		$		99.1
Net income taxes paid	$		2.1		$		0.9		$		1.3
Supplemental noncash activities:
Capitalized interest	$		8.3		$		3.0		$		1.4
Fair value of interest rate swap, net of taxes	$		2.8		$		–		$		–
Acquisitions:
Cash paid, net of cash received	$		1.2		$		0.2		$		0.2
Fair value of assets acquired			(3.3	)			–				0.2
Liabilities assumed			0.7				–				–
Additional paid-in capital			(0.3	)			–				–
Net assets acquired			(4.3	)			–				0.2
Goodwill and intangible assets acquired	$		5.5		$		0.2		$		–
Dispositions:
Cash received	$		28.7		$		37.0		$		3.0
Carrying value of assets sold			(14.8	)			(42.1	)			–
Gain on sale			11.1				–				–
Escrow receivable			–				3.0				(3.0	)
Liabilities assumed by buyer			–				5.5				–
Goodwill and intangible assets disposed	$		2.8		$		3.4		$		–

See accompanying notes.

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VANGUARD HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008

1.             Business and Basis of Presentation

Business

                Vanguard Health Systems, Inc. (“Vanguard”) is an investor-owned healthcare company whose affiliates own and operate hospitals and related healthcare businesses in urban and suburban areas.  As of June 30, 2008, Vanguard’s affiliates owned and managed 15 acute care hospitals with 4,181 licensed beds and related outpatient service locations complementary to the hospitals providing healthcare services in San Antonio, Texas; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; and Massachusetts. Vanguard also owns managed health plans in Chicago and Phoenix and two surgery centers in Orange County, California.

Basis of Presentation

                The accompanying consolidated financial statements include the accounts of subsidiaries and affiliates controlled by Vanguard. Vanguard generally defines control as the ownership of the majority of an entity’s voting interests. Vanguard also consolidates any entities for which it receives the majority of the entity’s expected returns or is at risk for the majority of the entity’s expected losses based upon its investment or financial interest in the entity. All material intercompany accounts and transactions have been eliminated. Since none of Vanguard’s common shares are publicly held, no earnings per share information is presented in the accompanying consolidated financial statements. Certain prior year amounts from the accompanying consolidated balance sheet have been reclassified to conform to current year presentation. The majority of Vanguard’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative include certain Vanguard corporate office costs, which approximated $30.6 million, $30.2 million and $44.3 million for the years ended June 30, 2006, 2007 and 2008, respectively.

       Use of Estimates

                In preparing Vanguard’s consolidated financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the amounts recorded or classification of items in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

2.             Summary of Significant Accounting Policies

Revenues and Revenue Deductions

                Vanguard recognizes patient service revenues during the period the healthcare services are provided based upon estimated amounts due from payers. Vanguard estimates contractual adjustments and allowances based upon payment terms set forth in managed care health plan contracts and by federal and state regulations. For the majority of its patient service revenues, Vanguard applies contractual adjustments to patient accounts at the time of billing using specific payer contract terms entered into the accounts receivable systems, but in some cases Vanguard records an estimated allowance until payment is received. Vanguard derives most of its patient service revenues from healthcare services provided to patients with Medicare and related managed Medicare plans or managed care insurance coverage. Medicare was the only individual payer for which Vanguard derived more than 10% of net patient revenues during its fiscal years ended June 30, 2006, 2007 and 2008.

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                Services provided to Medicare and related managed Medicare patients are generally reimbursed at prospectively determined rates per diagnosis (“PPS”), while services provided to managed care patients are generally reimbursed based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Medicaid reimbursements vary by state.

                Medicare regulations and Vanguard’s principal managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in its healthcare facilities. To obtain reimbursement for certain services under the Medicare program, Vanguard must submit annual cost reports and record estimates of amounts owed to or receivable from Medicare. These cost reports include complex calculations and estimates related to indirect medical education, reimbursable Medicare bad debts and other items that are often subject to interpretation that could result in payments that differ from recorded estimates. Vanguard estimates amounts owed to or receivable from the Medicare program using the best information available and its interpretation of the applicable Medicare regulations. Vanguard includes differences between original estimates and subsequent revisions to those estimates (including final cost report settlements) in the consolidated statements of operations in the period in which the revisions are made. Net adjustments for final third party settlements increased patient service revenues and income from continuing operations before income taxes by $8.6 million, $6.3 million and $7.9 million during the years ended June 30, 2006, 2007 and 2008, respectively. Additionally, updated regulations and contract negotiations occur frequently, which necessitates continual review of estimation processes by management.  Management believes that future adjustments to its current third party settlement estimates will not significantly impact Vanguard’s results of operations or financial position.

                Vanguard does not pursue collection of amounts due from uninsured patients that qualify for charity care under its guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by the Department of Health and Human Services). Vanguard deducts charity care accounts from revenues when it determines that the account meets its charity care guidelines. Vanguard also provides discounts from billed charges and alternative payment structures for uninsured patients who do not qualify for charity care but meet certain other minimum income guidelines, primarily those uninsured patients with incomes between 200% and 500% of the federal poverty guidelines. During the years ended June 30, 2006, 2007 and 2008, Vanguard deducted $71.1 million, $86.1 million and $86.1 million of charity care from revenues, respectively.

                During the third quarter of its fiscal year ended June 30, 2007, Vanguard was approved to receive payments under the Bexar County, Texas upper payment limit (“UPL”) Medicaid payment program. UPL programs allow private hospitals to enter into indigent care affiliation agreements with governmental entities. Within the parameters of these programs, private hospitals expand charity care services to indigent patients and alleviate expenses for the governmental entity. The governmental entity is then able to utilize its tax revenue to fund the Medicaid program for private hospitals. Vanguard recognizes revenues from the UPL program when Vanguard becomes entitled to the expected reimbursements, including a federal match portion, and such reimbursements are assured.

                Vanguard had premium revenues from its health plans of $375.0 million, $401.4 million and $450.2 million during the years ended June 30, 2006, 2007 and 2008, respectively.  Vanguard’s health plans, Phoenix Health Plan (“PHP”), Abrazo Advantage Health Plan (“AAHP”) and MacNeal Health Providers (“MHP”), have agreements with the Arizona Health Care Cost Containment System (“AHCCCS”), Centers for Medicare and Medicaid Services (“CMS”) and various health maintenance organizations (“HMOs”), respectively, to contract to provide medical services to subscribing participants. Under these agreements, Vanguard’s health plans receive monthly payments based on the number of HMO participants in MHP or the number and coverage type of enrollees in PHP and AAHP. Vanguard’s health plans recognize the payments as revenues in the month in which members are entitled to healthcare services with the exception of AAHP Medicare Part D reinsurance premiums and low income subsidy cost sharing premiums that are recorded as a liability to fund future healthcare costs or else repaid to the government.

Cash and Cash Equivalents

                Vanguard considers all highly liquid investments with maturity of 90 days or less when purchased to be cash equivalents. Vanguard manages its credit exposure by placing its investments in high quality securities and by periodically evaluating the relative credit standing of the financial institutions holding its cash and investments.

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Restricted Cash

                As of June 30, 2008 and 2007, Vanguard had restricted cash balances of $2.1 million and $6.2 million, respectively. These balances primarily represent restricted cash accounts related to liquidity requirements of AAHP and certain other arrangements.

Marketable Securities

                At June 30, 2008, Vanguard held $26.3 million par value investments in auction rate securities (“ARS”) backed by student loans. The ARS have maturity dates ranging from 2039 to 2043. Despite the underlying long-term maturity of the ARS, these securities have been priced and traded as short-term investments as a result of a Dutch auction process that resets the ARS interest rates at predetermined periods ranging from 7 to 35 days. Historically, the Dutch auction process has enabled Vanguard to liquidate its ARS prior to each fiscal quarter-end. However, due to liquidity issues affecting the global credit and capital markets, the auctions for these ARS since February 2008 have “failed”, and Vanguard was unable to liquidate these ARS as of June 30, 2008. A failed auction does not result in default of the debt instrument. The ARS continue to accrue interest until a successful auction occurs, the issuer calls the securities or the securities mature. During May 2008, Vanguard liquidated approximately $3.7 million of the $30.0 million ARS it held as of March 31, 2008 at par value plus accrued interest through a tender from the holder leaving $26.3 million of ARS outstanding as of June 30, 2008.

                Vanguard’s ARS were rated “AAA” by one or more major credit rating agencies at June 30, 2008. The ratings take into account insurance policies guaranteeing both the principal and accrued interest of the investments. The U.S. government guarantees approximately 96%-98% of the principal and accrued interest on each investment in student loans under the Federal Family Education Loan Program or other similar programs.

                Based upon the ARS successfully liquidated in May 2008 and additional available market information, Vanguard believes that the remaining $26.3 million par value of its ARS will become liquid during fiscal 2009. Thus, Vanguard has classified the ARS as current available-for-sale marketable securities under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”), on its consolidated balance sheet as of June 30, 2008. Vanguard determined that the fair value of the ARS, as required by SFAS 115, approximated par value due to the expected short-term liquidation of these marketable securities with no expectation of significant liquidation discounts supported by the governmental guarantee of the ARS. Vanguard intends and has the ability to hold the ARS until liquidation. Vanguard will continue to monitor market conditions for this type of ARS to ensure that its classification and fair value estimate for the ARS remain appropriate in future periods.

                If Vanguard sells any of the ARS, prior to maturity, at an amount below carrying value, or if it becomes probable that Vanguard will not receive full par value and accrued interest as to any of the ARS, Vanguard will be required to recognize an other-than-temporary impairment.

Accounts Receivable

                Vanguard’s primary concentration of credit risk is patient accounts receivable, which consists of amounts owed by various governmental agencies, insurance companies and private patients. Vanguard manages the receivables by regularly reviewing its accounts and contracts and by providing appropriate allowances for contractual discounts and uncollectible amounts. Vanguard typically writes off uncollected accounts receivable 180 days subsequent to discharge date. Medicare program net receivables, including managed Medicare receivables, comprised approximately 29% and 31% of net patient receivables as of June 30, 2007 and 2008, respectively. Medicare revenues are included in the acute care services operating segment. Receivables from various state Medicaid programs and managed Medicaid programs comprised approximately 24% and 23% of net patient receivables as of June 30, 2007 and 2008, respectively. Remaining receivables relate primarily to various HMO and Preferred Provider Organization (“PPO”) payers, commercial insurers and private patients. Concentration of credit risk for these payers is limited by the number of patients and payers.

                Effective July 1, 2007, Vanguard began estimating the allowance for doubtful accounts using a standard policy that reserves 100% of all accounts aged greater than 365 days subsequent to discharge date plus 85% of uninsured accounts less than 365 days old plus 40% of self-pay after insurance/Medicare less than 365 days old.

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Vanguard’s previous policy reserved all accounts greater than 180 days plus a market-specific percentage of uninsured and self-pay after insurance/Medicare balances. Effective June 30, 2008, Vanguard adjusted its policy to reserve for all accounts aged greater than 365 days subsequent to discharge date plus 92% of uninsured accounts less than 365 days old plus 45% of self-pay after insurance/Medicare less than 365 days old. These changes in policy negatively impacted Vanguard’s provision for doubtful accounts during the year ended June 30, 2008. However, management believes the revised policy will adjust more quickly to payer mix shifts over time. Vanguard tests its allowance for doubtful accounts policy quarterly using a hindsight calculation that utilizes write-off data for all payer classes duringthe previous twelve-month period to estimate the allowance for doubtful accounts at a point in time. Vanguard also supplements its analysis by comparing cash collections to net patient revenues and monitoring self-pay utilization. Significant changes in payer mix, business office operations, general economic conditions and healthcare coverage provided by federal or state governments or private insurers may have a significant impact on Vanguard’s estimates and significantly affect its results of operations and cash flows.

                Vanguard classifies accounts pending Medicaid approval as Medicaid accounts in its accounts receivable aging report and records a manual contractual allowance for these accounts equal to the average Medicaid reimbursement rate for that specific state. Vanguard has historically been successful in qualifying approximately 40%-45% of submitted accounts for Medicaid coverage. As of June 30, 2008, Vanguard had approximately $13.0 million of Medicaid pending accounts receivable from continuing operations ($4.1 million of which was stated at gross charges with a manual contractual allowance and $8.9 million of which was stated net of contractual discounts). In the event an account is not successfully qualified for Medicaid coverage and does not meet Vanguard’s charity guidelines, the previously recorded Medicaid contractual adjustment remains a revenue deduction (similar to a self-pay discount), and the remaining net account balance is reclassified to uninsured status and subjected to Vanguard’s allowance for doubtful accounts policy. During the years ended June 30, 2007 and 2008, approximately $13.2 million and $25.1 million, respectively, of net accounts receivable from continuing operations was reclassified from Medicaid pending status to uninsured status. If accounts do not qualify for Medicaid coverage but do qualify as charity care, the contractual adjustments are reversed and the gross account balances are recorded as charity deductions. During the years ended June 30, 2007 and 2008, Vanguard recorded $6.4 million and $7.1 million, respectively, of charity deductions from continuing operations for the net balances of accounts previously classified as Medicaid pending that did not meet Medicaid eligibility requirements.

                Because Vanguard requires patient verification of coverage at the time of admission, reclassifications of Medicare or managed care accounts to self-pay, other than patient coinsurance or deductible amounts, occur infrequently and are not material to its financial statements.  Additionally, the impact of these classification changes is further limited by Vanguard’s ability to identify any necessary classification changes prior to patient discharge or soon thereafter.  Due to information system limitations, Vanguard is unable to quantify patient deductible and coinsurance receivables that are included in the primary payer classification in the accounts receivable aging report at any given point in time. When classification changes occur, the account balance remains aged from the patient discharge date.

                A summary of Vanguard’s allowance for doubtful accounts activity, including those for discontinued operations, during the three most recent fiscal years follows (in millions).

		Balance at Beginning of Period			Additions Charged to Costs and Expenses			Accounts Written Off, Net of Recoveries			Balance at End of Period
Allowance for doubtful accounts:
Year ended June 30, 2006	$		90.1	$		178.1	$		164.7	$		103.5
Year ended June 30, 2007	$		103.5	$		191.3	$		181.6	$		113.2
Year ended June 30, 2008	$		113.2	$		201.0	$		196.5	$		117.7

Inventories

                Inventories, consisting of medical supplies and pharmaceuticals, are stated at the lower of cost (first-in, first-out) or market.

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Property, Plant and Equipment

                Purchases of property, plant and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase values, change capacities or extend useful lives are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which approximate 18 months to 44 years. Depreciation expense was approximately $97.1 million, $115.4 million and $127.8 million for the years ended June 30, 2006, 2007 and 2008, respectively. Vanguard tests its property, plant and equipment and other long-lived assets for impairment as management becomes aware of impairment indicators.

                During fiscal 2006, 2007 and 2008, Vanguard capitalized $8.3 million, $3.0 million and $1.4 million of interest, respectively, associated with certain of its hospital construction and expansion projects. Vanguard estimates that it is contractually obligated to expend approximately $29.5 million related to projects classified as construction in progress as of June 30, 2008. Vanguard also capitalizes costs associated with developing computer software for internal use under the provisions of AICPA Statement of Position 98-1 (“SOP 98-1”). Under SOP 98-1, Vanguard capitalizes both internal and external direct costs, excluding training, during the application development stage primarily for the purpose of customizing vendor software to integrate with our hospitals’ information systems. The following table provides the gross asset balances for each major class of asset and total accumulated depreciation as of June 30, 2007 and 2008 (in millions).

		June 30, 2007		June 30, 2008
Class of asset:
Land and improvements	$	131.8	$	143.5
Buildings and improvements		794.2		826.2
Equipment		485.0		558.9
Construction in progress		46.3		40.4
		1,457.3		1,569.0
Less: accumulated depreciation		(270.7)		(395.0)
Net property, plant and equipment	$	1,186.6	$	1,174.0

Long-Lived Assets and Goodwill

                Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of Vanguard’s total assets. Vanguard evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not expected to be recoverable, Vanguard reduces the carrying values to fair value. For long-lived assets held for sale, Vanguard compares the carrying values to an estimate of fair value less selling costs to determine potential impairment. Vanguard tests for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Given the relatively few number of hospitals Vanguard owns and the significant amounts of long-lived assets attributable to those hospitals, an impairment of the long-lived assets for even a single hospital could materially adversely impact its operating results or financial position.

                Goodwill also represents a significant portion of Vanguard’s total assets. Vanguard reviews goodwill for impairment annually during its fourth fiscal quarter or more frequently if certain impairment indicators arise under the provisions of SFAS 142, Goodwill and Other Intangible Assets. Vanguard reviews goodwill at the reporting unit level, which is one level below an operating segment. Vanguard compares the carrying value of the net assets of each reporting unit to the net present value of estimated discounted future cash flows of the reporting unit. If the carrying value exceeds the net present value of estimated discounted future cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions

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and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact Vanguard’s results of operations or statement of position.

Amortization of Intangible Assets

                Amounts allocated to contract-based intangible assets are amortized over their useful lives, which equal 10 years. No amortization is recorded for indefinite-lived intangible assets. Deferred loan costs and syndication costs are amortized over the life of the applicable credit facility or notes using the effective interest method. Physician income and service agreement guarantee intangible assets are recorded based upon the estimated future payments under the contracts and are amortized over the applicable contract service periods.

Income Taxes

                Vanguard accounts for income taxes using the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”) and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”). These guidelines require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.

                Vanguard believes that its tax return provisions are accurate and supportable, but certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. To reflect the possibility that all of its tax positions may not be sustained, Vanguard maintains tax reserves that are subject to adjustment as updated information becomes available or as circumstances change. Vanguard records the impact of tax reserve changes to its income tax provision in the period in which the additional information, including the progress of tax audits, is obtained.

                Vanguard 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, Vanguard 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:

                •  Cumulative losses in recent years
                •  Income/losses expected in future years
                •  Unsettled circumstances that, if favorably resolved, would adversely affect future operations
                •  Availability, or lack thereof, of taxable income in prior carryback periods that would limit realization of
                   tax benefits
                •  Carryforward period associated with the deferred tax assets and liabilities
                •  Prudent and feasible tax planning strategies

In addition, financial forecasts used in determining the need for or amount of federal and state valuation allowances are subject to changes in underlying assumptions and fluctuations in market conditions that could significantly alter Vanguard’s recoverability analysis and thus have a material adverse impact on Vanguard’s consolidated financial condition, results of operations or cash flows.

Medical Claims Reserves

                During the years ended June 30, 2006, 2007 and 2008, medical claims expense was $270.3 million, $297.0 million and $328.2 million, respectively, primarily representing medical claims of PHP. Vanguard estimates PHP’s reserve for medical claims using historical claims experience (including cost per member and payment lag time) and other actuarial data including number of enrollees and certain enrollee demographic information. The reserve for medical claims, including incurred but not reported claims, for all Vanguard health plans combined was approximately $61.4 million and $51.1 million as of June 30, 2007 and 2008, respectively. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from its estimates given changes in the healthcare cost structure or adverse experience. During the years ended June 30, 2006, 2007 and 2008, approximately $40.0 million, $34.2 million and $31.2 million,

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respectively, of accrued and paid claims for services provided to Vanguard’s health plan enrollees by its hospitals and its other healthcare facilities were eliminated in consolidation. Vanguard’s operating results and cash flows could be materially affected by increased or decreased utilization of its healthcare facilities by enrollees in its health plans.

Employee Health Insurance

                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.

Insurance Reserves

                Given the nature of its operating environment, Vanguard is subject to professional and general liability and workers compensation claims and related lawsuits in the ordinary course of business.  For professional and general liability claims incurred from June 1, 2002 to May 31, 2006, Vanguard’s wholly owned captive subsidiary insured its professional and general liability risks at a $10.0 million retention level. For professional and general liability claims incurred subsequent to May 31, 2006, Vanguard self-insures the first $9.0 million per claim, and the captive subsidiary insures the next $1.0 million per claim. Vanguard maintains excess coverage from independent third party insurers on a claims-made basis for individual claims exceeding $10.0 million up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate.

                Vanguard insures its excess coverage under a retrospectively rated policy, and premiums under this policy are recorded based on Vanguard’s historical claims experience. Vanguard self-insures its workers compensation claims up to $1.0 million per claim and purchases excess insurance coverage for claims exceeding $1.0 million.

                The following tables summarize Vanguard’s professional and general liability and workers compensation reserve balances as of June 30, 2007 and 2008 and its total provision for professional and general liability and workers compensation losses and related claims payments during the years ended June 30, 2006, 2007 and 2008.

	Professional and General Liability		Workers Compensation
	(In millions)
Reserve balance:
June 30, 2007		$          64.6	$	18.5
June 30, 2008		$          74.3	$	18.8
Provision for claims losses:
Fiscal Year 2006		$          21.0	$	8.9
Fiscal Year 2007		$          20.2	$	9.4
Fiscal Year 2008		$          21.8	$	5.3
Claims paid:
Fiscal Year 2006		$          12.7	$	6.4
Fiscal Year 2007		$          14.4	$	6.2
Fiscal Year 2008		$          12.1	$	5.0

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                Vanguard utilizes actuarial information to estimate its reserves for professional and general liability and workers compensation claims. Each reserve is comprised of estimated indemnity and expense payments related to:  (1) reported events (“case reserves”) and (2) incurred but not reported (“IBNR”) events as of the end of the period. Management uses information from its risk managers and its best judgment to estimate case reserves. Actuarial IBNR estimates are dependent on multiple variables including Vanguard’s risk exposures, its self-insurance limits, geographic locations in which it operates, the severity of its historical losses compared to industry averages and the reporting pattern of its historical losses compared to industry averages, among others. Most of these variables require judgment, and changes in these variables could result in significant period over period fluctuations in Vanguard’s estimates. Vanguard discounts its workers compensation reserve using actuarial estimates of projected cash payments in future periods. Vanguard adjusts these reserves from time to time as it receives updated information. During its fiscal years ended June 30, 2006, 2007 and 2008, due to changes in historical loss trends, Vanguard decreased its professional and general liability reserve related to prior fiscal years by $6.9 million, $4.5 million and $0.6 million, respectively. Similarly, Vanguard decreased its workers compensation reserve related to prior fiscal years by $2.3 million during its fiscal year ended June 30, 2008. Adjustments to the workers compensation reserve related to prior years during fiscal years ended June 30, 2006 and 2007 were not significant. Additional adjustments to prior year estimates may be necessary in future periods as Vanguard’s reporting history and loss portfolio matures.

Market and Labor Risks

                Vanguard operates primarily in four geographic markets. If economic or other factors limit its ability to provide healthcare services in one or more of these markets, Vanguard’s cash flows and results of operations could be materially adversely impacted. Approximately 1,600 full-time employees in Vanguard’s Massachusetts hospitals are subject to collective organizing agreements. This group represents approximately 9% of Vanguard’s workforce. During fiscal 2007, Vanguard entered into a new three-year contract with the union representing the majority of this group that ends on December 31, 2009. If Vanguard experiences significant future labor disruptions related to these unionized employees, its cash flows and results of operations could be materially adversely impacted.

Stock-Based Compensation

                Vanguard accounts for stock-based employee compensation granted prior to July 1, 2006 under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Effective July 1, 2003, Vanguard adopted SFAS 123 on a prospective basis, an acceptable transition method set forth in SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (“SFAS 148”). For grants dated July 1, 2006 and subsequent, Vanguard accounts for stock-based employee compensation under the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (“SFAS 123(R)”). Vanguard also adopted SFAS 123(R) on a prospective basis and such adoption did not significantly impact Vanguard’s results of operations or cash flows.

                The following table sets forth the weighted average assumptions utilized in the minimum value pricing model for stock option grants under the 2004 Option Plan prior to July 1, 2006 and those utilized in the Black-Scholes-Merton valuation model for grants under the 2004 Option Plan subsequent to July 1, 2006.

	Minimum    Value	Black-Scholes- Merton
Risk-free interest rate	4.5%	4.0%
Dividend yield	0.0%	0.0%
Volatility  (annual)	N/A	30.2%
Expected option life	10 years	6.5 years

                For stock options included in the Black-Scholes-Merton valuation model, Vanguard used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility. Vanguard determined the expected life of the stock options by averaging the contractual life of the options and the vesting period of the options. The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.

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Fair Value of Financial Instruments

       Cash and Cash Equivalents and Restricted Cash

                The carrying amounts reported for cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity of these instruments.

       Marketable Securities

                The carrying amounts reported for marketable securities approximate fair value because of the expected liquidation of these securities during the fiscal year ending June 30, 2009 at par value.

       Accounts Receivable and Accounts Payable

                The carrying amounts reported for accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

       Long-Term Debt

                The fair values of Vanguard’s 9.0% Notes, and 11.25% Notes and term debt as of June 30, 2008 were approximately $577.9 million, $190.1 million and $750.8, respectively, based upon stated market prices. The fair values are subject to change as market conditions change.

       Interest Rate Swap

                The fair value of Vanguard’s interest rate swap as of June 30, 2008 was an asset of $2.8 million, net of taxes, based upon information obtained from the counterparty.

Recently Issued Accounting Pronouncements

                In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts (“SFAS 163”). SFAS 163 requires that an insurance entity recognize a claim liability prior to the occurrence of an insured event when evidence of credit deterioration within an insured financial obligation exists. SFAS 163 also sets forth guidance related to the recognition and measurement to be used to account for premium revenues and claim liabilities and provides expanded disclosure requirements. SFAS 163 is effective for Vanguard’s fiscal year ending June 30, 2009 and all interim periods within that fiscal year with early application not permitted. Vanguard does not expect the adoption of SFAS 163 to significantly impact its financial position, results of operations or cash flows.

                In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosure About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities to improve the financial reporting for these derivative instruments. These disclosures include how and why an entity uses derivative instruments, the accounting treatment of the instruments under SFAS 133 and related interpretations and how the instruments affect the entity’s financial position, results of operations and cash flows. SFAS 161 also requires tabular presentation of the fair values of derivatives and their related gains and losses. SFAS 161 is effective for Vanguard’s fiscal quarter beginning January 1, 2009 with early adoption permitted. Other than additional required disclosures, Vanguard does not expect adoption of SFAS 161 to impact its consolidated financial statements.

                In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) applies to all transactions or other events in which an entity obtains control of one or more businesses even if the acquirer does not acquire 100% of all interests of the target. Under SFAS 141(R) the acquirer recognizes 100% of the fair values of acquired assets, including goodwill, and assumed liabilities with only limited exceptions. This methodology replaces the previous cost-allocation process set forth in SFAS No. 141 that often resulted in the measurement of assets and liabilities at values other than fair value at the acquisition date. SFAS 141(R) also requires contingent consideration to be measured at fair value at acquisition date

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with subsequent adjustments measured in future periods. Transactions costs are not considered part of the acquired assets and thus are expensed as incurred under SFAS 141(R). The acquisition date is deemed to be the date on which the acquisition is completed, not when the acquisition agreement is executed. Vanguard will adopt SFAS 141(R) prospectively for acquisitions completed on or after July 1, 2009. However, SFAS 141(R) requires changes to estimates of deferred taxes arising from business combinations to be adjusted through earnings even if the business combination occurred prior to the effective date of SFAS 141(R). SFAS 141(R) will affect Vanguard’s future financial position, results of operations or cash flows to the extent Vanguard completes a business combination on or subsequent to July 1, 2009 and could significantly impact Vanguard’s future results of operations should deferred tax estimates attributable to the Blackstone merger differ significantly from their ultimate resolution.

                In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 amended Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish a single method of accounting for non-controlling interests in subsidiaries, or previously referred to as minority interests. SFAS 160 requires that the noncontrolling interest in a subsidiary be reported as a component of stockholder’s equity in the consolidated balance sheet. SFAS 160 also requires that consolidated net income include both the parent and noncontrolling interest’s portion of the operating results of the subsidiary with separate disclosure on the statement of operations of the amounts attributable to the parent versus the noncontrolling interest. Changes in the parent’s ownership interest that do not result in deconsolidation are treated as equity transactions under SFAS 160. Vanguard will adopt SFAS 160 prospectively on July 1, 2009 with retrospective presentation for comparative periods shown. Vanguard does not expect SFAS 160 to have a material impact on its future financial position, results of operations or cash flows.

                In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 gives entities the option to voluntarily choose, at certain election dates, to measure many financial assets and liabilities at fair value. Elections are made on an instrument by instrument basis and are irrevocable once made. Subsequent changes to the fair value of any instrument for which an election is made are reflected through earnings. SFAS 159 is effective for Vanguard as of July 1, 2008 with early adoption permitted. Vanguard does not expect SFAS 159 to significantly impact its future financial position, results of operations or cash flows.

                On September 15, 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurement (“SFAS 157”).  SFAS 157 sets forth comprehensive guidance for measuring fair value of assets and liabilities. Under the provisions of SFAS 157, fair value should be based on the assumptions market participants would use to complete the sale of an asset or transfer of a liability.  SFAS 157 provides a hierarchy of information to be used to determine the applicable market assumptions, and fair value measurements would be separately disclosed under each applicable layer of the hierarchy. SFAS 157 does not expand or restrict the use of fair value for measuring assets and liabilities but provides a single methodology to be used when fair value accounting is applied.  For those financial assets and financial liabilities defined in SFAS 159, SFAS 157 is effective for Vanguard’s fiscal year beginning July 1, 2008 with early adoption permitted. For non-recurring nonfinancial assets and nonfinancial liabilities, SFAS 157 is effective for Vanguard’s fiscal year beginning July 1, 2009. Vanguard does not expect the adoption of SFAS 157 to significantly impact its future financial position, results of operations or cash flows.

3.             Discontinued Operations

                On March 8, 2006, certain subsidiaries of Vanguard sold medical office buildings in California to an independent third party for net sales proceeds of approximately $28.7 million. The net book value of the property, plant and equipment sold was approximately $14.8 million, and Vanguard allocated approximately $2.8 million of existing goodwill to the disposed assets. Vanguard recognized a gain on the sale of approximately $11.1 million ($8.3 million net of taxes) related to this transaction during fiscal 2006.

                On October 1, 2006, certain of Vanguard’s subsidiaries completed the sale of their three hospitals in Orange County, California (West Anaheim Medical Center, Huntington Beach Hospital and La Palma Intercommunity Hospital) to subsidiaries of Prime Healthcare, Inc. for net proceeds of $40.0 million, comprised of cash proceeds of $37.0 million and $3.0 million of proceeds placed in escrow which was distributed to a subsidiary of Vanguard on July 2, 2007.  Approximately $12.8 million of retained working capital, including $25.3 million of patient accounts receivable, was excluded from the sale.

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                The operations of the California hospitals and medical office buildings are included in discontinued operations, net of taxes, in the accompanying statements of operations for all periods presented in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) and EITF 03-13, Applying the Conditions of Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations (“EITF 03-13”). The post-transaction direct cash flows that previously precluded the California medical office buildings operations from being included in discontinued operations under EITF 03-13 were eliminated upon the sale of the California hospitals.

                During fiscal 2006, prior to the sale of the California hospitals, Vanguard recorded an impairment charge of $15.0 million ($9.4 million net of taxes) to write down its basis in the net property, plant and equipment of these hospitals to estimated fair value using a discounted cash flows model. This impairment charge is included in discontinued operations, net of taxes in the accompanying consolidated statement of operations for the year ended June 30, 2006.

                In June 2007, Vanguard ceased providing acute care services at Phoenix Memorial Hospital (“PMH”) and began leasing certain floors of the building to various third party healthcare providers. The leases are 5-year and 7-year leases with renewal options. When comparing the projected lease income to the historical total revenues of PMH, Vanguard determined that the expected cash inflows under the leases were insignificant and deemed indirect cash flows. Thus, the acute care operations of PMH are included in discontinued operations, net of taxes in the accompanying statements of operations for all periods presented in accordance with SFAS 144 and EITF 03-13.

                The following table sets forth the components of discontinued operations, net of taxes for the years ended June 30, 2006, 2007 and 2008, respectively (in millions).

		Year ended June 30,
		2006			2007			2008
Total revenues	$	234.1		$	91.7		$	(1.5	)
Operating expenses		239.3			115.9			(1.6	)
Allocated interest		7.2			2.7			–
Impairment loss		15.0			–			–
Loss (gain) on sale of assets		(11.1	)		1.7			0.6
Income tax benefit		(7.3	)		(9.5	)		(0.2	)
Loss from discontinued operations, net of taxes	$	9.0		$	19.1		$	0.3

                The interest allocations to discontinued operations for the years ended June 30, 2006 and 2007 were based upon the ratio of net assets to be divested to the sum of total net assets and Vanguard’s outstanding debt.  Income taxes were calculated using an effective tax rate of approximately 44.8%, 33.2% and 40.0% for the years ended June 30, 2006, 2007 and 2008, respectively.

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4.             Prepaid Expenses and Other Current Assets

                Prepaid expenses and other current assets in the accompanying consolidated balance sheets consist of the following at June 30, 2007 and 2008 (in millions).

		2007		2008
Prepaid insurance	$	6.0	$	5.2
Other prepaid expenses		10.1		10.5
Deferred tax assets		8.9		24.5
Interest rate swap receivable		–		2.8
Third party settlements		6.7		4.4
Other receivables		32.7		32.9
	$	64.4	$	80.3

5.             Impairment of Long-Lived Assets

                During the second quarter of fiscal 2007, as a result of certain trends in the business climate at its Chicago hospitals including payer mix shifts, Vanguard performed an impairment test of the long-lived assets of these two hospitals under SFAS 144 and SFAS 142, Goodwill and Other Intangible Assets. Based upon independent estimates of the fair value of the hospitals, Vanguard recorded a $123.8 million ($110.5 million, net of tax benefit) impairment charge during the quarter and six months ended December 31, 2006. The independent fair value estimates were developed using a discounted net cash flows approach and two market-based approaches. As a result of the impairment charge, Vanguard reduced goodwill for its acute care services segment by $123.8 million. Goodwill related to the Chicago hospitals was approximately $40.6 million as of June 30, 2008.

                Vanguard will continue to monitor the operations of its Chicago hospitals due to the sensitivity of the projected cash flows of this reporting unit to the goodwill impairment analysis. If projected future cash flows become less favorable than those projected by management, an additional impairment charge may become necessary that could have a material adverse impact on Vanguard’s financial position and results of operations.

6.             Goodwill and Intangible Assets

                The following table provides information regarding the intangible assets, including deferred loan costs, included in the accompanying consolidated balance sheets as of June 30, 2007 and 2008 (in millions).

	Gross Carrying Amount		Accumulated Amortization
Class of Intangible Asset	2007	2008	2007	2008
Amortized intangible assets:
Deferred loan costs	$          43.8	$          43.8	$          11.2	$          16.1
Contracts	31.4	31.4	8.6	11.8
Physician income and other guarantees	13.8	22.2	5.4	12.1
Other	1.3	1.3	0.3	0.5
Subtotal	90.3	98.7	25.5	40.5
Indefinite-lived intangible assets:
License and accreditation	3.2	3.2	–	–
Total	$          93.5	$        101.9	$          25.5	$          40.5

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                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).

		Acute Care Services			Health Plans		Total
Balance as of June 30, 2006	$	733.4		$	79.4	$	812.8
Chicago hospitals goodwill impairment		(123.8	)		–		(123.8	)
Acquisition of physician practice		0.2			–		0.2
Balance as of June 30, 2007 and 2008	$	609.8		$	79.4	$	689.2

                Vanguard completed its annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarter of fiscal 2008 noting no impairment. Approximately $148.6 million of Vanguard’s goodwill is deductible for tax purposes.

7.             Other Accrued Expenses and Current Liabilities

                The following table presents summaries of items comprising other accrued expenses and current liabilities in the accompanying consolidated balance sheets as of June 30, 2007 and 2008 (in millions).

		2007		2008
Property taxes	$	15.3	$	14.6
Current portion of insurance risks		21.5		19.0
Construction retention payable		1.7		–
Accrued income guarantees		4.3		4.4
Income taxes payable		–		2.4
Other		23.7		9.2
	$	66.5	$	49.6

8.             Long-Term Debt

                A summary of Vanguard’s long-term debt at June 30, 2007 and 2008 follows (in millions).

		2007		2008
9.0% Senior Subordinated Notes	$	575.0	$	575.0
11.25% Senior Discount Notes		168.9		188.4
Term loans payable under credit facility		781.9		774.1
Other		2.9		–
		1,528.7		1,537.5
Less: current maturities		(8.0)		(8.0)
	$	1,520.7	$	1,529.5

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9.0% Notes

                In connection with the Blackstone acquisition of Vanguard by merger on September 23, 2004 (the “Blackstone merger”), two of Vanguard’s wholly owned subsidiaries, Vanguard Health Holding Company II, LLC and Vanguard Holding Company II, Inc. (collectively, the “Issuers”), completed a private placement of $575.0 million 9% Senior Subordinated Notes due 2014 (“9.0% Notes”). Interest on the 9.0% Notes is payable semi-annually on October 1 and April 1 of each year. The 9.0% Notes are general unsecured senior subordinated obligations and rank junior in right of payment to all existing and future senior indebtedness of the Issuers. All payments on the 9.0% Notes are guaranteed jointly and severally on a senior subordinated basis by Vanguard and its domestic subsidiaries, other than those subsidiaries that do not guarantee the obligations of the borrowers under the senior credit facilities.

                Prior to October 1, 2009, the Issuers may redeem the 9.0% Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium. On or after October 1, 2009, the Issuers may redeem all or part of the 9.0% Notes at various redemption prices given the date of redemption as set forth in the indenture governing the 9.0% Notes. The initial redemption price for the 9.0% Notes on October 1, 2009 is equal to 104.50% 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.

                On January 26, 2005, Vanguard exchanged all of its outstanding 9.0% senior subordinated notes due 2014 for new 9.0% senior subordinated notes due 2014 with identical terms and conditions, except that they were registered under the Securities Act of 1933. Terms and conditions of the exchange offer were set forth in Vanguard’s registration statement on Form S-4 filed with the Securities and Exchange Commission that became effective on December 23, 2004.

11.25% Notes

                In connection with the Blackstone merger on September 23, 2004, two of Vanguard’s wholly owned subsidiaries, Vanguard Health Holding Company I, LLC and Vanguard Holding Company I, Inc. (collectively, the “Discount Issuers”), completed a private placement of $216.0 million aggregate principal amount at maturity ($124.7 million in gross proceeds) of 11.25% Senior Discount Notes due 2015 (“11.25% Notes”). The 11.25% Notes accrete at the stated rate compounded semi-annually on April 1 and October 1 of each year to, but not including, October 1, 2009. Subsequent to October 1, 2009, cash interest on the 11.25% Notes will accrue at 11.25% per annum, and will be payable on April 1 and October 1 of each year, commencing on April 1, 2010 until maturity. The 11.25% Notes are general senior unsecured obligations and rank junior in right of payment to all existing and future senior indebtedness of the Discount Issuers but senior to any of the Discount Issuers’ future senior subordinated indebtedness. All payments on the 11.25% Notes are guaranteed by Vanguard as a holding company guarantee.

                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.

                On January 26, 2005, Vanguard exchanged all of its outstanding 11.25% senior discount notes due 2015 for new 11.25% senior discount notes due 2015 with identical terms and conditions, except that they were registered under the Securities Act of 1933.  Terms and conditions of the exchange offer were set forth in Vanguard’s registration statement on Form S-4 filed with the Securities and Exchange Commission that became effective on December 23, 2004.

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Credit Facility Debt

                In connection with the Blackstone merger on September 23, 2004, two of Vanguard’s wholly owned subsidiaries, Vanguard Health Holding Company II, LLC and Vanguard Holding Company II, Inc. (collectively, the “Co-borrowers”), entered into new senior secured credit facilities (the “merger credit facilities”) with various lenders and Bank of America, N.A. as administrative agent and Citicorp North America, Inc. as syndication agent, and repaid all amounts outstanding under its previous credit facility. The merger credit facilities include a seven-year term loan facility in the aggregate principal amount of $800.0 million (of which $475.0 million was funded at closing) and a six-year $250.0 million revolving credit facility. Of the $325.0 million unfunded term loans, $150.0 million was made available to finance the acquisition of hospitals and related businesses provided that the acquisition occurred on or prior to February 20, 2005, and to fund capital expenditures and other corporate needs. Also, $175.0 million was made available for working capital, capital expenditures and other general corporate purposes until September 23, 2005. Vanguard borrowed all $325.0 million delayed draw term loans at various times during its fiscal years 2005 and 2006.

                On September 26, 2005, the Co-borrowers refinanced and repriced all $795.7 million of the then outstanding term loans under the merger credit facilities by borrowing $795.7 million of replacement term loans that also mature on September 23, 2011 (the “2005 term loan facility”). In addition, upon the occurrence of certain events, the Co-borrowers may request an incremental term loan facility to be added to the 2005 term loan facility in an amount not to exceed $300.0 million in the aggregate, subject to receipt of commitments by existing lenders or other financing institutions and to the satisfaction of certain other conditions. The revolving loan facility under the merger credit facilities did not change in connection with the term loan refinancing. As of June 30, 2008, $774.1 million of indebtedness was outstanding under the 2005 term loan facility. Vanguard’s remaining borrowing capacity under the revolving credit facility, net of letters of credit outstanding, was $222.0 million as of June 30, 2008.

                The 2005 term loan facility borrowings bear interest at a rate equal to, at Vanguard’s option, LIBOR plus 2.25% per annum or a base rate plus 1.25% per annum. These interest rates reflect a savings of 1.00% per annum over the interest rate options for term loan borrowings under the merger credit facilities. Borrowings under the revolving credit facility currently bear interest at a rate equal to, at Vanguard’s option, LIBOR plus 2.25% per annum or a base rate plus 1.25% per annum, subject to an increase of up to 0.25% per annum should Vanguard’s leverage ratio increase over certain designated levels. Vanguard also pays a commitment fee to the lenders under the revolving credit facility in respect of unutilized commitments thereunder at a rate equal to 0.50% per annum. Vanguard also pays customary letter of credit fees under this facility. Vanguard makes quarterly principal payments equal to one-fourth of one percent of the outstanding principal balance of the 2005 term loan facility, and will continue to make such payments until maturity of the term debt.

                Vanguard is subject to certain restrictive and financial covenants under the credit agreement governing the 2005 term loan facility and the revolving credit facility including a total leverage ratio, senior leverage ratio, interest coverage ratio and capital expenditure restrictions. Vanguard was in compliance with each of these financial covenants as of June 30, 2008. Obligations under the credit agreement are unconditionally guaranteed by Vanguard and Vanguard Health Holding Company I, LLC (“VHS Holdco I”) and, subject to certain exceptions, each of VHS Holdco I’s wholly-owned domestic subsidiaries (the “U.S. Guarantors”). Obligations under the credit agreement are also secured by substantially all of the assets of Vanguard Health Holding Company II, LLC (“VHS Holdco II”) and the U.S. Guarantors including a pledge of 100% of the membership interests of VHS Holdco II, 100% of the capital stock of substantially all U.S. Guarantors (other than VHS Holdco I) and 65% of the capital stock of each of VHS Holdco II’s non-U.S. subsidiaries that are directly owned by VHS Holdco II or one of the U.S. Guarantors and a security interest in substantially all tangible and intangible assets of VHS Holdco II and each U.S. Guarantor.

Interest Rate Swap Agreement

                During April 2008, Vanguard entered into an interest rate swap agreement with Bank of America, N.A. (the “counterparty”) that went into effect on June 30, 2008. Given the turbulence in the credit markets and the attractive swap rates then available, Vanguard executed the swap agreement to hedge its cash flows related to a portion of the 2005 term loan facility against potential market fluctuations to the variable 90-day LIBOR interest rate. Vanguard will continue to make its normal quarterly interest payments under the 2005 term loan facility as described above.

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However, Vanguard will also begin making quarterly fixed interest payments on September 30, 2008 at a rate equal to 2.785% on a notional $450.0 million of the 2005 term loan facility in exchange for payments to Vanguard from the counterparty based upon the applicable variable 90-day LIBOR rate on the same notional amount. Vanguard will account for this swap as a highly effective cash flow hedge with critical terms that substantially match the underlying term debt and will measure any ineffectiveness using the hypothetical derivative method. Vanguard deems the counterparty to be creditworthy. As of June 30, 2008, the estimated fair value of the interest rate swap was an asset for Vanguard of approximately $2.8 million (net of taxes of $1.8 million), which is included in prepaid expenses and other current assets and accumulated other comprehensive income on the accompanying balance sheet. Vanguard will make quarterly adjustments to other comprehensive income equal to the change in the fair value of the swap from quarter to quarter until the maturity of the swap on March 31, 2010 with any ineffectiveness included in earnings.

Deferred Loan Costs

                In connection with the Blackstone merger, Vanguard incurred $43.8 million of deferred offering and loan costs related to the 9.0% Notes, the 11.25% Notes and term and revolving loan borrowings under the merger credit facilities and the 2005 term loan facility. Vanguard incurred $4.0 million, $4.5 million and $4.9 million of interest expense, respectively, during the years ended June 30, 2006, 2007 and 2008 related to the amortization of these offering and loan costs.

Future Maturities

                Future maturities of Vanguard’s debt as of June 30, 2008 follow (in millions).

Fiscal Year	Amount
2009	$	8.0
2010		7.9
2011		8.0
2012		750.2
2013		–
Thereafter		791.0
	$	1,565.1

Other Information

                Vanguard conducts substantially all of its business through its subsidiaries. Most of Vanguard’s subsidiaries jointly and severally guarantee the 9.0% Notes on an unsecured senior subordinated basis. Certain of Vanguard’s other consolidated wholly-owned and non wholly-owned entities do not guarantee the 9.0% Notes in conformity with the provisions of the indenture governing the 9.0% Notes and do not guarantee Vanguard’s 2005 term loan facility in conformity with the provisions thereof. The condensed consolidating financial information for the parent company, the issuers of the 9.0% Notes, the issuers of the 11.25% Notes, the guarantor subsidiaries, the combined non-guarantor subsidiaries, certain eliminations and consolidated Vanguard as of June 30, 2007 and 2008, and for the years ended June 30, 2006, 2007 and 2008, follows.

100

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2007

	Parent		Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors		Eliminations			Total Consolidated
ASSETS	(In millions)
Current assets:
Cash and cash equivalents	$	–	$	–		$	–		$	11.7		$	108.4	$	–		$	120.1
Restricted cash		–		–			–			4.4			1.8		–			6.2
Accounts receivable, net		–		–			–			260.0			27.3		–			287.3
Inventories		–		–			–			41.8			5.0		–			46.8
Prepaid expenses and other current assets		0.1		–			–			44.5			22.4		(2.6	)		64.4
Total current assets		0.1		–			–			362.4			164.9		(2.6	)		524.8
Property, plant and equipment, net		–		–			–			1,112.1			74.5		–			1,186.6
Goodwill		–		–			–			605.6			83.6		–			689.2
Intangible assets, net		–		29.2			3.4			11.1			24.3		–			68.0
Investments in consolidated subsidiaries		608.8		–			–			–			26.6		(635.4	)		–
Other assets		–		–			–			69.4			0.1		–			69.5
Total assets	$	608.9	$	29.2		$	3.4		$	2,160.6		$	374.0	$	(638.0	)	$	2,538.1
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	–	$	–		$	–		$	132.8		$	11.3	$	–		$	144.1
Accrued expenses and other current    liabilities		–		13.4			–			130.5			87.9		(15.5	)		216.3
Current maturities of long-term debt		–		8.0			–			(0.2	)		0.2		–			8.0
Total current liabilities		–		21.4			–			263.1			99.4		(15.5	)		368.4
Other liabilities		–		–			–			50.6			45.3		(4.3	)		91.6
Long-term debt, less current maturities		–		1,348.9			168.9			2.9			–		–			1,520.7
Intercompany		51.5		(1,013.2	)		(120.9	)		1,368.3			51.8		(337.5	)		–
Stockholders’ equity		557.4		(327.9	)		(44.6	)		475.7			177.5		(280.7	)		557.4
Total liabilities and stockholders’            equity	$	608.9	$	29.2		$	3.4		$	2,160.6		$	374.0	$	(638.0	)	$	2,538.1

101

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
June 30, 2008

	Parent		Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
ASSETS	(In millions)
Current assets:
Cash and cash equivalents	$	–	$	–		$	–		$	82.0		$	59.6		$	–		$	141.6
Restricted cash		–		–			–			0.3			1.8			–			2.1
Marketable securities		–		–			–			–			26.3			–			26.3
Accounts receivable, net		–		–			–			275.7			24.7			–			300.4
Inventories		–		–			–			44.3			4.9			–			49.2
Prepaid expenses and other current assets		0.1		–			–			62.5			20.0			(2.3	)		80.3
Total current assets		0.1		–			–			464.8			137.3			(2.3	)		599.9
Property, plant and equipment, net		–		–			–			1,106.4			67.6			–			1,174.0
Goodwill		–		–			–			605.6			83.6			–			689.2
Intangible assets, net		–		24.5			3.2			12.9			20.8			–			61.4
Investments in consolidated subsidiaries		608.8		–			–			–			16.7			(625.5	)		–
Other assets		–		–			–			57.6			0.2			–			57.8
Total assets	$	608.9	$	24.5		$	3.2		$	2,247.3		$	326.2		$	(627.8	)	$	2,582.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	–	$	–		$	–		$	144.9		$	17.9		$	–		$	162.8
Accrued expenses and other current    liabilities		–		13.2			–			125.2			72.9			–			211.3
Current maturities of long-term debt		–		8.0			–			(0.2	)		0.2			–			8.0
Total current liabilities		–		21.2			–			269.9			91.0			–			382.1
Other liabilities		–		–			–			70.6			38.7			(3.2	)		106.1
Long-term debt, less current maturities		–		1,341.1			188.4			–			–			–			1,529.5
Intercompany		44.3		(900.0	)		(120.8	)		1,373.9			(51.9	)		(345.5	)		–
Stockholders’ equity		564.6		(437.8	)		(64.4	)		532.9			248.4			(279.1	)		564.6
Total liabilities and stockholders’            equity	$	608.9	$	24.5		$	3.2		$	2,247.3		$	326.2		$	(627.8	)	$	2,582.3

102

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended June 30, 2006

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Patient service revenues	$	–		$	–		$	–		$	1,929.0		$	144.5		$	(29.9	)	$	2,043.6
Premium revenues		–			–			–			47.9			358.9			(31.8	)		375.0
Total revenues		–			–			–			1,976.9			503.4			(61.7	)		2,418.6
Salaries and benefits		1.7			–			–			914.8			74.9			–			991.4
Supplies		–			–			–			369.3			24.8			–			394.1
Medical claims expense		–			–			–			29.1			271.1			(29.9	)		270.3
Purchased services		–			–			–			110.1			18.0			–			128.1
Provision for doubtful accounts		–			–			–			149.7			7.1			–			156.8
Other operating expenses		0.2			–			–			179.5			43.1			(31.8	)		191.0
Rents and leases		–			–			–			27.2			6.7			–			33.9
Depreciation and amortization		–			–			–			86.0			14.3			–			100.3
Interest, net		–			109.5			15.9			(22.3	)		0.7			–			103.8
Management fees		–			–			–			(6.7	)		6.7			–			–
Debt extinguishment costs		0.1			–			–			–			–			–			0.1
Other		–			–			–			8.4			0.7			–			9.1
Total costs and expenses		2.0			109.5			15.9			1,845.1			468.1			(61.7	)		2,378.9
Income (loss) from continuing operations    before income taxes		(2.0	)		(109.5	)		(15.9	)		131.8			35.3			–			39.7
Income tax expense (benefit)		17.8			–			–			6.7			7.6			(14.3	)		17.8
Equity in earnings of subsidiaries		32.7			–			–			–			–			(32.7	)		–
Income (loss) from continuing operations		12.9			(109.5	)		(15.9	)		125.1			27.7			(18.4	)		21.9
Loss from discontinued operations,    net of taxes		–			–			–			(7.8	)		(1.2	)		–			(9.0	)
Net income (loss)	$	12.9		$	(109.5	)	$	(15.9	)	$	117.3		$	26.5		$	(18.4	)	$	12.9

103

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended June 30, 2007

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Patient service revenues	$	–		$	–		$	–		$	2,053.9		$	150.9		$	(25.5	)	$	2,179.3
Premium revenues		–			–			–			56.5			345.3			(0.4	)		401.4
Total revenues		–			–			–			2,110.4			496.2			(25.9	)		2,580.7
Salaries and benefits		1.2			–			–			986.6			80.1			–			1,067.9
Supplies		–			–			–			394.1			27.7			–			421.8
Medical claims expense		–			–			–			35.6			286.9			(25.5	)		297.0
Purchased services		–			–			–			126.6			14.6			–			141.2
Provision for doubtful accounts		–			–			–			169.2			6.0			–			175.2
Other operating expenses		0.2			–			–			171.2			25.4			(0.4	)		196.4
Rents and leases		–			–			–			30.8			6.6			–			37.4
Depreciation and amortization		–			–			–			104.1			14.5			–			118.6
Interest, net		–			119.5			17.7			(8.2	)		(5.2	)		–			123.8
Management fees		–			–			–			(8.2	)		8.2			–			–
Impairment loss		–			–			–			120.1			3.7			–			123.8
Other		–			–			–			2.8			–			–			2.8
Total costs and expenses		1.4			119.5			17.7			2,124.7			468.5			(25.9	)		2,705.9
Income (loss) from continuing operations    before income taxes		(1.4	)		(119.5	)		(17.7	)		(14.3	)		27.7			–			(125.2	)
Income tax expense (benefit)		(11.6	)		–			–			–			2.1			(2.1	)		(11.6	)
Equity in earnings of subsidiaries		(142.9	)		–			–			–			–			142.9			–
Income (loss) from continuing operations		(132.7	)		(119.5	)		(17.7	)		(14.3	)		25.6			145.0			(113.6	)
Loss from discontinued operations,    net of taxes		–			–			–			(6.0	)		(13.1	)		–			(19.1	)
Net income (loss)	$	(132.7	)	$	(119.5	)	$	(17.7	)	$	(20.3	)	$	12.5		$	145.0		$	(132.7	)

104

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended June 30, 2008

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Patient service revenues	$	–		$	–		$	–		$	2,212.2		$	150.8		$	(22.5	)	$	2,340.5
Premium revenues		–			–			–			57.7			392.7			(0.2	)		450.2
Total revenues		–			–			–			2,269.9			543.5			(22.7	)		2,790.7
Salaries and benefits		2.5			–			–			1,068.7			81.5			–			1,152.7
Supplies		–			–			–			405.8			28.7			–			434.5
Medical claims expense		–			–			–			35.8			314.9			(22.5	)		328.2
Purchased services		–			–			–			136.5			13.0			–			149.5
Provision for doubtful accounts		–			–			–			196.9			8.7			–			205.6
Other operating expenses		0.2			–			–			182.4			32.1			(0.2	)		214.5
Rents and leases		–			–			–			34.8			7.0			–			41.8
Depreciation and amortization		–			–			–			116.8			14.2			–			131.0
Interest, net		–			109.9			19.8			(9.3	)		1.7			–			122.1
Management fees		–			–			–			(8.2	)		8.2			–			–
Other		–			–			–			63.5			(54.0	)		–			9.5
Total costs and expenses		2.7			109.9			19.8			2,223.7			456.0			(22.7	)		2,789.4
Income (loss) from continuing operations    before income taxes		(2.7	)		(109.9	)		(19.8	)		46.2			87.5			–			1.3
Income tax expense (benefit)		1.7			–			–			–			13.4			(13.4	)		1.7
Equity in earnings of subsidiaries		3.7			–			–			–			–			(3.7	)		–
Income (loss) from continuing operations		(0.7	)		(109.9	)		(19.8	)		46.2			74.1			9.7			(0.4	)
Income (loss) from discontinued    operations, net of taxes		–			–			–			2.9			(3.2	)		–			(0.3	)
Net income (loss)	$	(0.7	)	$	(109.9	)	$	(19.8	)	$	49.1		$	70.9		$	9.7		$	(0.7	)

105

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended June 30, 2006

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Operating activities:
Net income (loss)	$	12.9		$	(109.5	)	$	(15.9	)	$	117.3		$	26.5		$	(18.4	)	$	12.9
Adjustments to reconcile net income (loss)    to net cash provided by (used in)    operating activities
Loss from discontinued operations		–			–			–			7.8			1.2			–			9.0
Depreciation and amortization		–			–			–			86.0			14.3			–			100.3
Provision for doubtful accounts		–			–			–			149.7			7.1			–			156.8
Deferred income taxes		10.1			–			–			–			–			–			10.1
Amortization of loan costs		–			3.8			0.2			–			–			–			4.0
Accretion of principal on senior discount    notes		–			–			15.7			–			–			–			15.7
Loss (gain) on disposal of assets		–			–			–			6.1			(4.6	)		–			1.5
Stock compensation		1.7			–			–			–			–			–			1.7
Debt extinguishment costs		0.1			–			–			–			–			–			0.1
Changes in operating assets and    liabilities, net of effects of acquisitions:
Equity in earnings of subsidiaries		(31.1	)		–			–			–			–			31.1			–
Accounts receivable		–			–			–			(158.5	)		(3.9	)		–			(162.4	)
Inventories		–			–			–			(5.5	)		0.3			–			(5.2	)
Prepaid expenses and other current assets		11.7			–			–			(40.0	)		31.9			–			3.6
Accounts payable		–			–			–			4.4			(2.0	)		–			2.4
Accrued expenses and other liabilities		(5.4	)		(1.1	)		–			39.2			(31.9	)		(12.7	)		(11.9	)
Net cash provided by (used in) operating    activities – continuing operations		–			(106.8	)		–			206.5			38.9			–			138.6
Net cash provided by operating activities -    discontinued operations		–			–			–			4.4			6.3			–			10.7
Net cash provided by (used in) operating    activities		–			(106.8	)		–			210.9			45.2			–			149.3
Investing activities:
Acquisitions		–			–			–			(1.2	)		–			–			(1.2	)
Capital expenditures		–			–			–			(264.7	)		(10.8	)		–			(275.5	)
Proceeds from asset dispositions		–			–			–			11.1			–			–			11.1
Purchases of short-term investments		–			–			–			–			(128.4	)		–			(128.4	)
Sales of short-term investments		–			–			–			–			128.4			–			128.4
Other		–			–			–			(17.8	)		(4.2	)		22.6			0.6
Net cash used in investing activities-    continuing operations		–			–			–			(272.6	)		(15.0	)		22.6			(265.0	)
Net cash provided by (used in) operating    activities – discontinued operations		–			–			–			24.3			(4.7	)		–			19.6
Net cash used in investing activities		–			–			–			(248.3	)		(19.7	)		22.6			(245.4	)

106

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended June 30, 2006
(continued)

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes		Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Financing activities:
Payments of long-term debt		–			175.0			–		–			–			–			175.0
Payments of long-term debt and capital    leases		–			(30.0	)		–		(0.8	)		(0.6	)		–			(31.4	)
Payments of loan costs and debt termination    fees		–			–			–		(0.7	)		–			–			(0.7	)
Payments to retire stock and stock options		(2.5	)		–			–		–			–			–			(2.5	)
Cash provided by (used in) intercompany    activity		1.6			(38.2	)		–		83.3			(24.1	)		(22.6	)		–
Exercise of stock options		0.1			–			–		–			–			–			0.1
Net cash provided by (used in) financing    activities		(0.8	)		106.8			–		81.8			(24.7	)		(22.6	)		140.5
Net increase (decrease) in cash and cash    equivalents		(0.8	)		–			–		44.4			0.8			–			44.4
Cash and cash equivalents, beginning of    period		0.8			–			–		(5.9	)		84.3			–			79.2
Cash and cash equivalents, end of period	$	–		$	–		$	–	$	38.5		$	85.1		$	–		$	123.6

107

VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended June 30, 2007

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Operating activities:
Net income (loss)	$	(132.7	)	$	(119.5	)	$	(17.7	)	$	(20.3	)	$	12.5		$	145.0		$	(132.7	)
Adjustments to reconcile net income (loss)    to net cash provided by (used in)    operating activities
Loss from discontinued operations		–			–			–			6.0			13.1			–			19.1
Depreciation and amortization		–			–			–			104.1			14.5			–			118.6
Provision for doubtful accounts		–			–			–			169.2			6.0			–			175.2
Deferred income taxes		(12.7	)		–			–			–			–			–			(12.7	)
Amortization of loan costs		–			4.3			0.2			–			–			–			4.5
Accretion of principal on senior discount    notes		–			–			17.5			–			–			–			17.5
Gain on disposal of assets		–			–			–			(4.1	)		–			–			(4.1	)
Stock compensation		1.2			–			–			–			–			–			1.2
Impairment loss		–			–			–			120.1			3.7			–			123.8
Changes in operating assets and    liabilities, net of effects of acquisitions:
Equity in earnings of subsidiaries		142.9			–			–			–			–			(142.9	)		–
Accounts receivable		–			–			–			(206.9	)		2.9			–			(204.0	)
Inventories		–			–			–			(2.9	)		1.0			–			(1.9	)
Prepaid expenses and other current assets		–			–			–			(28.5	)		(1.5	)		–			(30.0	)
Accounts payable		–			–			–			11.2			(3.8	)		–			7.4
Accrued expenses and other liabilities		1.3			0.1			–			61.3			(22.8	)		(2.1	)		37.8
Net cash provided by (used in) operating    activities – continuing operations		–			(115.1	)		–			209.2			25.6			–			119.7
Net cash provided by operating activities -    discontinued operations		–			–			–			0.5			3.1			–			3.6
Net cash provided by (used in) operating    activities		–			(115.1	)		–			209.7			28.7			–			123.3
Investing activities:
Acquisitions		–			–			–			(0.2	)		–			–			(0.2	)
Capital expenditures		–			–			–			(153.3	)		(11.0	)		–			(164.3	)
Proceeds from asset dispositions		–			–			–			9.5			–			–			9.5
Purchases of short-term investments		–			–			–			–			(120.0	)		–			(120.0	)
Sales of short-term investments		–			–			–			–			120.0			–			120.0
Other		–			–			–			1.8			0.2			–			2.0
Net cash used in investing activities-    continuing operations		–			–			–			(142.2	)		(10.8	)		–			(153.0	)
Net cash provided by (used in) operating    activities – discontinued operations		–			–			–			36.3			(1.8	)		–			34.5
Net cash used in investing activities		–			–			–			(105.9	)		(12.6	)		–			(118.5	)

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VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended June 30, 2007
(continued)

	Parent		Issuers of 9.0% Notes			Issuers of 11.25% Notes		Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations		Total Consolidated
	(In millions)
Financing activities:
Payments of long-term debt and capital    leases		–		(7.9	)		–		–			(0.1	)		–		(8.0	)
Payments to retire stock, equity incentive    units and stock options		–		–			–		(0.5	)		–			–		(0.5	)
Cash provided by (used in) intercompany    activity		–		123.0			–		(130.3	)		7.3			–		–
Exercise of stock options		–		–			–		0.2			–			–		0.2
Net cash provided by (used in) financing    activities		–		115.1			–		(130.6	)		7.2			–		(8.3	)
Net increase (decrease) in cash and cash    equivalents		–		–			–		(26.8	)		23.3			–		(3.5	)
Cash and cash equivalents, beginning of    period		–		–			–		38.5			85.1			–		123.6
Cash and cash equivalents, end of period	$	–	$	–		$	–	$	11.7		$	108.4		$	–	$	120.1

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VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended June 30, 2008

	Parent			Issuers of 9.0% Notes			Issuers of 11.25% Notes			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
	(In millions)
Operating activities:
Net income (loss)	$	(0.7	)	$	(109.9	)	$	(19.8	)	$	49.1		$	70.9		$	9.7		$	(0.7	)
Adjustments to reconcile net income (loss)    to net cash provided by (used in)    operating activities
Loss (income) from discontinued    operations		–			–			–			(2.9	)		3.2			–			0.3
Depreciation and amortization		–			–			–			116.8			14.2			–			131.0
Provision for doubtful accounts		–			–			–			196.9			8.7			–			205.6
Deferred income taxes		(2.2	)		–			–			–			–			–			(2.2	)
Amortization of loan costs		–			4.6			0.3			–			–			–			4.9
Accretion of principal on senior discount    notes		–			–			19.5			–			–			–			19.5
Loss on disposal of assets		–			–			–			0.9			–			–			0.9
Stock compensation		2.5			–			–			–			–			–			2.5
Changes in operating assets and    liabilities, net of effects of acquisitions:
Equity in earnings of subsidiaries		(3.7	)		–			–			–			–			3.7			–
Accounts receivable		–			–			–			(217.5	)		(6.1	)		–			(223.6	)
Inventories		–			–			–			(4.3	)		0.2			–			(4.1	)
Prepaid expenses and other current assets		(4.5	)		–			–			(17.6	)		2.4			–			(19.7	)
Accounts payable		–			–			–			13.3			6.6			–			19.9
Accrued expenses and other liabilities		4.9			(0.2	)		–			67.6			(21.6	)		(13.4	)		37.3
Net cash provided by (used in) operating    activities – continuing operations		(3.7	)		(105.5	)		–			202.3			78.5			–			171.6
Net cash provided by operating activities –    discontinued operations		–			–			–			0.2			1.3			–			1.5
Net cash provided by (used in) operating    activities		(3.7	)		(105.5	)		–			202.5			79.8			–			173.1
Investing activities:
Acquisitions		–			–			–			(0.2	)		–			–			(0.2	)
Capital expenditures		–			–			–			(118.1	)		(3.5	)		–			(121.6	)
Purchases of marketable securities		–			–			–			–			(90.0	)		–			(90.0	)
Sales of marketable securities		–			–			–			–			63.7			–			63.7
Other		–			–			–			–			1.5			–			1.5
Net cash used in investing activities –    continuing operations		–			–			–			(118.3	)		(28.3	)		–			(146.6	)
Net cash provided by (used in) operating    activities – discontinued operations		–			–			–			3.1			(0.3	)		–			2.8
Net cash used in investing activities		–			–			–			(115.2	)		(28.6	)		–			(143.8	)

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VANGUARD HEALTH SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended June 30, 2008
(continued)

	Parent		Issuers of 9.0% Notes			Issuers of 11.25% Notes		Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations		Total Consolidated
	(In millions)
Financing activities:
Payments of long-term debt		–		(7.8	)		–		–			–			–		(7.8	)
Payments to retire stock, equity incentive    units and stock options		–		–			–		(0.2	)		–			–		(0.2	)
Cash provided by (used in) intercompany    activity		3.7		113.3			–		(17.0	)		(100.0	)		–		–
Exercise of stock options		–		–			–		0.2			–			–		0.2
Net cash provided by (used in) financing    activities		3.7		105.5			–		(17.0	)		(100.0	)		–		(7.8	)
Net increase (decrease) in cash and cash    equivalents		–		–			–		70.3			(48.8	)		–		21.5
Cash and cash equivalents, beginning of    period		–		–			–		11.7			108.4			–		120.1
Cash and cash equivalents, end of period	$	–	$	–		$	–	$	82.0		$	59.6		$	–	$	141.6

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9.             Income Taxes

                Significant components of income tax expense/benefit attributable to continuing operations are as follows (in millions):

		2006		2007		2008
Current:
Federal	$	2.2	$	0.9	$	1.5
State		(0.3)		0.1		2.4
		1.9		1.0		3.9
Deferred:
Federal		15.2		(13.7)		(1.2)
State		(3.9)		(4.8)		(8.6)
		11.3		(18.5)		(9.8)
Increase in valuation allowance		4.6		5.9		7.6
Total	$	17.8	$	(11.6)	$	1.7

                The following table presents the income taxes associated with continuing operations and discontinued operations as reflected in the accompanying consolidated statements of operations (in millions).

		2006		2007		2008
Continuing operations	$	17.8	$	(11.6)	$	1.7
Discontinued operations		(7.3)		(9.5)		(0.2)
Total	$	10.5	$	(21.1)	$	1.5

                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:

	2006	2007	2008
Income tax expense at federal statutory rate	35.0%	35.0%	35.0%
Income tax expense at state statutory rate	(3.8)	3.6	(564.6)
Nondeductible expenses and other	1.9	(0.6)	44.0
Increase in valuation allowance	11.7	(4.7)	616.4
Nondeductible impairment loss	–	(24.0)	–
Effective income tax rate	44.8%	9.3%	130.8%

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                Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Vanguard’s deferred tax assets and liabilities as of June 30, 2007 and 2008, were approximately as follows (in millions):

	2007			2008
Deferred tax assets:
Net operating loss carryover	$	77.4		$	69.7
Excess tax basis over book basis of accounts receivable		5.9			8.2
Accrued expenses and other		12.8			24.7
Deferred loan costs		2.5			2.3
Professional liabilities reserves		10.7			16.4
Self-insurance reserves		10.1			9.4
Alternative minimum tax credit and other credits		2.3			3.4
Total deferred tax assets		121.7			134.1
Valuation allowance		(22.5	)		(29.9	)
Total deferred tax assets, net of valuation allowance		99.2			104.2
Deferred tax liabilities:
Depreciation, amortization and fixed assets basis differences		29.7			29.3
Excess book basis over tax basis of prepaid assets and other		7.9			8.0
Total deferred tax liabilities		37.6			37.3
Net deferred tax assets and liabilities	$	61.6		$	66.9

                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.

                As of June 30, 2008, Vanguard had generated net operating loss (“NOL”) carryforwards for federal income tax purposes and state income tax purposes of approximately $107.0 million and $596.0 million, respectively. The federal and state NOL carryforwards expire from 2020 to 2027 and 2008 to 2027, respectively. Approximately $2.8 million of these NOLs are subject to annual limitations for federal purposes. These limitations are not expected to significantly affect Vanguard’s ability to ultimately recognize the benefit of these NOLs in future years.

                Effective July 1, 2007, Vanguard adopted the provisions of FIN 48. In connection with the adoption of FIN 48, Vanguard recorded a $0.4 million net liability for unrecognized tax benefits, accrued interest and penalties, which was comprised of the following (in millions).

Reclassification from  income taxes payable	$	0.3
Increase to non-current deferred tax assets		2.7
Cumulative impact of change recorded to retained earnings		(2.6	)
	$	0.4

                The provisions of FIN 48 allow for the classification election of interest on an underpayment of income taxes, when the tax law requires interest to be paid, and penalties, when a tax position does not meet the minimum statutory threshold to avoid payment of penalties, in income taxes, interest expense or another appropriate expense classification based on the accounting policy election of the entity. Vanguard has elected to continue its historical practice of classifying interest and penalties as a component of income tax expense.

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                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.

                Vanguard’s U.S. federal income tax returns for tax years 2005 and beyond remain subject to examination by the Internal Revenue Service.

                On May 18, 2006, Texas repealed its current income tax and replaced it with a gross margins tax to be accounted for as an income tax. Vanguard became subject to the Texas margins tax on July 1, 2006. On July 3, 2008, Massachusetts enacted corporate tax reform legislation that will become effective for Vanguard for its fiscal year ending June 30, 2010. State deferred tax assets increased by $1.0 million during the fiscal year ended June 30, 2008 to reflect the impact of the Massachusetts corporate tax reform legislation.

10.          Stockholders’ Equity

                Vanguard has the authority to issue 1,000,000 shares of common stock, par value $.01 per share.

Common Stock of Vanguard and Class A Membership Units of Holdings

                In connection with the Blackstone merger, Blackstone, MSCP, management and other investors purchased $624.0 million of Class A Membership Units of Holdings. Holdings then invested the $624.0 million in the common stock of Vanguard, and in addition Blackstone invested $125.0 million directly in the common stock of Vanguard.  In February 2005, other investors purchased approximately $0.6 million of Class A membership units of Holdings. Holdings then invested the $0.6 million in the common stock of Vanguard.

Equity Incentive Membership Units of Holdings

                In connection with the Blackstone merger, certain members of senior management purchased Class B, Class C and Class D membership units in Holdings (collectively the “equity incentive units”) for approximately $5.7 million pursuant to the Amended and Restated Limited Liability Company Operating Agreement of Holdings dated September 23, 2004 (“LLC Agreement”). Vanguard determined the value of the equity incentive units by utilizing appraisal information. The Class B and D units vest 20% on each of the first five anniversaries of the purchase date, while the Class C units vest on the eighth anniversary of the purchase date subject to accelerated vesting upon the occurrence of a sale by Blackstone of at least 25% of its Class A units at a price per unit exceeding 2.5 times the per unit price paid on September 23, 2004.  Upon a change of control (as defined in the LLC Agreement), all Class B and D units fully vest, and Class C units fully vest if the change in control constitutes a liquidity event (as defined in the LLC Agreement). In exchange for a cash payment of $5.7 million, Vanguard issued to Holdings 83,890 warrants with an exercise price of $1,000 per share and 35,952 warrants with an exercise price of $3,000 per share to purchase Vanguard’s common stock. The warrants may be exercised at any time. Vanguard reserved 119,842 shares of its common stock to be issued upon exercise of the warrants.

                During fiscal 2006 and fiscal 2007, Vanguard and Holdings repurchased a total of 33,708 outstanding equity incentive units from former executive officers for approximately $1.7 million. The purchase price for unvested units was based upon the lower of cost or fair market value (determined by an independent appraisal) or the lower of cost or fair market value less a 25% discount, as set forth in the LLC Agreement. The purchase price for vested units was fair market value or fair market value less a 25% discount.

Put and Call Features of Acquisition Subsidiary Stock

                For a period of 30 days commencing June 1, 2007 and each June 1 thereafter, University of Chicago Hospitals (“UCH”) has the right to require Vanguard to purchase its shares in the subsidiary that acquired Louis A. Weiss Memorial Hospital for a purchase price equal to four times the acquisition subsidiary’s Adjusted EBITDA (as defined in the shareholders agreement between the parties) for the most recent 12 months of operations less all indebtedness of the acquisition subsidiary (including capital leases) at such time, multiplied by UCH’s percentage

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interest in the acquisition subsidiary on the date of purchase. Similarly, during the same 30-day periods, Vanguard has the right to require UCH to sell to it UCH’s shares in the acquisition subsidiary for a purchase price equal to the greater of (i) six times the acquisition subsidiary’s Adjusted EBITDA (as defined in the shareholders agreement among the parties) for the most recent 12 months of operations less all indebtedness of the acquisition subsidiary (including capital leases) at such time, times UCH’s percentage interest in the acquisition subsidiary on the date of purchase, and (ii) the price paid by UCH for its interest in the acquisition subsidiary minus dividends or other distributions to UCH in respect of that interest.

11.          Stock Based Compensation

                As previously discussed, Vanguard used the minimum value pricing model permitted under SFAS 123 to determine stock compensation costs related to stock option grants prior to July 1, 2006.  On July 1, 2006, Vanguard adopted the provisions of SFAS 123(R), to account for stock option grants subsequent to July 1, 2006.  Vanguard adopted SFAS 123(R) on a prospective basis as required for companies that chose to adopt SFAS 123 using the transition guidance set forth in SFAS 148. During fiscal years 2006, 2007 and 2008, Vanguard incurred stock compensation of $1.7 million and $1.2 million and $2.5 million, respectively, related to grants under its 2004 Stock Incentive Plan.

2004 Stock Incentive Plan

                After the Blackstone merger, Vanguard adopted the 2004 Stock Incentive Plan (“the 2004 Option Plan”). As of June 30, 2008, the 2004 Option Plan, as amended, allows for the issuance of up to 101,117 options to purchase common stock of Vanguard to its employees, members of its Board of Directors or other service providers of Vanguard or any of its affiliates. The stock options may be granted as Liquidity Event Options, Time Options or Performance Options at the discretion of the Board. The Liquidity Event Options vest 100% at the eighth anniversary of the date of grant and have an exercise price per share as determined by the Board or a committee thereof. The Time Options vest 20% at each of the first five anniversaries of the date of grant and have an exercise price per share as determined by the Board or a committee thereof.  The Performance Options vest 20% at each of the first five anniversaries of the date of grant and have an exercise price equal to $3,000 per share or as determined by the Board. The Time Options and Performance Options immediately vest upon a change of control, while the Liquidity Event Options immediately vest only upon a qualifying Liquidity Event, as defined in the Plan Document. As of June 30, 2008, 88,698 options were outstanding under the 2004 Option Plan, as amended.

                The following tables summarize options transactions during the years ended June 30, 2006, 2007 and 2008.

	2004 Stock Incentive Plan
	# of Options		Wtd Avg Exercise Price
Options outstanding at June 30, 2005	38,184	$	1,600.00
Options granted	41,297		1,675.81
Options exercised	(141)		1,000.00
Options cancelled	(8,683)		1,611.03
Options outstanding at June 30, 2006	70,657		1,644.12
Options granted	10,110		1,715.06
Options exercised	(195)		1,000.00
Options cancelled	(14,998)		1,624.81
Options outstanding at June 30, 2007	65,574		1,661.39
Options granted	30,583		1,611.90
Options exercised	(168)		1,038.49
Options cancelled	(7,291)		1,667.85
Options outstanding at June 30, 2008	88,698	$	1,644.97
Options available for grant at June 30, 2008	11,915	$	1,600.00
Options exercisable at June 30, 2008	16,993	$	1,960.54

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                The following table provides information relating to the 2004 Option Plan during each period presented.

		Year ended June 30,
		2006		2007		2008
Weighted average fair value of options granted during each year	$	407.62	$	590.70	$	408.59
Intrinsic value of options exercised during each year (in millions)	$	0.1	$	0.1	$	0.1
Fair value of outstanding options that vested during each year (in millions)	$	0.5	$	1.4	$	1.7

                The following table sets forth certain information regarding vested options at June 30, 2008, options expected to vest subsequent to June 30, 2008 and the total options expected to vest over the life of all options granted.

		Currently Vested		Additional Expected to Vest		Total Expected to Vest
Number of options at June 30, 2008		16,993		44,058		61,051
Weighted average exercise price	$	1,960.54	$	1,622.31	$	1,716.45
Aggregate intrinsic value at June 30, 2008 (in millions)	$	3.6	$	13.1	$	16.7
Weighted average remaining contractual term		7.0 years		8.1 years		7.8 years

12.          Defined Contribution Plan

                Effective June 1, 1998, Vanguard adopted its defined contribution employee benefit plan, the Vanguard 401(k) Retirement Savings Plan (the “401(k) Plan”). The 401(k) Plan is a multiple employer defined contribution plan whereby employees who are age 21 or older are eligible to participate.

                The 401(k) Plan allows eligible employees to make contributions of 2% to 20% of their annual compensation. Employer matching contributions, which vary by employer, vest 20% after two years of service and continue vesting at 20% per year until fully vested. For purposes of determining vesting percentages in the 401(k) Plan, many employees received credit for years of service with their respective predecessor companies. Vanguard’s matching expense for the years ended June 30, 2006, 2007 and 2008 was approximately $11.7 million, $13.8 million and $14.5 million, respectively.

13.          Leases

                Vanguard leases certain real estate properties and equipment under operating leases having various expiration dates. Future minimum operating lease payments at June 30, 2008 are approximately as follows (in millions).

	Operating Leases
2009	$         33.6
2010	29.0
2011	24.6
2012	21.1
2013	15.9
Thereafter	55.8
Total minimum lease payments	$       180.0

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                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.

14.          Contingencies and Healthcare Regulation

Contingencies

                Vanguard is presently, and from time to time, subject to various claims and lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on Vanguard’s financial position or results of operations.

Reimbursement

                Final determination of amounts earned under prospective payment and cost-reimbursement activities is subject to review by appropriate governmental authorities or their agents. In the opinion of Vanguard’s management, adequate provision has been made for any adjustments that may result from such reviews.

                Laws and regulations governing the Medicare and Medicaid and other federal healthcare programs are complex and subject to interpretation. Vanguard’s management believes that it is in compliance with all applicable laws and regulations in all material respects and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing related to Medicare and Medicaid programs. While no such regulatory inquiries have been made, Vanguard’s compliance with such laws and regulations is subject to future government review and interpretation. Non-compliance with such laws and regulations could result in significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs.

Acquisitions

                Vanguard has acquired and may continue to acquire businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although Vanguard institutes policies designed to conform practices to its standards following the completion of its acquisitions, there can be no assurance that it will not become liable for past activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although Vanguard generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Employment-Related Agreements

                Effective June 1, 1998, Vanguard executed employment agreements with three of its current senior executive officers. Vanguard executed an employment agreement with a fourth current senior executive officer on September 1, 1999. The employment agreements were amended on September 23, 2004 to extend the term of each employment agreement another 5 years and to provide that the Blackstone merger did not constitute a change of control, as defined in the agreements. On November 15, 2007, Vanguard entered into written employment agreements with two other executive officers for terms expiring on November 15, 2012. The employment agreements will renew automatically for additional one-year periods, unless terminated by Vanguard or the executive officer. The employment agreements provide, among other things, for minimum salary levels, for participation in bonus plans, and for amounts to be paid as liquidated damages in the event of a change in control or termination by Vanguard without cause.

                Vanguard has executed severance protection agreements (“severance agreements”) between Vanguard and each of its other officers who do not have employment agreements. The severance agreements are automatically extended for successive one year terms at the discretion of Vanguard unless a change in control occurs, as defined in the severance agreement, at which time the severance agreement continues in effect for a period of not less than three years beyond the date of such event. Vanguard may be obligated to pay severance payments as set forth in the

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severance agreements in the event of a change in control and the termination of the executive’s employment of Vanguard.

Guarantees

       Physician Guarantees

                Vanguard has entered into multiple physician relocation agreements and service agreements under which it provides minimum monthly revenues or collections guarantees or maximum expense guarantees to physicians during a specified period of time (typically 12 months to 24 months). In return for the physician guarantee payments, the physicians are required to practice in the community for a stated period of time (typically 3 to 5 years) or else return the payments to Vanguard. No community commitment provision or repayment provision exists for the service guarantees. In January 2006, Vanguard adopted Financial Accounting Standards Board Staff Position No. FIN 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (“FSP 45-3”).  FSP 45-3 requires that a liability be recorded at fair value for all guarantees entered into on or after January 1, 2006. Vanguard determines this liability and an offsetting intangible asset by calculating an estimate of expected payments to be made over the guarantee period. Vanguard reduces the liability as it makes guarantee payments and amortizes the intangible asset over the term of the physicians’ relocation or service agreements. As of June 30, 2008, Vanguard had a net intangible asset of $9.5 million and a remaining liability of $4.4 million related to these physician guarantees. The maximum amount of Vanguard’s unpaid physician income and service guarantees under FSP 45-3 as of June 30, 2008 was approximately $6.7 million.

       Other Guarantees

                As part of its contract with AHCCCS, PHP is required to maintain a performance guarantee in the amount of $22.0 million, an amount determined based upon PHP’s membership and capitation premiums received.  As of June 30, 2008, Vanguard maintained this $22.0 million performance guarantee entirely in the form of surety bonds with independent third party insurers that expire on September 30, 2008. Vanguard is required to arrange for $2.9 million in letters of credit to collateralize its $22.0 million in surety bonds with the third party insurers. Vanguard expects this performance guarantee obligation to increase significantly when the new PHP AHCCCS contract commences on October 1, 2008. As of June 30, 2008, Vanguard provided a $0.6 million guarantee of the debt of a joint venture accounted for as an equity method investment and also from time to time enters into parent-subsidiary guarantee arrangements in the ordinary course of operating its business.

Variable Interest Entities

                Vanguard is a party to one contractual agreement whereby it may be required to make monthly payments to the developer and manager of a medical office building located on one of its hospital campuses through a minimum rent revenue guarantee. Vanguard entered into this agreement to provide an incentive to the developer to fund the construction of a medical office building and manage the building upon its completion in order to make physician office space available near the hospital campus. The contract commenced in April 2005 for a period of 12 years.  Vanguard deemed this contract a variable interest entity in which Vanguard is not the primary beneficiary. The maximum annual amount Vanguard would pay under the contract assuming zero occupancy would be approximately $1.5 million. Vanguard currently expects to make no rental shortfall payments during fiscal 2009 under this contract given current and expected future occupancy levels in the medical office building.

                As of June 30, 2007, Vanguard had another minimum rent guarantee arrangement with an entity owning another medical office building located on the campus of another of its hospitals. Due to the significance of Vanguard’s historical minimum rent revenue payments to the operations of the medical office building, Vanguard consolidated this entity for financial reporting purposes. During the quarter ended September 30, 2007, the entity that owned the medical office building sold the building to a third party, which terminated Vanguard’s minimum rent guarantee obligation. Thus, Vanguard no longer included this entity in its consolidated financial statements as of June 30, 2008.

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15.          Related Party Transactions

                Pursuant to the Blackstone merger agreement, Vanguard entered into a transaction and monitoring fee agreement with Blackstone and Metalmark Subadvisor LLC (“Metalmark”).  Under the terms of the agreement, Vanguard agreed to pay Blackstone and Metalmark an annual monitoring fee of $4.0 million and $1.2 million, respectively, plus out of pocket expenses. The monitoring fee represents compensation to Blackstone and Metalmark for their advisory and consulting services with respect to financing transactions, strategic decisions, dispositions or acquisitions of assets and other Vanguard affairs from time to time. Blackstone also has the option under the agreement to elect at any time in anticipation of a change in control or initial public offering to require Vanguard to pay both Blackstone and Metalmark a lump sum monitoring fee, calculated as the net present value of future annual monitoring fees assuming a remaining ten-year payment period, in lieu of the remaining annual monitoring fee payments. If Blackstone chooses a lump sum payment, Metalmark is entitled to receive not less than 15% of the sum of the initial $20.0 million Blackstone transaction fee and the cumulative monitoring fees and lump sum monitoring fee paid to Blackstone less the cumulative aggregate monitoring fees paid to Metalmark to date. During both fiscal 2006 and 2007, Vanguard paid $4.0 million and $1.2 million in monitoring fees to Blackstone and Metalmark, respectively. During fiscal 2008, Vanguard paid approximately $5.2 million and $1.2 million in monitoring fees and expenses to Blackstone and Metalmark, respectively.

                Blackstone and Metalmark have the ability to control Vanguard’s policies and operations, and their interests may not in all cases be aligned with Vanguard’s interests. Vanguard also conducts business with other entities controlled by Blackstone or Metalmark. Vanguard’s results of operations could be materially different as a result of Blackstone and Metalmark’s control than such results would be if Vanguard were autonomous.

16.          Segment Information

                Vanguard’s acute care hospitals and related healthcare businesses are similar in their activities and economic environments in which they operate (i.e. urban markets). Accordingly, Vanguard’s reportable operating segments consist of 1) acute care hospitals and related healthcare businesses, collectively, and 2) health plans consisting of MacNeal Health Providers, a contracting entity for MacNeal Hospital and Weiss Memorial Hospital in the metropolitan Chicago area, Phoenix Health Plan, a Medicaid managed health plan operating in Arizona, and Abrazo Advantage Health Plan, a Medicare and Medicaid dual eligible managed health plan operating in Arizona. The following tables provide financial information by business segment for the years ended June 30, 2006, 2007 and 2008.

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	For the Year Ended June 30, 2006
	Health Plans	Acute Care Services	Eliminations	Consolidated
	(In millions)
Patient service revenues (1)	$              –	$     2,043.6	$               –	$     2,043.6
Premium revenues	375.0	–	–	375.0
Inter-segment revenues	–	40.0	(40.0)	–
Total revenues	375.0	2,083.6	(40.0)	2,418.6
Salaries and benefits (excludes stock    compensation of $1.7 million)	13.6	976.1	–	989.7
Supplies	0.2	393.9	–	394.1
Medical claims expense (1)	270.3	–	–	270.3
Provision for doubtful accounts	–	156.8	–	156.8
Other operating expenses – external	18.3	334.7	–	353.0
Operating expenses – inter-segment	40.0	–	(40.0)	–
Total operating expenses	342.4	1,861.5	(40.0)	2,163.9
Segment EBITDA (2)	32.6	222.1	–	254.7
Depreciation and amortization	4.3	96.0	–	100.3
Interest, net	(2.3)	106.1	–	103.8
Minority interests	–	2.6	–	2.6
Equity method income	–	(0.2)	–	(0.2)
Stock compensation	–	1.7	–	1.7
Debt extinguishment costs	–	0.1	–	0.1
Loss on disposal of assets	–	1.5	–	1.5
Monitoring fees and expenses	–	5.2	–	5.2
Income from continuing operations       before income taxes	$          30.6	$            9.1	$               –	$          39.7
Segment assets	$        161.9	$     2,488.6	$               –	$     2,650.5
Capital expenditures	$            0.2	$        275.3	$               –	$        275.5

____________________
(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 owned health plans and also eliminates the corresponding medical claims expenses incurred by the health plans for those services.
(2)	Segment EBITDA is defined as income before interest expense (net of interest income), income taxes, depreciation and amortization, minority interests, equity method income or loss, stock compensation, debt extinguishment costs, gain or loss on disposal of assets, monitoring fees and expenses, impairment loss and discontinued operations. 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, 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.

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	For the Year Ended June 30, 2007
	Health Plans	Acute Care Services	Eliminations	Consolidated
	(In millions)
Patient service revenues (1)	$              –	$     2,179.3	$               –	$     2,179.3
Capitation premiums	401.4	–	–	401.4
Inter-segment revenues	–	34.2	(34.2)	–
Total revenues	401.4	2,213.5	(34.2)	2,580.7
Salaries and benefits (excludes stock    compensation of $1.2 million)	14.7	1,052.0	–	1,066.7
Supplies	0.2	421.6	–	421.8
Medical claims expense (1)	297.0	–	–	297.0
Provision for doubtful accounts	–	175.2	–	175.2
Other operating expenses – external	27.3	347.7	–	375.0
Operating expenses – inter-segment	34.2	–	(34.2)	–
Total operating expenses	373.4	1,996.5	(34.2)	2,335.7
Segment EBITDA (2)	28.0	217.0	–	245.0
Depreciation and amortization	4.3	114.3	–	118.6
Interest, net	(5.8)	129.6	–	123.8
Minority interests	–	2.6	–	2.6
Equity method income	–	(0.9)	–	(0.9)
Stock compensation	–	1.2	–	1.2
Gain on disposal of assets	–	(4.1)	–	(4.1)
Impairment loss	–	123.8	–	123.8
Monitoring fees and expenses	–	5.2	–	5.2
Income (loss) from continuing operations       before income taxes	$          29.5	$       (154.7)	$               –	$       (125.2)
Segment assets	$        197.3	$     2,340.8	$               –	$     2,538.1
Capital expenditures	$            0.2	$        164.1	$               –	$        164.3

____________________
(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 owned health plans and also eliminates the corresponding medical claims expenses incurred by the health plans for those services.
(2)	Segment EBITDA is defined as income before interest expense (net of interest income), income taxes, depreciation and amortization, minority interests, equity method income or loss, stock compensation, debt extinguishment costs, gain or loss on disposal of assets, monitoring fees and expenses, impairment loss and discontinued operations. 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, 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.

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	For the Year Ended June 30, 2008
	Health Plans	Acute Care Services	Eliminations	Consolidated
	(In millions)
Patient service revenues (1)	$              –	$     2,340.5	$               –	$     2,340.5
Capitation premiums	450.2	–	–	450.2
Inter-segment revenues	–	31.2	(31.2)	–
Total revenues	450.2	2,371.7	(31.2)	2,790.7
Salaries and benefits (excludes stock    compensation of $2.5 million)	16.0	1,134.2	–	1,150.2
Supplies	0.2	434.3	–	434.5
Medical claims expense (1)	328.2	–	–	328.2
Provision for doubtful accounts	–	205.6	–	205.6
Other operating expenses – external	29.9	375.9	–	405.8
Operating expenses – inter-segment	31.2	–	(31.2)	–
Total operating expenses	405.5	2,150.0	(31.2)	2,524.3
Segment EBITDA (2)	44.7	221.7	–	266.4
Depreciation and amortization	4.2	126.8	–	131.0
Interest, net	(4.5)	126.6	–	122.1
Minority interests	–	3.0	–	3.0
Equity method income	–	(0.7)	–	(0.7)
Stock compensation	–	2.5	–	2.5
Loss on disposal of assets	–	0.9	–	0.9
Monitoring fees and expenses	–	6.3	–	6.3
Income (loss) from continuing operations       before income taxes	$          45.0	$         (43.7)	$               –	$            1.3
Segment assets	$        181.5	$     2,400.8	$               –	$     2,582.3
Capital expenditures	$            0.6	$        121.0	$               –	$        121.6

____________________
(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 owned health plans and also eliminates the corresponding medical claims expenses incurred by the health plans for those services.
(2)	Segment EBITDA is defined as income before interest expense (net of interest income), income taxes, depreciation and amortization, minority interests, equity method income or loss, stock compensation, debt extinguishment costs, gain or loss on disposal of assets, monitoring fees and expenses, impairment loss and discontinued operations. 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, 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.

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17.          Unaudited Quarterly Operating Results

                The following table presents summarized unaudited quarterly results of operations for the fiscal years ended June 30, 2007 and 2008. Management believes that all necessary adjustments have been included in the amounts stated below for a fair presentation of the results of operations for the periods presented when read in conjunction with Vanguard’s consolidated financial statements for the fiscal years ended June 30, 2007 and 2008. Results of operations for a particular quarter are not necessarily indicative of results of operations for an annual period and are not predictive of future periods (in millions).

		September 30, 2006		December 31, 2006		March 31, 2007		June 30, 2007
Total revenues	$	618.3	$	638.4	$	672.9	$	651.1
Net income (loss)	$	(7.7)	$	(118.7)	$	3.3	$	(9.6)
		September 30, 2007		December 31, 2007		March 31, 2008		June 30, 2008
Total revenues	$	662.5	$	686.0	$	725.6	$	716.6
Net income (loss)	$	(6.9)	$	0.5	$	6.5	$	(0.8)

                    Total revenues disclosed above for the first three quarters during fiscal 2007 differ from the amounts disclosed in our previously filed fiscal 2007 Quarterly Reports on Form 10-Q due to the reclassification of PMH total revenues to discontinued operations as presented below (in millions).

		September 30, 2006		December 31, 2006		March 31, 2007
As previously reported	$	634.9	$	652.9	$	684.5
Reclassification of PMH revenues		16.6		14.5		11.6
As disclosed above	$	618.3	$	638.4	$	672.9

Item 9.        Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

                    None.

Item 9A(T).           Controls and Procedures.

                    Evaluation of Disclosure Control and Procedures

                    As of the end of the period covered by this report, our management conducted an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

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                    Report of Management on Internal Control over Financial Reporting

                    The management of Vanguard Health Systems, Inc. is responsible for the preparation, integrity and fair presentation of the consolidated financial statements appearing in our periodic filings with the Securities and Exchange Commission. The consolidated financial statements were prepared in conformity with generally accepted accounting principles appropriate in the circumstances and, accordingly, include certain amounts based on our best judgments and estimates.

                    Management is also responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel including a dedicated Compliance department and a written Code of Business Conduct and Ethics adopted by our Board of Directors, applicable to all of our directors, officers and employees.

                    Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected in a timely manner. Because of its inherent limitations, including the possibility of human error and the circumvention or overriding of control procedures, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Therefore, even those internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

                    Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2008.

                    This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the United States Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report for the year ended June 30, 2008.

                    Changes in Internal Control Over Financial Reporting

                    There was no change in our internal control over financial reporting during our fiscal quarter ended June 30, 2008 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.     Other Information.

                    None.

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PART III

Item 10.     Directors, Executive Officers and Corporate Governance.

                    The table below presents information with respect to the members of our board of directors and our executive officers and their ages as of September 1, 2008.

Name	Age	Position
Charles N. Martin, Jr.	65	Chairman of the Board & Chief Executive Officer; Director
Kent H. Wallace	53	President & Chief Operating Officer
Keith B. Pitts	51	Vice Chairman
Joseph D. Moore	61	Executive Vice President
Phillip W. Roe	47	Executive Vice President, Chief Financial Officer & Treasurer
Ronald P. Soltman	62	Executive Vice President, General Counsel & Secretary
Dan F. Ausman	53	Senior Vice President-Operations
Reginald M. Ballantyne III	64	Senior Vice President-Market Strategy & Government Affairs
Bruce F. Chafin	52	Senior Vice President-Compliance & Ethics
Karen Flinn	47	Senior Vice President-Physician & Ambulatory Services
James Johnston	64	Senior Vice President-Human Resources
Joseph J. Mullany	44	Senior Vice President-Operations
Harold H. Pilgrim III	47	Senior Vice President-Operations
James H. Spalding	49	Senior Vice President, Assistant General Counsel & Assistant Secretary
Alan G. Thomas	54	Senior Vice President-Operations Finance
Thomas M. Ways	58	Senior Vice President-Managed Care
Gary D. Willis	43	Senior Vice President, Controller & Chief Accounting Officer
Deanna L. Wise	39	Senior Vice President & Chief Information Officer
Michael A. Dal Bello	37	Director
M. Fazle Husain	44	Director
Alan M. Muney, M.D.	55	Director
Michael J. Parsons	53	Director
James A. Quella	58	Director
Neil P. Simpkins	42	Director

                Charles N. Martin, Jr. has served as Chairman of the board of directors and Chief Executive Officer of Vanguard since July 1997. Until May 31, 2001, he was also Vanguard’s President. From January 1992 until January 1997, Mr. Martin was Chairman, President and Chief Executive Officer of OrNda HealthCorp (“OrNda”), a hospital management company. Prior thereto Mr. Martin was President and Chief Operating Officer of HealthTrust, Inc., a hospital management company, from September 1987 until October 1991. Mr. Martin is also a director of several privately held companies.

                Kent H. Wallace has served as Vanguard’s President & Chief Operating Officer since September 2005. Prior thereto he was a Senior Vice President - Operations of Vanguard from February 2003 until September 2005. Prior thereto from July 2001 to December 2002 he was Regional Vice President of Province Healthcare Company of Brentwood, Tennessee, an owner and operator of 20 non-urban, acute care hospitals in 13 states of the United States. During this time Mr. Wallace had managerial responsibility for seven of these hospitals. From June 1999 until June 2001 Mr. Wallace was President and Chief Executive Officer of Custom Curb, Inc. of Chattanooga, Tennessee, a family owned company which manufactured roof accessories. Prior thereto from January 1997 until May 1999 Mr. Wallace was a Vice President - Acquisitions and Development of Tenet Healthcare Corporation of Dallas, Texas, a hospital management company (“Tenet”).

                Keith B. Pitts has been Vanguard’s Vice Chairman since May 2001, was a director of Vanguard from August 1999 until September 2004, and was an Executive Vice President of Vanguard from August 1999 until May 2001. Prior thereto, from November 1997 until June 1999, he was the Chairman and Chief Executive Officer of Mariner Post-Acute Network, Inc. and its predecessor, Paragon Health Network, Inc., which is a nursing home

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management company. Prior thereto from August 1992 until January 1997, Mr. Pitts served as Executive Vice President and Chief Financial Officer of OrNda.

                Joseph D. Moore has served as an Executive Vice President of Vanguard since November 2007. He served as Executive Vice President, Chief Financial Officer and Treasurer of Vanguard from July 1997 until November 2007 and was a director of Vanguard from July 1997 until September 2004. From February 1994 to April 1997, he was Senior Vice President - Development of Columbia/HCA Healthcare Corporation (“Columbia”), a hospital management company. Mr. Moore first joined Hospital Corporation of America (a predecessor of Columbia) in April 1970, rising to Senior Vice President - Finance and Development in January 1993.

                Phillip W. Roe has been Executive Vice President, Chief Financial Officer and Treasurer since November 2007. He was Senior Vice President, Controller and Chief Accounting Officer of Vanguard from July 1997 to November 2007. Prior thereto he was Senior Vice President, Controller and Chief Accounting Officer of OrNda from September 1996 until January 1997 and was Vice President, Controller and Chief Accounting Officer of OrNda from October 1994 until September 1996.

                Ronald P. Soltman has been Vanguard’s Executive Vice President, General Counsel and Secretary since July 1997 and was a director of Vanguard from July 1997 until September 2004. From April 1994 until January 1997, he was Senior Vice President, General Counsel and Secretary of OrNda. From February 1994 until March 1994, he was Vice President and Assistant General Counsel of Columbia. From 1984 until February 1994, he was Vice President and Assistant General Counsel of Hospital Corporation of America.

                Dan F. Ausman has served as a Senior Vice President - Operations of Vanguard since February 2006. Prior thereto from May 2005 to February 2006 he was Vice President - Operations of Vanguard. From 1998 to April 2005 Mr. Ausman was the President & Chief Executive Officer of Irvine Regional Hospital and Medical Center, a 176-bed acute care hospital in Irvine, CA which is owned by an affiliate of Tenet.

                Reginald M. Ballantyne III, joined Vanguard in May 2001 and has served as Senior Vice President - Market Strategy & Government Affairs of Vanguard since January 2002. From 1984 to 2001, he served as President of PMH Health Resources, Inc., an Arizona based multi-unit healthcare system. Prior to 1984, Mr. Ballantyne served as President of Phoenix Memorial Hospital in Phoenix, Arizona. Mr. Ballantyne served as Chairman of the American Hospital Association (“AHA”) in 1997 and as Speaker of the AHA House of Delegates in 1998. He is a Fellow of the American College of Healthcare Executives (“ACHE”) and a recipient of the ACHE Gold Medal Award for Management Excellence. Mr. Ballantyne also served as a member of the national Board of Commissioners for the Joint Commission on Accreditation of Healthcare Organizations and as Chairman of the AHA Committee of Commissioners from 1992 until 1995. Mr. Ballantyne previously served as a director of Superior Consultant Holdings Corporation and is currently a director of several privately held companies.

                Bruce F. Chafin has served as Senior Vice President - Compliance & Ethics of Vanguard since July 1997. Prior thereto, from April 1995 to January 1997, he served as Vice President - Compliance & Ethics of OrNda.

                Karen Flinn has served as Senior Vice President - Physician & Ambulatory Services of Vanguard since September 11, 2007. Prior thereto from May 1999 until July 2007 she was Vice President - Physician Integration/Managed Care of Triad Hospitals, Inc., an investor owned hospital management company headquartered in Plano, Texas. Prior thereto from May 1996 until May 1999 she was Vice President - Physician Integration/Managed Care of the Central and Pacific Group of Columbia.

                James Johnston has served as Senior Vice President - Human Resources of Vanguard since July 1997. Prior thereto from November 1995 to January 1997, he served as Senior Vice President - Human Resources of OrNda.

                Joseph J. Mullany has served as a Senior Vice President - Operations of Vanguard since September 2005. Prior thereto from October 2002 to August 2005 he was a Regional Vice President of Essent Healthcare, Inc. of Nashville, TN, an investor-owned hospital management company, responsible for its New England Division. Prior thereto from October 1998 to October 2002 Mr. Mullany was a Division Vice President of Health Management

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Associates, Inc. of Naples, Florida, an investor-owned hospital management company, responsible for its Mississippi Division.

                Harold H. Pilgrim III has served as a Senior Vice President - Operations of Vanguard since September 2005. Prior thereto from February 2003 to September 2005 he was Vice President - Business Development of Vanguard, responsible for development for Vanguard’s Texas operations. Prior thereto from November 2001 to January 2003 Mr. Pilgrim was Vanguard’s Vice President - Investor Relations, and during that period he was also involved in Vanguard’s acquisitions and development activities.  From January 1, 2001 to October 2001 Mr. Pilgrim was Chief Development Officer for Velocity Health Capital, Inc., a Nashville, TN - based investment banking firm focused on the health care and bio-sciences industries.

                James H. Spalding has served as Senior Vice President, Assistant General Counsel and Assistant Secretary of Vanguard since November 1998. Prior thereto he was Vice President, Assistant General Counsel and Assistant Secretary of Vanguard from July 1997 until November 1998. Prior thereto from April 1994 until January 1997, he served as Vice President, Assistant General Counsel and Assistant Secretary of OrNda.

                Alan G. Thomas has been Senior Vice President - Operations Finance of Vanguard since July 1997. Prior thereto, Mr. Thomas was Senior Vice President - Hospital Financial Operations of OrNda from April 1995 until January 1997. Prior thereto he was Vice President - Reimbursement and Revenue Enhancement of OrNda from June 1994 until April 1995.

                Thomas M. Ways has served as Senior Vice President - Managed Care of Vanguard since March 1998. Prior thereto from February 1997 to February 1998, he was Chief Executive Officer of MSO/Physician Practice Development for the Southern California Region of Tenet. Prior thereto from August 1994 to January 1997, he was Vice President - Physician Integration of OrNda.

                Gary D. Willis has served as Senior Vice President, Controller and Chief Accounting Officer of Vanguard since May 2008. From February 2006 to May 2008, he was Senior Vice President and Chief Accounting Officer of LifePoint Hospitals (“LifePoint”), a hospital management company based in Brentwood, Tennessee. From December 2002 to February 2006, he was Vice President and Controller of LifePoint. 

                Deanna L. Wise has served as Senior Vice President and Chief Information Officer of Vanguard since November 2006. Prior thereto from August 2004 to October 2006 she was the Chief Information Officer of Vanguard’s operating region managing its Phoenix-area healthcare facilities. From November 2002 until August 2004 she was chief information officer of the Maricopa Integrated Health System in Phoenix, Arizona, which was a county integrated health care system including an acute care hospital, health clinics and health plans. Prior thereto, from October 1997 to November 2002 she was the director of applications of Ascension Health –Central Indiana Health System in Indianapolis, Indiana, a regional healthcare management organization supervising the operations of twelve acute care hospitals.

                Michael A. Dal Bello became a member of Vanguard’s board of directors on September 23, 2004. Mr. Dal Bello has been a Principal in the Private Equity Group of Blackstone since December 2005 and from 2002 until December 2005, he was an Associate in this Group. While at Blackstone, Mr. Dal Bello has been actively involved in Blackstone’s healthcare investment activities. Prior to joining Blackstone, Mr. Dal Bello received an M.B.A. from Harvard Business School in 2002. Mr. Dal Bello worked at Hellman & Friedman LLC from 1998 to 2000 and prior thereto at Bain & Company. He currently serves on the board of representatives or directors of Team Finance LLC,  Biomet, Inc., Catalent Pharma Solutions, Inc. and Sithe Global.

                M. Fazle Husain became a member of Vanguard’s board of directors on November 7, 2007. Mr. Husain is a Managing Director of Metalmark Capital, the private equity division of Citigroup Alternative Investments. Prior to joining Metalmark, Mr. Husain was with Morgan Stanley & Co. for 18 years, where he was a Managing Director in the private equity and venture capital investment business. Mr. Husain currently also serves on the board of directors of Allscripts Healthcare Solutions, Inc. and SouthernCare Hospice.

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                Alan M. Muney, M.D. became a member of Vanguard’s board of directors on May 6, 2008. Dr. Muney has served as an Executive Director in the Private Equity Group of Blackstone since October 2007. Before joining Blackstone Dr. Muney was the executive vice president and chief medical officer of Oxford Health Plans and the chief medical officer of United Healthcare (Northeast region) from 1998 to September 2007. He also currently serves as a member of the board of representatives of Team Finance LLC.

                Michael J. Parsons became a member of Vanguard’s board of directors on May 6, 2008. He is a private investor. From May 1999 until July 2007 he served as Executive Vice President and Chief Operating Officer of Triad Hospitals, Inc., an investor owned hospital management company headquartered in Plano, Texas, which was acquired by Community Health Systems, Inc. in July 2007.

                James A. Quella became a member of Vanguard’s board of directors on September 11, 2007. Mr. Quella is a Senior Managing Director and Senior Operating Partner in the Private Equity Group at Blackstone. Prior to joining Blackstone in 2004, Mr. Quella was a Managing Director and Senior Operating Partner with DLJ Merchant Banking Partners-CSFB Private Equity from June 2000 to February 2004. Prior to that, Mr. Quella worked at Mercer Management Consulting and Strategic Planning Associates, its predecessor firm, from September 1981 to January 2000 where he served as a Senior Consultant to chief executive officers and senior management teams, and was Co-Vice Chairman with shared responsibility for overall management of the firm.  Mr. Quella currently serves as a director of Allied Waste Industries, Inc., Graham Packaging Holdings Company, Intelenet Global Services, The Nielsen Company and Michaels Stores, Inc.

                Neil P. Simpkins became a member of Vanguard’s board of directors on September 23, 2004. Mr. Simpkins has served as a Senior Managing Director in the Private Equity Group of Blackstone since December 1999. From 1993 until the time he joined Blackstone, Mr. Simpkins was a Principal at Bain Capital. Prior to joining Bain Capital, Mr. Simpkins was a consultant at Bain & Company in London and the Asia Pacific region. He currently serves as Chairman of the board of directors of TRW Automotive Holdings Corp. and is a member of the board of representatives of Team Finance LLC.

Composition of the Board of Directors

       General

                As of the date of this report, the board of directors of Vanguard consists of seven members, four of whom were nominated by Blackstone, one of whom was nominated by MSCP, one of whom is our chief executive officer (and, if our chief executive officer is not Charles N. Martin, Jr., such other person designated by senior management (the “Manager Representative”)) and one independent director. Blackstone has the right to increase the size of Vanguard’s board from seven to nine members, with one additional director to be designated by Blackstone and one additional director to be an independent person identified by our chief executive officer and acceptable to Blackstone. MSCP and, subject to the conditions above, senior management, will each continue to be entitled to nominate and elect one director unless and until the respective group ceases to own at least 50.0% of the Class A membership units in VHS Holdings LLC (“Holdings”) owned on September 23, 2004.  Holdings acquired Vanguard pursuant to a merger (the “Merger”) on September 23, 2004.  See “Item 1. Business – The Merger”.

       Committees

                Our board of directors currently does not have any standing committees, including an audit committee. Our entire board of directors is acting as our audit committee to oversee our accounting and financial reporting processes and the audits of our financial statements, as allowed under the Securities Exchange Act of 1934 for issuers without securities listed on a national securities exchange or on an automated national quotation system. Additionally, because our securities are not so listed, our board of directors is not required to have on it a person who qualifies under the rules of the Securities and Exchange Commission as an “audit committee financial expert” or as having accounting or financial management expertise under the similar rules of the national securities exchanges. While our board of directors has not designated any of its members as an audit committee financial expert, we believe that each of the current board members is fully qualified to address any accounting, financial reporting or audit issues that may come before it.

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      Code of Ethics

                We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, which has been posted on our Internet website at www.vanguardhealth.com/pdfs/codeofbusinessconductandethics.pdf. Our Code of Business Conduct and Ethics is a “code of ethics”, as defined in Item 406(b) of Regulation S-K of the Securities and Exchange Commission.  Please note that our Internet website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our Internet website.

Item 11.  Executive Compensation.

COMPENSATION DISCUSSION AND ANALYSIS

Overview

                This section discusses the principles underlying our executive compensation policies and decisions. It provides qualitative information regarding the manner in which compensation is earned by our executive officers and places in context the data presented in the tables that follow. In addition, in this section, we address the compensation paid or awarded during fiscal year 2008 to: Charles N. Martin, Jr., our Chief Executive Officer (principal executive officer); Phillip W. Roe, our Chief Financial Officer (principal financial officer); and three other executive officers who were our three other most highly compensated executive officers in fiscal year 2008, Keith B. Pitts, our Vice Chairman; Kent H. Wallace, our President and Chief Operating Officer; and Joseph D. Moore, one of our Executive Vice Presidents.  We refer to these five executive officers as our “named executive officers.”

                On September 23, 2004, we were acquired in the Merger by private equity investment funds associated with Blackstone Group who invested $494.4 million in our equity for a 66% equity interest, with private equity funds associated with our former equity sponsor, MSCP, retaining a 17.3% equity interest in us by reinvesting $130 million in our equity and  with 13 of our 16 current executive officers retaining a 11.8% equity interest in us by  reinvesting $88.4 million in us (such $88.4 million exclusive of amounts invested by our executive officers  in Holdings’ Class B, C and D units, as discussed below). As a result of the Merger, we are privately held and controlled by private equity funds associated with Blackstone and MSCP (the “Sponsors”) with a board of directors made up of five representatives of the Sponsors, one independent director and our Chief Executive Officer. As discussed in more detail below, various aspects of named executive officer compensation were negotiated and determined at the time of the Merger.

                As a privately-owned company with a relatively small board of directors, our entire board of directors acts as our Compensation Committee (hereinafter referred to either as the “Committee”, the “Compensation Committee” or the “board of directors”). Our executive compensation program is overseen and administered by the Compensation Committee. The Compensation Committee operates somewhat informally without a written charter and has responsibility for discharging the responsibilities of the board of directors relating to the compensation of our executive officers and related duties. As a member of the Compensation Committee, our Chief Executive Officer presents cash, equity and benefits compensation recommendations to the Compensation Committee for its consideration and approval. The Compensation Committee reviews these proposals and makes all final compensation decisions for executive officers by exercising its discretion in accepting, modifying or rejecting any such recommendations.

Philosophy of Executive Compensation Programs

                Our overall executive compensation objective is to provide a comprehensive plan designed to focus on our strategic business initiatives, financial performance objectives and the creation and maintenance of equity value. The following are the principal objectives in the design of our executive compensation programs:

• Attract, retain, and motivate superior management talent critical to our long-term success with compensation that is competitive within the marketplace;

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• Maintain a reasonable balance among base salary, annual incentive payments and long-term equity-based incentive compensation and other benefits;

• Ensure compensation levels reflect the internal value and future potential of each executive within the Company and the achievement of outstanding individual results;

• Link executive compensation to the creation and maintenance of long-term equity value;

• Promote equity ownership by executives in order to align their interests with the interests of our equity holders; and

• Ensure that incentive compensation is linked to the achievement of specific financial and strategic objectives, which are established in advance and approved by the Committee.

                To meet these objectives, our compensation program balances short-term and long-term performance goals and mixes fixed and at-risk compensation that is directly related to stockholder value and overall performance.

                During our fiscal year ended June 30, 2008, the Committee did not retain the services of any external compensation consultant. Our Chief Executive Officer, Charles N. Martin, Jr., as a member of the board of directors, is also a member of the Committee, presents his recommendations to the Committee on all executive compensation matters and participates in discussions and deliberations of the Committee. While other named executive officers may also attend the Committee meetings and participate in Committee discussions, they would do so only if and when required by the Committee and such attendance has been rare in recent years. Any deliberations and decisions by the Committee regarding compensation for Mr. Martin or other named executive officers take place while the Committee is in executive session without such persons in attendance.

                The Committee believes that compensation to its executive officers should be aligned closely with our short-term and long-term financial performance goals. As a result, a portion of executive compensation is “at risk” and is tied to the attainment of previously established financial goals. However, the Committee also believes that it is prudent to provide competitive base salaries and benefits to attract and retain superior talent in order to achieve our strategic objectives.

Elements of Our Executive Compensation Program

                In fiscal year 2008, the principal elements of our compensation for our executive officers, including our named executive officers were:

• Base Salary;

• Annual cash incentive opportunities;

• Long-term equity based incentives; and

• Benefits and executive perquisites.

                Detail regarding each of these elements is discussed below.

Base Salaries

                Annual base salaries reflect the compensation for an executive’s ongoing contribution to the operating performance of his or her functional area of responsibility with us. We believe that base salaries must be competitive based upon the scope of responsibilities and market compensation of similar executives. We utilize as a tool the database provided by Salary.com’s Job Analyzer. Job Analyzer includes data about 2,900 standard jobs using data from 7,500 organizations representing all industries of all types and sizes, both public and private companies. Other factors such as internal equity and comparability are also considered when establishing a base salary for a given executive. The Committee utilizes the experience, market knowledge and insight of its members in evaluating the

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competitiveness of current salary levels. Our Human Resources Department is also a resource for such additional information as needed.

                Generally, base salaries of all executive officers, including the named executive officers, are reviewed and adjusted by the Committee effective January 1 of each year based upon the recommendations of our Chief Executive Officer. In turn, our Chief Executive Officer bases his recommendations upon his assessment of each executive’s performance and our overall budgetary guidelines. Upon the recommendation of our Chief Executive Officer, the Committee gave none of the named executive officers base salary increases as of January 1, 2008, but gave most of our other executive officers base salary increases as of January 1, 2008 which averaged 3.6% for all executive officers. In addition, based upon the recommendations of our Chief Executive Officer, the Committee may adjust base salaries at other times during the year in connection with promotions, increased responsibilities or to maintain competitiveness within the market. Thus, the Committee raised the base salary of one of our named executive officers, Phillip W. Roe, from $375,000 to $475,000, effective the November 7, 2007 date upon which he was promoted to the position of our Chief Financial Officer. The salary for each named executive officer for our fiscal year ended June 30, 2008 is reported in the Summary Compensation Table below.

Annual Incentive Compensation

                Annual incentive awards are available to the named executive officers, as well as to Vanguard’s other executive officers, under the Vanguard Health Systems, Inc. 2001 Annual Incentive Plan (the “Annual Incentive  Plan”). The Annual Incentive Plan is designed to reward management for the achievement of annual financial performance level targets and other operational goals, which are linked to the creation of long-term equity value.

                Each year under the Annual Incentive Plan the Committee establishes specific earnings-related or operations-related goals for all of our executive officers, including the named executive officers, for the fiscal year based upon the recommendations of our Chief Executive Officer. The executive officers are eligible to receive a cash award or awards based primarily on the extent to which the Company meets its pre-established earnings and/or cash flow and/or other operations-related goals. The Committee determines one or more target awards for each executive officer, designates a Company performance level or levels required to earn each target award and may also determine threshold performance levels at which minimum awards are earned and performance levels that result in maximum awards to be paid. Target awards may vary among executives based on competitive market practices for comparable positions, their decision-making authority and their ability to affect financial and operational performance. In addition to performance-related awards, the Committee may make and pay out discretionary awards at any time. Also, the Committee has the discretion to adjust the annual performance targets during the year in the event of acquisitions and divestitures, restructured or discontinued operations, or other extraordinary or unusual issues occurring during the year. The Committee evaluates the allocation factors within the Annual Incentive Plan on an annual basis and has the flexibility to adjust the structure including allocation percentages as needed in order to better align the incentives under the Annual Incentive Plan.

                For fiscal year 2008, Annual Incentive Plan target awards for most executive officers (including all five of the named executive officers, Messrs. Martin, Roe, Moore, Pitts, and Wallace) were 50% based on the Company achieving a certain consolidated Adjusted EBITDA performance level target goal and 50% upon achieving a certain consolidated free cash flow performance level target goal. Award target levels for these executive officers ranged from 30% to 50% of their base salaries for meeting the Adjusted EBITDA target and 30% to 50% of their base salaries for meeting the free cash flow target. Award target levels for Mr. Martin were 50% of his base salary for meeting the Adjusted EBITDA target and 50% of his base salary for meeting the free cash flow target. Award target levels for Messrs. Pitts and Wallace were 45% of their respective base salaries for meeting the Adjusted EBITDA target and 45% of their respective base salaries for meeting the free cash flow target. Award target levels for Messrs. Moore and Roe were 35% of their respective base salaries for meeting the Adjusted EBITDA target and 35% of their respective base salaries for meeting the free cash flow target.

                For executive officers responsible only for the operations of  our various regions, their Annual Incentive Plan target awards were 50% based upon regional Adjusted EBITDA targets and 50% based upon their hospitals achieving certain specified quality, employee engagement and patient and physician satisfaction goals, with their target awards and maximum awards being set at 70% and 108%, respectively, of their base salaries depending on the

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Adjusted EBITDA levels actually obtained by their operating regions as well as their attainment of the quality and satisfaction goals.

                All of our five named executive officers earned their target awards with respect to their financial performance level target goals under our Annual Incentive Plan for fiscal year 2008. These target awards were approved by the Committee and paid to the named executive officers in September 2008 in the individual amounts set forth in the column of the Summary Compensation Table entitled “Non-Equity Incentive Plan Compensation”. In addition, two of our named executive officers (Messrs. Pitts and Wallace) were also granted discretionary awards by the Committee under our Annual Incentive Plan for fiscal year 2008 at its September 2008 meeting in the individual amounts set forth in the column of the Summary Compensation Table entitled “Bonus” and such discretionary awards were paid to Messrs. Pitts and Wallace also in September 2008.

                The Committee has historically attempted to maintain consistency year over year with respect to the difficulty of achieving the target performance levels under our Annual Incentive Plan. The financial performance targets used by the Committee in recent years for the annual incentive awards for most of our executive officers (Adjusted EBITDA and free cash flow) are identical to or derived from our consolidated annual Adjusted EBITDA and capital expenditures budgets approved each July by our board of directors. Our annual Adjusted EBITDA budget, and, thus, the annual Adjusted EBITDA financial target, typically increases each year to promote continuous growth consistent with our business plan. Despite such increase,  the financial performance targets are designed to be realistic and attainable though slightly aggressive, requiring in each fiscal year strong performance and execution that in our view provides an annual incentive firmly aligned with stockholder interests. This balance is reflected in the fact that none of these named executive officers earned any awards under the Plan for fiscal year 2007 when our Company’s financial performance was not strong, but, as stated above, they did earn their target awards under the Plan for fiscal year 2008 when our Company’s financial performance was much stronger.

Long Term Incentive Compensation

                The Committee provides equity incentives to executive officers and other key employees in order to directly align their interests with the long term interests of the other equity holders who are principally the Sponsors.

Holdings LLC Units Plan

                Holdings acquired Vanguard in the Merger on September 23, 2004.  The following contains a summary of the material terms of the Holdings LLC Units Plan, which we refer to as the 2004 Unit Plan, pursuant to which Holdings granted the right to purchase units to members of our management on September 23, 2004 in connection with consummation of the Merger. All of our named executive officers, and certain other members of our management, have been granted the right to purchase units under the 2004 Units Plan.

       General

                The 2004 Unit Plan permits the grant of the right to purchase Class A Units, Class B Units, Class C Units and Class D Units to employees of Holdings or its affiliates. A maximum of 117,067 Class A Units, 41,945 Class B Units, 41,945 Class C Units and 35,952 Class D Units may be subject to awards under the 2004 Unit Plan. Units covered by awards that expire, terminate or lapse will again be available for option or grant under the 2004 Unit Plan. On September 23, 2004, certain members of management purchased all 117,067 Class A Units for an aggregate purchase price of $117,067,000 and all 41,945 Class B units, all 41,945 Class C Units and all 35,952 of the Class D Units for an aggregate purchase price of $5.7 million.

       Administration

                The 2004 Unit Plan is administered by a committee of Holdings’ board of representatives or, in the board of representatives’ discretion, the board of representatives. The committee has the sole discretion to determine the employees to whom awards may be granted under the 2004 Unit Plan, the number and/or class of Units to be covered by an award, the purchase price, if any, of such awards, determine the terms and conditions of any award and determine under what circumstances awards may be settled or cancelled. The committee is authorized to interpret the 2004 Unit Plan, to establish, amend and rescind any rules and regulations relating to the 2004 Unit

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Plan, and to make any other determinations that it deems necessary or desirable for the administration of the plan. The committee may correct any defect or supply any omission or reconcile any inconsistency in the 2004 Unit Plan in the manner and to the extent the committee deems necessary or desirable.

       Adjustments Upon Certain Events

                In the event of any changes in the Units by reason of any reorganization, recapitalization, merger, unit exchange or any other similar transaction, the board of representatives, in its sole discretion, may adjust (1) the number or kind of Units or other securities that may be issued or reserved for issuance pursuant to the 2004 Unit Plan or pursuant to any outstanding awards or (2) any other affected terms of such awards.

       Amendment and Termination

                The Holdings board of representatives may amend or terminate the 2004 Unit Plan at any time, provided that no amendment or termination is permitted that would diminish any rights of a management member pursuant to a previously granted award without his or her consent, subject to the committee’s authority to adjust awards upon certain events as described in the previous paragraph. No awards may be made under the 2004 Unit Plan after the tenth anniversary of the effective date of the plan.

       Holdings LLC Units Held by Certain of our Managers

                The units of Holdings consist of Class A units, Class B units, Class C units and Class D units. As of September 1, 2008, approximately 59.2% of Holdings’ Class A Units were held by Blackstone, approximately 20.8% were held by MSCP, approximately 15.4% were held by certain members of our management and approximately 4.6% were held by other investors. The Class B units, Class C units and Class D units are held exclusively by members of our senior management and all such units were purchased on September 23, 2004.

                Of our named executive officers, Charles N. Martin, Jr. owns 40,000 class A units, 8,913 class B units, 8,913 class C units and 7,640 class D units; Kent H. Wallace owns 850 class A units, 2,622 class B units, 2,622 class C units and 2,247 class D units; Keith B. Pitts owns 11,000 class A units, 5,243 class B units, 5,243 class C units and 4,494 class D units; Joseph D. Moore owns 10,450 class A units, 3,146 class B units, 3,146 class C units and 2,696 class D units; and Phillip W. Roe owns 3,030 class A units, 2,097 class B units, 2,097 class C units and 1,798 class D units. As of September 1, 2008, none of the class C units are vested, but 60% of the Class B and D units are vested; and an additional 20% of such class B and D units will vest on September 23, 2008. See the vesting provisions in respect of the class A, B, C and D units in the discussion immediately below.

       Terms of the Holdings’ Class A Units, Class B Units, Class C Units and Class D Units

                The following is a summary of certain terms of the Holdings’ Class A units, Class B units, Class C units and Class D units and certain rights and restrictions applicable to those units.

                Class A units have economic characteristics that are similar to those of shares of common stock in a private corporation.  Subject to applicable law, only the holders of Class A units are entitled to vote on any matter.  Class A units are fully vested. The Class B units, Class C units and Class D units are subject to the vesting provisions described below.

                Class B units vest in five equal annual installments on the first five anniversaries of the date of purchase, subject to an employee’s continued service with Holdings and its affiliates.  However, the Class B units will vest earlier upon a change of control of Holdings. In the event of an employee’s termination of employment with Vanguard, other than due to termination by Vanguard for “cause” or by the employee without “good reason”, the employee shall be deemed vested in any Class B unit that would otherwise have vested in the calendar year in which such termination of employment occurs. No employee who holds Class B units will receive any distributions until the holders of the Class A units receive the aggregate amount invested for their Class A units. Following return of the aggregate amount invested for the Class A units, the holders of Class B units will be entitled to receive the amount of their investment in the Class B units and, once all the aggregate investment amount invested for all of the

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units has been returned to their holders, the vested Class B units will share in any distributions pro rata with the Class A units and vested Class C units.

                Class C units vest on the eighth anniversary of the date of purchase, subject to the employee’s continued service with Holdings and its affiliates. However, the Class C units will vest earlier upon the occurrence of a sale by Blackstone of at least 25.0% of its Class A Units at a price per Class A unit exceeding two and one-half times the price per Class A Unit invested by Blackstone in connection with the Merger. No employee who holds Class C units will receive any distributions until the holders of the Class A units receive the aggregate amount invested for their Class A units. Following return of the aggregate amount invested for the Class A units, the holders of Class C units will be entitled to receive the amount of their investment in the Class C units and, once all the aggregate investment amount invested for all of the units has been returned to their holders, the vested Class C units will share in any distributions pro rata with the Class A units and vested Class B units.

                Class D units vest in five equal annual installments on the fifth anniversary of the date of purchase, subject to an employee’s continued service with Holdings and its affiliates.  However, the Class D units will vest earlier upon a change of control of Holdings. In the event of an employee’s termination of employment with Vanguard, other than due to termination by Vanguard for “cause” or by the employee without “good reason”, the employee shall be deemed vested in any Class D unit that would otherwise have vested in the calendar year in which such termination of employment occurs. No employee who holds Class D units will receive any distributions until the holders of the Class A units receive the aggregate amount invested for their Class A units. Following return of the aggregate amount invested for the Class A units, the holders of Class D units will be entitled to receive the amount of their investment in the Class D units and, once all the aggregate investment amount invested for all of the units has been returned to their holders and the holders of the Class A units have received an amount representing a 300% return on their aggregate investment along with pro rata distributions to the vested Class B and Class C units, the vested Class D units will share in any distributions pro rata with the Class A units, the vested Class B units and the vested Class C units.

       Certain Rights and Restrictions Applicable to the Units Held by Our Managers

                The units held by members of our management are not transferable for a limited period of time except in certain circumstances. In addition, the units (other then Class A units) may be repurchased by Holdings, and in certain cases, Blackstone, in the event that the employees cease to be employed by us. Blackstone has the ability to force the employees to sell their units along with Blackstone if Blackstone decides to sell its units.

                The employees that hold units are entitled to participate in certain sales by Blackstone. In addition, in the event that Holdings were to make a public offering of its equity securities, the employees would have limited rights to participate in subsequent registered public offerings.

Our 2004 Stock Incentive Plan

       General

                Since all Units have been granted under the 2004 Unit Plan, we intend for our option program pursuant to our 2004 Stock Incentive Plan to be the primary vehicle currently for offering long-term incentives and rewarding our executive officers, managers and key employees. Because of the direct relationship between the value of an option and the value of our stock, we believe that granting options is the best method of motivating our executive officers to manage our Company in a manner that is consistent with our interests and our stockholders’ interests. We also regard our option program as a key retention tool.

                We adopted the 2004 Stock Incentive Plan upon consummation of the Merger which permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and other stock-based awards to our employees or our affiliates’ employees. The awards available under the 2004 Stock Incentive Plan, together with Holdings’ equity incentive units, represent 20.0% of our fully-diluted equity at the closing of the Merger. Shares covered by awards that expire, terminate or lapse are again available for option or grant under the 2004 Stock Incentive Plan. The total number of shares of our common stock which may be issued under the 2004

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Stock Incentive Plan is 101,117.  All of our previous option plans were terminated upon consummation of the Merger on September 23, 2004.

       Administration

                The 2004 Stock Incentive Plan is administered by a committee of the board of directors or, in the sole discretion of the board of directors, the board of directors. The committee has the sole discretion to determine the employees, representatives and consultants to whom awards may be granted under the 2004 Stock Incentive Plan and the manner in which such awards will vest. Options, stock appreciation rights, restricted stock and other stock-based awards will be granted by the committee to employees, representatives and consultants in such numbers and at such times during the term of the 2004 Stock Incentive Plan as the committee shall determine. The committee is authorized to interpret the 2004 Stock Incentive Plan, to establish, amend and rescind any rules and regulations relating to the 2004 Stock Incentive Plan, and to make any other determinations that it deems necessary or desirable for the administration of the plan. The committee may correct any defect or supply any omission or reconcile any inconsistency in the 2004 Stock Incentive Plan in the manner and to the extent the committee deems necessary or desirable.

       Stock Options and Stock Appreciation Rights

                Options granted under the 2004 Stock Incentive Plan are vested and exercisable at such times and upon such terms and conditions as may be determined by the committee, but in no event will an option be exercisable more than 10 years after it is granted. Under the 2004 Stock Incentive Plan, the exercise price per share for any option awarded is determined by the committee, but may not be less than 100% of the fair market value of a share on the day the option is granted with respect to incentive stock options.

                Stock option grants under the 2004 Stock Incentive Plan are generally made at the commencement of employment and occasionally following a significant change in job responsibilities or on a periodic basis to meet other special retention or performance objectives.  All stock options granted by our board of directors  to date under the 2004 Stock Incentive Plan have been granted at or above the fair market value of our common stock at the grant date based upon the most recent appraisal of our common stock. We have not back-dated any option awards.

                As a privately-owned company, there has been no market for our common stock. Accordingly, in fiscal year 2007, we had no program, plan or practice pertaining to the timing of stock option grants to executive officers, coinciding with the release of material non-public information.

                An option may be exercised by paying the exercise price in cash or its equivalent, and/or, to the extent permitted by the committee, shares, a combination of cash and shares or, if there is a public market for the shares, through the delivery of irrevocable instruments to a broker to sell the shares obtained upon the exercise of the option and to deliver to us an amount equal to the exercise price.

                The committee may grant stock appreciation rights independent of or in conjunction with an option. The exercise price of a stock appreciation right is an amount determined by the committee. Generally, each stock appreciation right entitles a participant upon exercise to an amount equal to (i) the excess of (1) the fair market value on the exercise date of one share over (2) the exercise price, times (ii) the number of shares covered by the stock appreciation right. Payment will be made in shares or in cash or partly in shares and partly in cash (any shares valued at fair market value), as determined by the committee.

                As of June 30, 2008, options to purchase 88,698 shares of our common stock (the “New Options”) were outstanding under the 2004 Stock Incentive Plan. The New Options were granted in part as “time options,” and in part as “performance options” which vest and become exercisable ratably on a yearly basis on each of the first five anniversaries following the date of grant (or earlier upon a change of control). 35% of the options granted were time options with an exercise price equal to the greater of the fair market price per share or $1,000 per share at the time of grant (a range of $1,000 to $1,167.50 per share). 30% of the options granted were performance options with an exercise price of $3,000 per share. 35% of the options granted were “liquidity options” with an exercise price equal to greater of the fair market price per share or $1,000 per share at the time of grant (a range of $1,000 to $1,167.50 per share) that become fully vested and exercisable upon the completion of any of certain designated business events

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(“liquidity events”), and in any event on the eighth anniversary of the date of grant. Any common stock for which such options are exercised are governed by a stockholders agreement, which is described below under “Item 13.  Certain Relationships and Related Transactions - Stockholders Agreement.”

                Of our named executive officers, Messrs. Martin and Moore have been granted no New Options as of September 1, 2008, Mr. Pitts has been granted 1,500 New Options, Mr. Roe has been granted 3,008 New Options and Mr. Wallace has been granted 8,500 New Options. During fiscal year 2008 the Committee granted 2,000 New Options to Mr. Roe, 1,500 New Options to Mr. Pitts and 1,500 New Options to Mr. Wallace.

       Other Stock-Based Awards

                The committee, in its sole discretion, may grant restricted stock, stock awards, stock appreciation rights, unrestricted stock and other awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of our shares. Such other stock-based awards shall be in such form, and dependent on such conditions, as the committee shall determine, including, without limitation, the right to receive, or vest with respect to, one or more shares (or the equivalent cash value of such shares) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives.

       Adjustments Upon Certain Events

                In the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar transaction, the committee, in its sole discretion, may adjust (i) the number or kind of shares or other securities that may be issued or reserved for issuance pursuant to the 2004 Stock Incentive Plan or pursuant to any outstanding awards, (ii) the option price or exercise price and/or (iii) any other affected terms of such awards. In the event of a change of control, the committee may, in its sole discretion, provide for the (i) termination of an award upon the consummation of the change of control, but only if such award has vested and been paid out or the participant has been permitted to exercise the option in full for a period of not less than 30 days prior to the change of control, (ii) acceleration of all or any portion of an award, (iii) payment of a cash amount in exchange for the cancellation of an award, which, in the case of options and stock appreciation rights, may equal the excess, if any, of the fair market value of the shares subject to such options or stock appreciation rights over the aggregate option price or grant price of such option or stock appreciation rights, and/or (iv) issuance of substitute awards that will substantially preserve the otherwise applicable terms of any affected awards previously granted hereunder.

       Amendment and Termination

                The committee may amend or terminate the 2004 Stock Incentive Plan at any time, provided that no amendment or termination shall diminish any rights of a participant pursuant to a previously granted award without his or her consent, subject to the committee’s authority to adjust awards upon certain events (described under “Adjustments Upon Certain Events” above). No awards may be made under the 2004 Stock Incentive Plan after the tenth anniversary of the effective date of the plan.

Benefits and Executive Perquisites

                The Committee believes that attracting and retaining superior management talent requires an executive compensation program that is competitive in all respects with the programs provided at similar companies. In addition to salaries, incentive bonus and equity awards, competitive executive compensation programs include retirement and welfare benefits and reasonable executive perquisites.

       Retirement Benefits

                Substantially all of our salaried employees, including our named executive officers, participate in our 401(k) savings plan. Employees are permitted to defer a portion of their income under the 401(k) plan. At our discretion, we may make a matching contribution of either (1) up to 50%, subject to annual limits established under the Internal Revenue Code, of the first 6% of an employee’s contributions under this 401(k) plan as determined each year or (2) in respect of a few of our employees who came to us with plans in place having a larger match than this match, a match of 100% of the first 5% of an employee’s contributions under this 401(k) plan.  Most recently, we

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authorized such maximum discretionary amounts as a match on employees’ aggregate 401(k) Plan contributions for calendar year 2007, including the named executive officers. Employee contributions are fully vested immediately. Our matching contributions vest to the employee’s account over time related to the employee’s years of service with us, with 20% of our contribution vesting after 2 years of service, 40% after 3 years, 60% after 4 years, 80% after 5 years and 100% after 6 years. Participants may receive distribution of their 401(k) accounts any time after they cease service with us.

                We maintain no defined benefit plans.

       Other Benefits

                All executive officers, including the named executive officers, are eligible for other benefits including: medical, dental, life insurance, and short term disability. The executives participate in these plans on the same basis, terms, and conditions as other administrative employees. In addition, we provide long-term disability insurance coverage on behalf of the named executive officers at an amount equal to 60% of current base salary (up to $10,000 per month). The named executive officers also participate in our vacation, holiday and sick program which provides paid leave during the year at various amounts based upon the executive’s position and length of service.

       Perquisites

                Our executive officers may have limited use of our corporate plane for personal purposes as well as very modest other usual and customary perquisites. All of such perquisites are reflected in the All Other Compensation column of the Summary Compensation Table and the accompanying footnotes.

Our Employment Agreements with Certain Named Executive Officers

                We have entered into written employment agreements with all five of our named executive officers. On June 1, 1998, we entered into written employment agreements with our Chief Executive Officer and then Chief Financial Officer (Messrs. Martin and  Moore, respectively), which were amended and restated on September 23, 2004, to extend the term of the employment agreements for five years, and to provide that the Merger did not constitute a change in control under the agreements. On September 1, 1999, we entered into a written employment agreement with Keith B. Pitts to be our Executive Vice President for a term expiring on September 1, 2004. Effective May 31, 2001, Mr. Pitts was promoted to the position of Vice Chairman, and on September 23, 2004, his employment agreement was amended and restated to extend the term of the employment agreement for five years, and to provide that the Merger did not constitute a change in control under the agreement. On November 15, 2007, we entered into written employment agreements with our Chief Operating Officer and our new Chief Financial Office (Messrs. Wallace and Roe, respectively) for terms expiring on November 15, 2012.

                The term of each employment agreement will renew automatically for additional one-year periods, unless any such agreement is terminated by us or by the officer by delivering notice of termination no later than 90 days before the end of any such renewal term. The base salaries of Messrs. Martin, Moore, Pitts, Wallace and Roe under such written employment agreements are, during calendar year 2008, $1,050,291, $525,146, $641,844, $600,000 and $475,000, respectively. Pursuant to these agreements the officers are eligible to participate in an annual bonus plan giving each of them an opportunity to earn an annual bonus in such amount as our board of directors should determine, as well as pension, medical and other customary employee benefits. The terms of these agreements state that if the officer terminates his employment for Good Reason (as defined in the agreements) or if we terminate the officer’s employment without Cause (as defined in the agreements), he will receive within a specified time after the termination a payment of up to three times the sum of (i) his annual salary plus (ii) the average of the bonuses given to him in the two years immediately preceding his termination.

Our Severance Protection Agreements

                We provide our officers at the Vice President level and above (other than Messrs. Martin, Moore, Wallace and Roe and Ronald P. Soltman (our General Counsel), who each have a written employment agreement containing severance provisions) with severance protection agreements granting them severance payments in amounts of 200% to 250% of annual salary and bonus. Generally, severance payments are due under these agreements if a change in

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control (as defined in the agreements) should occur and employment of the officer is terminated during the term of the agreement by us (or our successor) without Cause (as defined in the agreements) or by the executive for Good Reason (as defined in the agreement). In addition, these agreements state that in the event of a Potential Change in Control (defined as the time at which an agreement which would result in a change in control is signed, an acquisition attempt relating to us is publicly announced or there is an increase in the number of shares owned by one of our 10% shareholders by 5% or more), the executives have an obligation to remain in our employ until the earliest of (1) six months after the Potential Change in Control; (2) a change in control; (3) a termination of employment by us; or (4) a termination of employment by the employee for Good Reason (treating Potential Change in Control as a change in control for the purposes of determining whether the executive had a Good Reason) or due to death, disability or retirement. On September 23, 2004, all the outstanding severance protection agreements were amended and restated to provide that the Merger did not constitute a change in control under the agreements, and that we would not terminate the agreements prior to the third anniversary of the closing of the Merger.

Stock Ownership

                We do not have a formal policy requiring stock ownership by management. Our senior managers, including all of our named executive officers, however, have committed significant personal capital to our Company in connection with the consummation of the Merger.  See the beneficial ownership chart below under Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.  Our stock is not publicly traded and is subject to a stockholder agreement that limits a stockholder’s ability to transfer his or her shares. See “Holdings Limited Liability Company Agreement” and “Stockholders Agreement” under Item 13, “Certain Relationships and Related Transactions, and Director Independence.”

Impact of Tax and Accounting Rules

                The forms of our executive compensation are largely dictated by our capital structure and have not been designed to achieve any particular accounting treatment. We do take tax considerations into account, both to avoid tax disadvantages, and obtain tax advantages where reasonably possible consistent with our compensation goals. (Tax advantages for our executives benefit us by reducing the overall compensation we must pay to provide the same after-tax income to our executives.)  Thus our severance pay plans are designed or are being reviewed to take account of and avoid  “parachute” excise taxes under Section 280G of the Internal Revenue Code. Similarly we have taken steps to structure and assure that our executive compensation program is applied in compliance with Section 409A of the Internal Revenue Code. Since we currently have no publicly traded common stock, we are not currently subject to the $1,000,000 limitation on deductions for certain executive compensation under Section 162(m) of the Internal Revenue Code, though that rule will be considered if our common stock becomes publicly traded. Incentives paid to executives under our annual incentive plan are taxable at the time paid to our executives.

                The expenses associated with the stock options issued by us to our executive officers and other key employees are reflected in our consolidated financial statements. In the first quarter of the fiscal year ended June 30, 2007, we began accounting for these stock-based payments in accordance with the requirements of SFAS 123(R), which requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the consolidated financial statements based on their fair values. For further discussion see “ITEM 8, Note 2-Summary of Critical and Significant Accounting Policies” under the heading “Stock-Based Compensation.” We previously accounted for these awards under the provisions of SFAS 123, which allowed us to estimate the fair value of options using the minimum value method.

Recovery of Certain Awards

                We do not have a formal policy for recovery of annual incentives paid on the basis of financial results which are subsequently restated. Under the Sarbanes-Oxley Act, our chief executive officer and chief financial officer must forfeit incentive compensation paid on the basis of financial statements for which they were responsible and which have to be restated. In that event we would expect to recover such bonuses and incentive compensation. If and when the situation arises in other events, we would consider our course of action in light of the particular facts and circumstances, including the culpability of the individuals involved.

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Compensation Committee Report

                The Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon the review and discussions, the Committee directed that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.

Compensation Committee:

Michael Dal Bello
M. Fazle Husain
Charles N. Martin, Jr.
Alan M. Muney, M.D.
James A. Quella
Michael J. Parsons
Neil P. Simpkins

Summary Compensation Table

                The following table sets forth, for the fiscal years ended June 30, 2008 and 2007, the compensation earned by the Chief Executive Officer and Chief Financial Officer and the three other most highly compensated executive officers of the registrant, Vanguard, at the end of Vanguard’s last fiscal year ended June 30, 2008. We refer to these persons as our named executive officers.

Name and Principal Position	Year	Salary ($)	Bonus($)	Non-Equity Incentive Plan Compensation ($)(a)	Option Awards($)(b)	All Other Compensation ($)(c)	Total ($)
Charles N. Martin, Jr. Chairman of the Board & Chief Executive Officer	2008	1,050,291	–	1,050,291	–	13,608	2,114,190
	2007	1,050,291	–	–	–	10,164	1,060,455
Phillip W. Roe Executive Vice President, Chief Financial Officer & Treasurer	2008	440,192	–	332,500	9,359	7,620	789,671
	2007	350,000	–	–	4,683	7,410	362,093
Keith B. Pitts Vice Chairman	2008	641,845	100,000	577,661	3,507	7,992	1,331,005
	2007	641,845	–	–	–	7,410	649,255
Kent H. Wallace President & Chief Operating Officer	2008	600,000	100,000	540,000	35,827	7,992	1,283,819
	2007	600,000	–	–	32,319	230,212	862,531
Joseph D. Moore Executive Vice President	2008	583,495	–	408,447	–	3,564	995,506
	2007	583,495	–	–	–	3,564	587,059

____________________
(a)	The Compensation Committee has determined the amount of the Annual Incentive Plan compensation that was earned by each of these named executive officers for fiscal year 2008. This amount was paid to the named executive officers in September 2008.
(b)	Option Awards reflect the compensation expense recognized in our financial statements for fiscal years 2008 and 2007 in accordance with SFAS 123(R) with respect to options to purchase shares of our common stock which have been awarded under our 2004 Stock Incentive Plan in our 2006 and 2008 fiscal years to three of our named executive officers. See Note 12 to our consolidated financial statements for assumptions used in calculation of these amounts. The actual number of Option Awards granted in fiscal year 2008 is shown in the “Grants of Plan Based Awards in Fiscal Year 2008” table included below in this report. Because these amounts represent expense for financial reporting purposes, they are not representative of the actual value that the named executive officer would receive upon exercise of these options.

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(c) The amounts disclosed under All Other Compensation in the Summary Compensation Table represent for the named executive officers in fiscal 2008 (i) the following amounts of our matching contributions made under our 401(k) Plan:  Mr. Martin: $6,750; Mr. Roe: $6,750; Mr. Pitts: $6,750; Mr. Wallace $6,750; and Mr. Moore: $0; and (ii) the following amounts of insurance premiums paid by Vanguard with respect to group term life insurance:  Mr. Martin: $6,858; Mr. Roe: $870; Mr. Pitts: $1,242; Mr. Wallace: $1,242; and Mr. Moore: $3,564. No amounts for perquisites and other personal benefits, or property, have been included in this column for 2008 for Messrs. Martin, Roe,  Pitts, Wallace and Moore because the aggregate value thereof for each of these named executive officers was below the $10,000 reporting threshold established by the Securities and Exchange Commission for this column.

Grants of Plan-Based Awards in Fiscal Year 2008

Name	Grant Date		Estimated Future Payouts Under Non-Equity Incentive Plan Awards (a) Target	All Other Option Awards: Number of Securities Underlying Options(b)	Exercise or Base Price of Option Awards ($/sh)(b)	Grant Date Fair Value of Option Awards(b)
Charles N. Martin, Jr.	n/a	$	1,050,291	–	–	–
Phillip W. Roe	n/a	$	332,500	–	–	–
	2/5/08			700	$1,000.00	$244,293
	2/5/08			700	$1,000.00	$293,391
	2/5/08			600	$3,000.00	$          0
Keith B. Pitts	n/a	$	577,661	–	–	–
	2/5/08			525	$1,000.00	$183,220
	2/5/08			525	$1,000.00	$220,043
	2/5/08			450	$3,000.00	$           0
Kent H. Wallace	n/a	$	540,000	–	–	–
	2/5/08			525	$1,000.00	$183,220
	2/5/08			525	$1,000.00	$220,043
	2/5/08			450	$3,000.00	$          0
Joseph D. Moore	n/a	$	408,447	–	–	–

____________________
(a)	There is solely a target award under the Annual Incentive Plan for the named executive officers. For fiscal year 2008 the named executive officers earned these target awards, the Committee approved them and they were paid in cash to the named executive officers in September 2008 and these amounts are reflected in the Summary Compensation Table. See the “Compensation Discussion and Analysis –Annual Incentive Compensation,” for a detailed description of the Annual Incentive Plan.
(b)	Stock options awarded under the 2004 Stock Incentive Plan by the Committee as part of the named executive officer’s long term equity incentive award.  None of these options were granted with exercise prices below the fair market value of the underlying common stock on the date of grant. Since we are a privately-held company, the Committee determines the fair market value of our common stock primarily from an independent appraisal of our common stock which we obtain no less frequently than annually. The terms of these option awards are described in more detail under “Compensation Discussion and Analysis –Long Term Incentive Compensation –Our 2004 Stock Incentive Plan.” We utilize a Black-Scholes-Merton model to estimate the fair value of options granted. The compensation expense recognized in our financial statements for fiscal year 2008 in accordance with SFAS 123(R) with respect to these option grants is reflected in the “Option Awards” column of the Summary Compensation Table.

Outstanding Equity Awards at Fiscal 2008 Year-End

                The following table summarizes the outstanding equity awards held by each named executive officer at June 30, 2008.  The table reflects options to purchase common stock of Vanguard which were granted under the Vanguard Health Systems, Inc. 2004 Stock Incentive Plan.

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Name	Number of Securities Underlying Unexercised Options (#) Exercisable(a)	Number of Securities Underlying Unexercised Options (#) Unexercisable(b)	Option Exercise Price ($)(c)	Option Expiration Date
Charles N. Martin, Jr.	–	–	–	–
Phillip W. Roe	142(d)	211(d)	1,150.37	11/3/15
	–	353(e)	1,150.37	11/3/15
	122(d)	180(d)	3,000.00	11/3/15
	–	700(f)	1,000.00	2/5/18
	–	700(g)	1,000.00	2/5/18
	–	600(f)	3,000.00	2/5/18
Keith B. Pitts	–	525(f)	1,000.00	2/5/18
	–	525(g)	1,000.00	2/5/18
	–	450(f)	3,000.00	2/5/18
Kent H. Wallace	344(d)	514(d)	1,150.37	11/3/15
	–	858(e)	1,150.37	11/3/15
	295(d)	441(d)	3,000.00	11/3/15
	638(h)	954(h)	1,150.37	11/28/15
	–	1,592(i)	1,150.37	11/28/15
	546(h)	818(h)	3,000.00	11/28/15
	–	525(f)	1,000.00	2/5/18
	–	525(g)	1,000.00	2/5/18
	–	450(f)	3,000.00	2/5/18
Joseph D. Moore	–	–	–	–

____________________
(a)	This column represents the number of  stock options that had vested and were exercisable as of June 30, 2008.
(b)	This column represents the number of stock options that had not vested and were not exercisable as of June 30, 2008.
(c)	The exercise price for the options was never less than the grant date fair market value of a share of Vanguard common stock as determined by the Compensation Committee.
(d)	20% of the options represented by this option grant vest and become exercisable on each of the first five anniversaries of the November 3, 2005 grant date of these options (or earlier upon a change of control). 40% of this option grant was vested as of June 30, 2008.
(e)	100% of the options represented by this option grant vest and become exercisable on the eighth anniversary of the November 3, 2005 grant date of these options (or earlier upon a liquidity event).
(f)	20% of the options represented by this option grant vest and become exercisable on each of the first five anniversaries of the February 5, 2008 grant date of these options (or earlier upon a change of control). None of this option grant was vested as of June 30, 2008.
(g)	100% of the options represented by this option grant vest and become exercisable on the eighth anniversary of the February 5, 2008 grant date of these options (or earlier upon a liquidity event).
(h)	20% of the options represented by this option grant vest and become exercisable on each of the first five anniversaries of the November 28, 2005 grant date of these options (or earlier upon a change of control). 40% of this option grant was vested as of June 30, 2008.
(i)	100% of the options represented by this option grant vest and become exercisable on the eighth anniversary of the November 28, 2005 grant date of these options (or earlier upon a liquidity event).

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Option Exercises and Stock Vested

                No named executive officer exercised any stock options of Vanguard during fiscal 2008 nor were any restricted stock awards vested during fiscal 2008. Vanguard has made no restricted stock awards of its common stock since the Merger.

Pension Benefits

                Vanguard maintains a 401(k) plan as previously discussed in the Compensation Discussion and Analysis. Vanguard maintains no defined benefit plans.

Nonqualified Deferred Compensation

                None of the named executive officers receive nonqualified deferred compensation benefits.

Employment and Severance Protection Agreements

                As discussed above, we have entered into definitive employment or severance protection agreements with each of the named executive officers. The terms of these agreements are described above under Compensation Discussion and Analysis.

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Potential Payments Upon Termination or Change of Control

                The following table describes the potential payments and benefits under our compensation and benefit plans and arrangements to which the named executive officers would be entitled upon a termination of their employment under their employment agreement, if they have an employment agreement, or if they do not have an employment agreement, under their severance protection agreement. In accordance with SEC disclosure rules, dollar amounts below assume a termination of employment on June 30, 2008 (the last business day of our last completed fiscal year).

Current	Cash Severance Payment ($)	Continuation of Medical/Welfare Benefits (present value) ($)	Total Termination Benefits ($)
Charles N. Martin, Jr.
–Voluntary retirement	0	0	0
–Involuntary termination	4,201,164	25,947	4,227,111
–Involuntary or Good Reason termination after
change in control	6,301,746	25,947	6,327,693
Phillip W. Roe
–Voluntary retirement	0	0	0
–Involuntary termination	1,615,000	25,848	1,640,848
–Involuntary or Good Reason termination after
change in control	2,422,500	25,848	2,448,348
Keith B. Pitts
–Voluntary retirement	0	0	0
–Involuntary termination	2,439,012	25,947	2,464,959
–Involuntary or Good Reason termination after
change in control	3,658,518	25,947	3,684,465
Kent H. Wallace
–Voluntary retirement	0	0	0
–Involuntary termination	2,280,000	25,947	2,305,947
–Involuntary or Good Reason termination after
change in control	3,420,000	25,947	3,445,947
Joseph D. Moore
–Voluntary retirement	0	0	0
–Involuntary termination	1,750,486	17,855	1,768,341
–Involuntary or Good Reason termination after
change in control	2,625,729	17,855	2,643,584

                Accrued Pay and Regular Retirement Benefits. The amounts shown in the table above do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon termination of employment. These include:

                                • Accrued salary and vacation pay and earned but unpaid bonus.
                                • Distributions of plan balances under our 401(k) plan.

                Death and Disability.  A termination of employment due to death or disability does not entitle the named executive officers to any payments or benefits that are not available to salaried employees generally.

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                Involuntary Termination and Change-in-Control Severance Pay Program.  As described above under “—Our Employment Agreements,” all of the named executive officers are entitled to severance pay in the event that their employment is terminated by us without Cause or if the named executive officer terminates the agreement as a result of our breach of his employment agreement. Additionally, they are entitled to severance pay under their employment agreements in the event they terminate the agreements after a change in control if their termination is for Good Reason.

                Under our executive severance pay program, no payments due in respect of a change of control are “single trigger”, that is, payments of severance due to the named executive officers merely upon a change of control. All of our change of control payments are “double trigger”, due to the executive only subsequent to a change of control and after a termination of employment has occurred.

                Under their employment agreements, all of our named executive officers owe the following obligations to us:

• Not to disclose our confidential business information;

• Not to solicit for employment any of our employees for a period expiring two years after the termination of their employment; and

• Not to accept employment with or consult with, or have any ownership interest in, any hospital or hospital management entity for a period expiring two years after the termination of their employment, except there shall be not such prohibitions if (1) we terminate the executive under his employment agreement or (2) the executive terminates his agreement for Good Reason or because we have breached his agreement.

                The amounts shown in the table are for such involuntary or Good Reason terminations for the named executive officers and are based on the following assumptions and provisions in the employment agreements.

                • Covered terminations following a Change in Control. Eligible terminations for all of our named executive officers include an involuntary termination for reasons other than Cause both before and following a change of control, or a voluntary resignation by the executive as a result of Good Reason following a change in control.

                • Definitions of Cause and Good Reason

                A termination of a named executive officer by us is for Cause if it is for any of the following reasons:

                                (a)           the conviction of the executive of a criminal act classified as a felony;

                                (b)           the willful failure by the executive to substantially perform the executive’s duties with
                                                us (other than any such failure resulting from the executive’s incapacity due to
                                                physical or mental illness); or

                                (c)           the willful engaging by the executive in conduct which is materially injurious to
                                                us monetarily or otherwise.

                A termination by the executive officer is for Good Reason if it results from, after a change of control has occurred, one of the following events:

                                (a)           a material diminution in the executive’s base compensation;

                                (b)           a material diminution in the executive’s authority, duties or responsibilities;

                                (c)           a material diminution in the authority, duties or responsibilities of the supervisor to whom
                                                the executive is required to report, including a requirement that the executive’s supervisor

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                                                report to a corporate officer or employee instead of reporting directly to our Board of
                                                Directors;

                                (d)           a material diminution in the budget over which the executive retains authority;

                                (e)           a material change in the geographic location at which the executive must
                                                perform services, except for required travel on our business to an extent
                                                substantially consistent with his business travel obligations prior to the
                                                change in control; or

                                (f)            any other action or inaction that constitutes a material breach by us of the
                                                terms of the employment agreement.

                • Cash severance payments; Timing. Represents, for each of our named executive officers, (1) if it relates to an involuntary termination without Cause by us prior to a change of control, a payment of 2 times the named executive officer’s base salary and average annual incentive actually paid during the last two years plus an additional amount equal to such officer’s pro rata annual target incentive for the year of termination and (2) if it relates to an involuntary termination without cause by us or a Good Reason termination by the executive after a change of control, payment of 3 times the named executive officer's base salary and average annual incentive actually paid during the last two years plus an additional amount equal to such officer’s pro rata annual target incentive for the year of termination. All of these severance payments are “lump sum” payments by us to the named executive officers due within 5 days of termination of employment, except that the amounts of severance described above payable in respect of a termination of their employment prior to a change of control are payable monthly in equal monthly installments starting with the month after employment terminates and ending with the month that their 5-year employment agreements terminate (which is September 2009 for Messrs. Martin, Pitts and Moore and November 2012 for Messrs. Roe and Wallace).

                • Continuation of health, welfare and other benefits. Represents the value of coverage for 18 months following a covered termination equivalent to our current active employee medical, dental, life, long-term disability insurances and other covered benefits.

Director Compensation

                During fiscal 2008, our directors who are either our employees or affiliated with our private equity Sponsors did not receive any fees or other compensation services as our directors. As described in the table below, Michael J. Parsons, a director who is not our employee or an affiliate of our Sponsors, receives our current standardized director compensation plan for our independent directors of $60,000 per annum in cash plus an initial grant, upon election to our board of directors, of 85 stock options pursuant to our 2004 Stock Incentive Plan, as described in this Item under the caption “Our 2004 Stock Incentive Plan”. We do, however, reimburse all of our directors for travel expenses and other out-of-pocket costs incurred in connection with attendance at meetings of the board.

                The following table summarizes all compensation for our non-employee directors for our fiscal year ended June 30, 2008.

Name	Fees Earned or Paid in Cash(1) ($)	Stock Awards ($)	Option Awards(2)(3) ($)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings	All Other Compensation ($)	Total ($)
Michael J. Parsons	$        10,000	–	$   83	–	–	–	$  10,083

____________________
(1)	The director compensation in the above table reflects an annual cash retainer paid to each independent, non-employee director of $60,000, prorated for Mr. Parsons’ election as one of our directors in May 2008. The employee and Sponsor-affiliated directors receive no additional compensation for serving on the board and, as a result, are not listed in the above table.

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(2)

The amount in this column reflects the dollar amount recorded for financial statement reporting purposes for the fiscal year ended June 30, 2008, in accordance with FAS 123(R), relating to  Mr. Parsons’ option award granted pursuant to our 2004 Stock Option Plan. Assumptions used in the calculation of this amount are included in Note 2 of the Notes to our consolidated financial statements for the fiscal year ended June 30, 2008 included in this report.

(3)

This represents a grant of 85 stock options on May 6, 2008 under our 2004 Stock Option Plan. None of such options were exercisable on June 30, 2008. 30 of the options had an option exercise price of $1,000 per share and become exercisable 20% on each of the first five anniversaries of their May 6, 2008 grant date (or earlier upon a change of control). 30 of the options also had an option exercise price of $1,000 per share and become exercisable on the eighth anniversary of the May 6, 2008 grant date (or earlier upon a liquidity event). 25 of the options had an option exercise price of $3,000 per share and become exercisable 20% on each of the first five anniversaries of their May 6, 2008 grant date (or earlier upon a change of control). The exercise price for the options is not less than the fair market value of a share of our common stock as determined by the Compensation Committee. All of these 85 options have an expiration date of May 6, 2018. For more information about options granted under our 2004 Stock Option Plan, see information in this Item under the caption “Our 2004 Stock Incentive Plan”.

Compensation Committee Interlocks and Insider Participation

                During fiscal 2008, we had no compensation committee of our board of directors.  Charles N. Martin, Jr., one of the named executive officers, participated in deliberations of our board of directors concerning executive officer compensation during fiscal 2008.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

                As of September 1, 2008, VHS Holdings LLC (“Holdings”) directly owned 624,550 of the outstanding shares of the common stock of Vanguard (representing a 83.3% ownership interest), certain investment funds affiliated with Blackstone directly owned 125,000 of the outstanding shares of the common stock of Vanguard (representing a 16.7% ownership interest) and no other person or entity had a direct beneficial ownership interest in the common stock of Vanguard, except for certain key employees who held an aggregate of 17,237 exercisable options into 17,237 shares of the common stock of Vanguard as of such date. However, ignoring only the direct ownership of Holdings in the common stock of Vanguard, the following table sets forth information with respect to the direct or indirect beneficial ownership of the common stock of Vanguard as of September 1, 2008 by (1) each person (other than Holdings) known to own beneficially more than 5.0% of the common stock of Vanguard, (2) each named executive officer, (3) each of our directors and (4) all executive officers and directors as a group.  The indirect beneficial ownership of the common stock of Vanguard reflects the direct beneficial ownership of all Class A units and all vested Class B and D units of Holdings. None of the shares listed in the table are pledged as security pursuant to any pledge arrangement or agreement. Additionally, there are no arrangements with respect to the share, the operation of which may result in a change in control of Vanguard.

                Notwithstanding the beneficial ownership of the common stock of Vanguard presented below, the limited liability company agreement of Holdings governs the holders’ exercise of their voting rights with respect to election of Vanguard’s directors and certain other material events. See “Item 13.  Certain Relationships and Related Transactions - Holdings Limited Liability Company Agreement.”

Name of Beneficial Owner	Beneficial Ownership	Ownership Percentage
Blackstone Funds(1)	494,930	66.0%
MSCP Funds(2)	130,000	17.3%
Charles N. Martin Jr.(3)	53,243	7.0%
Phillip W. Roe(4)	6,411	*
Keith B. Pitts(5)	18,791	2.5%
Kent H. Wallace(6)	6,569	*
Joseph D. Moore(7)	15,124	2.0%
M. Fazle Husain(8)	126,750	16.9%
James A. Quella(1)	494,930	66.0%
Neil P. Simpkins (1)	494,930	66.0%
Michael A. Dal Bello	—(9)	—(9)
Alan M. Muney, M.D.	—(9)	—(9)
Michael J. Parsons	—	—
All directors and executive officers as a group (24 persons) (10)	762,636	95.1%

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____________________
*	Less than 1% of shares of common stock outstanding (excluding, in the case of all directors and executive officers as a group, shares beneficially owned by Blackstone and by the MSCP Funds).
(1)	Includes common stock interests directly and indirectly owned by each of Blackstone FCH Capital Partners IV L.P., Blackstone FCH Capital Partners IV-A L.P., Blackstone FCH Capital Partners IV-B L.P., Blackstone Capital Partners IV-A L.P., Blackstone Family Investment Partnership IV-A L.P., Blackstone Health Commitment Partners L.P. and Blackstone Health Commitment Partners-A L.P. (the “Blackstone Funds”), for which Blackstone Management Associates IV L.L.C. (“BMA”) is the general partner having voting and investment power over the membership interests in Holdings and the shares in Vanguard held or controlled by each of the Blackstone Funds. Messrs. Quella and Simpkins are members of BMA, but disclaim any beneficial ownership of the membership interests or the shares beneficially owned by BMA. Messrs. Peter G. Peterson and Stephen A. Schwarzman are the founding members of BMA and as such may be deemed to share beneficial ownership of the membership interests or shares held or controlled by the Blackstone Funds. Each of BMA and Messrs. Peterson and Schwarzman disclaims beneficial ownership of such membership interests and shares. The address of BMA and the Blackstone Funds is c/o The Blackstone Group L.P., 345 Park Avenue, New York, New York 10154
(2)	The MSCP Funds consist of the following six funds: Morgan Stanley Capital Partners III, L.P., MSCP III 892 Investors, L.P., Morgan Stanley Capital Investors,  L.P., Morgan Stanley Dean Witter Capital Partners IV, L.P., MSDW IV 892 Investors, L.P., and Morgan Stanley Dean Witter Capital Investors IV, L.P. The address of each of Morgan Stanley Capital Partners III, L.P., MSCP III 892 Investors, L.P., Morgan Stanley Dean Witter Capital Partners IV, L.P. and MSDW IV 892 Investors, L.P. is c/o Metalmark Capital LLC, 1177 Avenue of the Americas, New York, New York 10036. The address of each of Morgan Stanley Capital Investors, L.P. and Morgan Stanley Dean Witter Capital Investors IV, L.P. is c/o Morgan Stanley, 1585 Broadway, New York, New York 10036. Metalmark Capital LLC shares investment and voting power with Morgan Stanley Capital Partners III, L.P., MSCP III 892 Investors, L.P., Morgan Stanley Dean Witter Capital Partners IV, L.P. and MSDW IV 892 Investors, L.P. over 126,750 of these 130,000 shares of Vanguard common stock indirectly owned by these four funds.
(3)	Includes 7,131 B units and 6,112 D units in Holdings which are vested or vest within 60 days of September 1, 2008.
(4)	Includes 264 options in Vanguard and 1,678 B units and 1,439 D units in Holdings which are vested or vest within 60 days of September 1, 2008.
(5)	Includes 4,195 B units and 3,596 D units in Holdings which are vested or vest within 60 days of September 1, 2008.
(6)	Includes 1,823 options in Vanguard and 2,098 B units and 1,798 D units in Holdings which are vested or vest within 60 days of September 1, 2008.
(7)	Includes 2,517 B units and 2,157 D units in Holdings which are vested or vest within 60 days of September 1, 2008.
(8)	Mr. Husain is a Managing Director of Metalmark Capital LLC and exercises shared voting or investment power over the membership interests in Holdings owned by Morgan Stanley Capital Partners III, L.P., MSCP III 892 Investors, L.P., Morgan Stanley Dean Witter Capital Partners IV, L.P., and MSDW IV 892 Investors, L.P. and, as a result, may be deemed to be the beneficial owner of such membership interests and the 126,750 shares of Vanguard common stock indirectly owned by these four funds. Mr. Husain disclaims beneficial ownership of such membership interests and shares of common stock as a result of his employment arrangements with Metalmark, except to the extent of his pecuniary interest therein ultimately realized. Metalmark Capital does not have investment and voting power with respect to 3,250 shares of Vanguard common stock indirectly owned by Morgan Stanley Capital Investors, L.P. and Morgan Stanley Dean Witter Capital Investors IV, L.P. and these 3,250 shares are not included in the 126,750 shares contained in this table for Mr. Husain.
(9)	Mr. Dal Bello and Mr. Muney are employees of Blackstone, but do not have investment or voting control over the shares beneficially owned by Blackstone.
(10)	Includes 7,741 options in Vanguard and 24,124 B units and 20,678 D units in Holdings which have vested or vest within 60 days of September 1, 2008.

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Equity Compensation Plan Information

                The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of Vanguard’s existing equity compensation plans as of June 30, 2008.

	Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by    security holders	88,698 (1)	$1,644.97		11,915  (1)
Equity compensation plans not approved    by security holders	0	$           0		0
Total	88,698	$1,644.97		11,915
____________________
(1)  The material features of the equity compensation plan under which these options were issued are set forth in this report under “Item       11. Executive Compensation – Our 2004 Stock Incentive Plan.”

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

Holdings Limited Liability Company Agreement

                In the Merger, Blackstone invested, and MSCP, Baptist and the Rollover Management Investors re-invested, in our company by subscribing for and purchasing Class A membership units in Holdings. In addition, at the closing of the Merger, the board of representatives of Holdings issued to certain Rollover Management Investors Class B, C and D membership units in Holdings as part of a new equity incentive program.

                Under the limited liability company agreement of Holdings, the board of representatives of Holdings consists of the same five individuals who constitute the sole members of our board of directors. At Blackstone’s election, the size of the board of representatives may be increased to nine members, with two additional representatives to be designated by Blackstone and two additional representatives to be independent representatives identified by our chief executive officer and acceptable to Blackstone. If at any time our chief executive officer is not Charles N. Martin, Jr., the Rollover Management Investors shall have the right to designate one representative to the board (the “Manager Representative”) so long as the Rollover Management Investors continue to own not less than 50% of the Class A units held by them immediately after the completion of the Merger. MSCP will continue to be entitled to nominate and elect one representative so long as MSCP continues to own not less than 50% of the Class A units it held immediately after the completion of the Merger.

                The limited liability company agreement of Holdings also has provisions relating to restrictions on transfer of securities, rights of first refusal, tag-along, drag-along, preemptive rights and affiliate transactions. At the completion of the Merger, the Company issued Class B, C and D warrants to Holdings, exercisable for the proportional percentage of equity represented by the related classes of membership units in Holdings. With respect to the Class B, C and D units only, the limited liability company agreement also has call provisions applicable in the event of certain termination events relating to a Rollover Management Investor’s employment.

Stockholders Agreement

                Recipients of options to purchase the Company’s common stock are required to enter into a stockholders agreement governing such grantees’ rights and obligations with respect to the common stock underlying such options. The provisions of the stockholders agreement are, with limited exceptions, similar to those set forth in the

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limited liability company agreement of Holdings, including certain restrictions on transfer of shares of common stock, rights of first refusal, call rights, tag-along rights and drag-along rights. The transfer restrictions apply until the earlier of the fifth anniversary of the date the stockholder becomes a party to the stockholders agreement, or a change in control of the Company. The right of first refusal provision gives the Company a right of first refusal at any time after the fifth anniversary of the date the stockholder became a party to the stockholders agreement and prior to the earlier of a change in control of the Company or a registered public offering of our common stock meeting certain specified criteria. The call provisions provide rights with respect to the shares of our common stock held by the stockholder, whether or not such shares were acquired upon the exercise of a New Option, except for shares received upon conversion of or in redemption for Class A membership units in Holdings pursuant to the limited liability company agreement of Holdings. Such call rights are applicable in the event of certain termination events relating to the grantee’s employment with the Company.

Transaction and Monitoring Fee Agreement

                In connection with the Merger, Vanguard entered into a transaction and monitoring fee agreement with affiliates of Blackstone and Metalmark pursuant to which these affiliates provide certain structuring, advisory and management services to us. Under this agreement, Vanguard paid to Blackstone Management Partners IV L.L.C. (“BMP”) upon the closing of the Merger a transaction fee of $20.0 million. In consideration for ongoing consulting and management advisory services, Vanguard is required to pay to BMP an annual fee of $4.0 million. In consideration for on-going consulting and management services Vanguard is required to pay to Metalmark Subadvisor LLC (“Metalmark SA”), an affiliate of Metalmark, an annual fee of $1.2 million for the first five years and thereafter an annual fee of $600,000. In the event or in anticipation of a change of control or initial public offering, BMP may elect at any time to have Vanguard pay to BMP and Metalmark SA lump sum cash payments equal to the present value (using a discount rate equal to the yield to maturity on the date of notice of such event of the class of outstanding U.S. government bonds having a final maturity closest to the tenth anniversary of such written notice) of all then-current and future fees payable to each of BMP and Metalmark SA under the agreement (assuming that the agreement terminates on the tenth anniversary of the closing of the Merger). In the event that BMP receives any additional fees in connection with an acquisition or disposition involving Vanguard, Metalmark SA will receive an additional fee equal to 15.0% of such fees paid to BMP or, if both parties provide equity financing in connection with the transaction, Metalmark SA will receive a portion of the aggregate fees payable by Vanguard, if any, based upon the amount of equity financing provided by Metalmark SA. The transaction and monitoring fee agreement also requires Vanguard to pay or reimburse BMP and Metalmark SA for reasonable out-of-pocket expenses in connection with, and indemnify them for liabilities arising from, the engagement of BMP and Metalmark SA of independent professionals pursuant to and the performance by BMP and Metalmark SA of the services contemplated by the transaction and monitoring fee agreement. The transaction and monitoring fee agreement will remain in effect with respect to each of BMP and Metalmark SA until the earliest of (1) BMP and Metalmark SA, as the case may be, beneficially owning less than 5.0% of Vanguard’s common equity on a fully diluted basis, (2) the completion of a lump-sum payout as described above or (3) termination of the agreement upon the mutual consent of BMP and/or Metalmark SA, as the case may be, and Vanguard. Upon termination of Metalmark SA as a party to the agreement, Metalmark SA will be entitled to the excess, if any, of 15.0% of the aggregate amount of fees paid to date to BMP under the agreement minus any monitoring fees already paid to Metalmark SA.

                Under the transaction and monitoring fee agreement during fiscal year 2008, Vanguard paid to BMP the annual $4.0 million fee referred to above and reimbursed BMP approximately $1.2 million for expenses incurred by BMP on Vanguard’s behalf. BMP is an affiliate of the Blackstone Funds which own 66.0% of the equity of Vanguard.  Four of our seven directors, Messrs. Dal Bello, Muney, Quella and Simpkins, are employed by affiliates of BMP.

                Under the transaction and monitoring fee agreement during fiscal year 2008, Vanguard paid to Metalmark SA the annual $1.2 million fee referred to above. Metalmark SA is an affiliate of Metalmark Capital LLC which manages the MSCP Funds and the MSCP Funds own 17.3% of the equity of Vanguard.

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Registration Rights Agreement

                In connection with the Merger, the Company entered into a registration rights agreement with Blackstone, MSCP and other investors and the Rollover Management Investors, pursuant to which Blackstone and MSCP are entitled to certain demand registration rights and pursuant to which Blackstone, MSCP and other investors and the Rollover Management Investors are entitled to certain piggyback registration rights.

Commercial Transactions with Sponsor Portfolio Companies

                Blackstone, MSCP and Metalmark each sponsor private equity funds which have ownership interests in a broad range of companies. We have entered into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services. None of these transactions or arrangements is of great enough value to be considered material to us.

Policy on Transactions with Related Persons

                The Vanguard  board of directors recognizes the fact that transactions with related persons present a heightened risk of conflicts of interests and/or improper valuation (or the perception thereof). In February  2007, the board of directors adopted a written policy reflecting existing practices to be followed in connection with any transaction between the Company and a “related person.”

                Any transaction with the Company in which a director, executive officer or beneficial holder of more than 5% of the total equity of the Company, or any immediate family member of the foregoing (each, a "related person") has a direct or indirect material interest, and where the amount involved exceeds $120,000, must be specifically disclosed by the Company in its public filings. Any such transaction would be subject to the Company's written policy respecting the review, approval or ratification of related person transactions.

                Under this policy:

–  the Company or any of its subsidiaries may employ a related person in the ordinary course of business
 consistent with the Company's policies and practices with respect to the employment of non-related
 persons in similar positions; and

–  any other related person transaction that would be required to be publicly disclosed must be approved or ratified by the board of directors, a committee thereof or if it is impractical to defer consideration of the matter until a board or committee meeting, by a non-management director who is not involved in the transaction.

                If the transaction involves a related person who is a director or an immediate family member of a director, that director may not participate in the deliberations or vote. In approving or ratifying a transaction under this policy, the board of directors, the committee or director considering the matter must determine that the transaction is fair to the Company and may take into account, among other factors deemed appropriate, whether the transaction is on terms not less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

                During fiscal year 2008, there were no transactions between the Company and a related person requiring approval under this policy.

Director Independence

                Our board of directors has not made a formal determination as to whether each director is “independent” because we have no equity securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, which has requirements that a majority of its board of directors be independent. Six of our seven directors have either been appointed by our equity Sponsors or are employed by us (Mr. Martin, our chairman and chief executive officer). Our seventh director (Michael J. Parsons) is neither our employee or otherwise affiliated with us in any significant way. Thus, we do not believe any of our

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directors would be considered independent under the New York Stock Exchange’s definition of independence, except for Mr. Parsons.

Item 14.  Principal Accounting Fees and Services.

Fees Paid to the Independent Auditor

                    The following table presents fees for professional services rendered by Ernst & Young LLP for the audit of Vanguard’s annual financial statements for 2007 and 2008, and fees billed for audit-related services, tax services and all other services rendered by Ernst & Young LLP for 2007 and 2008.

		2007		2008
Audit fees(1)	$	834,133	$	856,929
Audit-related fees		–		–
Audit and audit-related fees		834,133		856,929
Tax fees(2)		34,316		64,263
All other fees(3)		1,870,901		1,109,572
Total fees(4)	$	2,739,350	$	2,030,764

____________________
(1)	Audit fees for 2007 and 2008 include fees for the audit of the annual consolidated financial statements, reviews of the condensed consolidated financial statements included Vanguard’s quarterly reports and statutory audits.
(2)	Tax fees for 2007 and 2008 consisted principally of fees for tax advisory services.
(3)	All other fees for 2007 and 2008 consisted of assistance in identification of Medicaid eligible days for inclusion in the Medicare cost reports for Medicare disproportionate share reimbursement; assistance in validating average wage rates in our markets used in Medicare reimbursement; assistance in preparing reports for us relating to payer matters; and assistance in preparing occupational mix survey data in accordance with CMS requirements.
(4)	Ernst & Young LLP full time, permanent employees performed all of the professional services described in this chart.

Pre-Approval Policies and Procedures

                    In February 2004, our board of directors first adopted an audit and non-audit services pre-approval policy and in November 2004 and May 2006 the board amended and restated this policy.  This policy sets forth the Board’s procedures and conditions pursuant to which services proposed to be performed by the Company’s regular independent auditor (and those other independent auditors for whom pre-approvals are legally necessary) are presented to the Board for pre-approval. Normally, the policy would have been approved by the audit committee and ratified by the board of directors, but in February 2004, November 2004 and May 2006 we had no audit committee and, as a result, the full board of directors has the responsibility for all matters that are usually the responsibility of the audit committee.

                    The policy provides that the board of directors shall pre-approve audit services, audit-related services, tax services and those other services that it believes to be routine and recurring services that do not impair the independence of the auditor.  Under the policy, our Chief Accounting Officer is responsible for determining whether services provided by the independent auditor are included as part of those services already pre-approved or whether separate approval from the board of directors is required. All services performed for us by Ernst & Young LLP, our independent registered public accounting firm, subsequent to the adoption of the policy have been pre-approved by the board of directors.  The board of directors has concluded that the audit-related services, tax services and other non-audit services provided by Ernst & Young LLP in fiscal year 2008 were compatible with the maintenance of the firm’s independence in the conduct of its auditing functions. In addition, to safeguard the continued independence of the independent auditors, the policy prevents our independent auditors from providing services to us that are prohibited under Section 10A(g) of the Securities Exchange Act of 1934, as amended.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

                    (a)       List of documents filed as part of this report.

                                (1)  Financial Statements.  The accompanying index to financial statements on page 78 of this
                                       report is provided in response to this item.

                                (2)  Financial Statement Schedules.  All schedules are omitted because the required information
                                       is either not present, not present in material amounts or presented within the consolidated
                                       financial statements.

                                (3)  Exhibits.  The exhibits filed as part of this report are listed in the Exhibit Index which is
                                       located at the end of this report.

                    (b)       Exhibits.
                                See Item 15(a)(3) of this report.

                    (c)       Financial Statement Schedules.
                                See Item 15(a)(2) of this report.

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SIGNATURES

                    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

                    VANGUARD HEALTH SYSTEMS, INC.                                     Date

                    By:  /s/ Charles N. Martin, Jr.                                                         September 23, 2008
                           Charles N. Martin, Jr.
                           Chairman of the Board & Chief Executive Officer

                    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Charles N. Martin, Jr.	Chairman of the Board & Chief Executive Officer; Director (Principal Executive Officer)	September 23, 2008
Charles N. Martin, Jr.
/s/ Phillip W. Roe	Executive Vice President, Chief Financial Officer & Treasurer (Principal Financial Officer)	September 23, 2008
Phillip W. Roe
/s/ Gary D. Willis	Senior Vice President, Controller & Chief Accounting Officer (Principal Accounting Officer)	September 23, 2008
Gary D. Willis
/s/ Michael A. Dal Bello	Director	September 23, 2008
Michael A. Dal Bello
/s/ M. Fazle Husain	Director	September 23, 2008
M. Fazle Husain
/s/ Alan M. Muney, M.D.	Director	September 23, 2008
Alan M. Muney, M.D.
/s/ Michael J. Parsons	Director	September 23, 2008
Michael J. Parsons
/s/ James A. Quella	Director	September 23, 2008
James A. Quella
/s/ Neil P. Simpkins	Director	September 23, 2008
Neil P. Simpkins

153

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.

No annual report or proxy material has been sent to security holders.

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	EXHIBIT INDEX
	Exhibit No.		Description
	2.1		Agreement and Plan of Merger, dated as of July 23, 2004, among VHS Holdings LLC, Health Systems Acquisition Corp. and Vanguard Health Systems, Inc.(1)
	2.2		First Amendment to the Agreement and Plan of Merger, dated as of September 23, 2004, among VHS Holdings LLC, Health Systems Acquisition Corp. and Vanguard Health Systems, Inc.(1)
	2.3		Indemnification Agreement, dated as of July 23, 2004, among VHS Holdings LLC, Vanguard Health Systems, Inc., and the stockholders and holders of options set forth therein(1)(3)
	3.1		Amended and Restated Certificate of Incorporation of Vanguard Health Systems, Inc.(1)
	3.2		By-Laws of Vanguard Health Systems, Inc.(10)
4.1		Indenture, relating to the 9% Senior Subordinated Notes, dated as of September 23, 2004, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee(1)
4.2		First Supplemental Indenture, dated as of November 5, 2004, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee(1)
4.3		Indenture, relating to the 11 1/4% Senior Discount Notes, dated as of September 23, 2004, among Vanguard Health Holding Company I, LLC, Vanguard Holding Company I, Inc, Vanguard Health Systems, Inc. and the Trustee(1)
4.4		Registration Rights Agreement relating to the 9% Senior Subordinated Notes, dated as of September 23, 2004, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto, Citigroup Global Markets Inc., Banc of America Securities LLC, Bear Stearns & Co., Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC and ABN AMRO Incorporated(1)
4.5		Registration Rights Agreement, relating to the 11 1/4% Senior Discount Notes, dated as of September 23, 2004, among Vanguard Health Holding Company I, LLC, Vanguard Holding Company I, Inc., Vanguard Health Systems, Inc., Citigroup Global Markets Inc., Banc of America Securities LLC, Bear Stearns & Co., Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC and ABN AMRO Incorporated(1)
4.6		Registration Rights Agreement, concerning Vanguard Health Systems, Inc., dated as of September 23, 2004(1)
4.7		Second Supplemental Indenture, dated as of March 28, 2005, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee (8)
4.8		Third Supplemental Indenture, dated as of July 13, 2006, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee (15)
4.9		Fourth Supplemental Indenture, dated as of June 25, 2007, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee(19)

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4.10	Fifth Supplemental Indenture, dated as of July 1, 2007, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee(19)
4.11	Sixth Supplemental Indenture, dated as of October 2, 2007, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the Guarantors party thereto and the Trustee (20)
10.1	Credit Agreement, dated as of September 23, 2004, among Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., Vanguard Health Holding Company I, LLC, the lenders party thereto, Bank of America, N.A. as administrative agent, Citicorp North America, Inc., as syndication agent, the other agents named therein, and Banc of America Securities LLC and Citigroup Global Markets Inc., as joint lead arrangers and book runners(1)
10.2	Security Agreement, dated as of September 23, 2004, made by each assignor party thereto in favor of Bank of America, N.A., as collateral agent(1)
10.3	Vanguard Guaranty, dated as of September 23, 2004, made by and among Vanguard Health Systems, Inc. in favor of Bank of America, N.A., as administrative agent(1)
10.4	Subsidiaries Guaranty, dated as of September 23, 2004, made by and among each of the guarantors party thereto in favor of Bank of America, N.A., as administrative agent(1)
10.5	Pledge Agreement, dated as of September 23, 2004, among each of the pledgors party thereto and Bank of America, N.A., as collateral agent(1)
10.6	Transaction and Monitoring Fee Agreement, dated as of September 23, 2004, among Vanguard Health Systems, Inc., Blackstone Management Partners IV L.L.C., and Metalmark Management LLC(1)
10.7	Amended and Restated Limited Liability Company Operating Agreement of VHS Holdings LLC, dated as of September 23, 2004(1)
10.8	Vanguard Health Systems, Inc. 2004 Stock Incentive Plan(1)(3)
10.9	VHS Holdings LLC 2004 Unit Plan(1)(3)
10.10	Vanguard Health Systems, Inc. 2001 Annual Incentive Plan(2)(3)
10.11	Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Charles N. Martin, Jr., dated as of September 23, 2004(1)(3)
10.12	Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Joseph D. Moore, dated as of September 23, 2004(1)(3)
10.13	Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Ronald P. Soltman, dated as of September 23, 2004(1)(3)
10.14	Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Keith B. Pitts, dated as of September 23, 2004(1)(3)
10.15	Form of Amended and Restated Severance Protection Agreement of Vanguard Health Systems, Inc. dated as of September 23, 2004 for Vice Presidents and above (1)(3)
10.16	Arizona Health Care Cost Containment System Administration RFP re Contract No. YH04-0001-06 with VHS Phoenix Health Plan, awarded May 1, 2003(4)

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10.17	Solicitation Amendments to RFP numbers One, Two, Three and Four and Contract Amendment No. 01 dated May 1, 2003, to Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 with VHS Phoenix Health Plan(4)
10.18	Contract Amendments Numbered 02, 03, 04 and 05, each effective October 1, 2003, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 with VHS Phoenix Health Plan(5)
10.19	Contract Amendment Number 06, executed on November 10, 2003, but effective as of October 1, 2003, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(6)
10.20	Contract Amendment Number 07, executed on April 28, 2004, but effective as of April 1, 2004, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(1)
10.21	Contract Amendment Number 08, executed on September 16, 2004, but effective as of October 1, 2004, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(1)
10.22	Contract Amendment Number 09, executed on November 4, 2004, but effective as of October 1, 2004, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(1)
10.23	Amended and Restated Agreement Between the Shareholders of VHS Acquisition Subsidiary Number 5, Inc. executed on September 8, 2004, but effective as of September 1, 2004(1)
10.24	Certificate of Designations, Preferences and Rights of Series A Preferred Stock of VHS Acquisition Subsidiary Number 5, Inc., dated as of September 8, 2004(1)
10.25	License Agreement between Baptist Health System and VHS San Antonio Partners, L.P. dated as of January 1, 2003(7)
10.26	Form of Performance Option Under 2004 Stock Incentive Plan(1)(3)
10.27	Form of Time Option Under 2004 Stock Incentive Plan(1)(3)
10.28	Form of Liquidity Event Option Under 2004 Stock Incentive Plan(1)(3)
10.29	Stockholders Agreement Concerning Vanguard Health Systems, Inc., dated as of November 4, 2004, by and among Vanguard Health Systems, Inc., VHS Holdings LLC, Blackstone FCH Capital Partners IV L.P. and its affiliates identified on the signature pages thereto and the employees identified on the signature pages thereto(1)
10.30	Amendment No. 1 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Charles N. Martin, Jr., dated as of December 1, 2004(1)(3)
10.31	Amendment No. 1 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Joseph D. Moore, dated as of December 1, 2004(1)(3)
10.32	Amendment No. 1 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Ronald P. Soltman, dated as of December 1, 2004(1)(3)

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10.33	Amendment No. 1 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Keith B. Pitts, dated as of December 1, 2004(1)(3)
10.34	Restatement dated October 22, 2004, but effective as of October 1, 2004, of Arizona Health Care Cost Containment System Administration (“AHCCCS”) Contract No. YH04-0001-06 with VHS Phoenix Health Plan, to reflect Solicitation Amendments One through Four and Contract Amendments Numbers 01 through 09 (unofficial and never executed, but prepared by AHCCCS and distributed to VHS Phoenix Health Plan for ease of contract administration)(1)
10.35	First Amendment of VHS Holdings LLC 2004 Unit Plan(3)(10)
10.36	First Amendment to Credit Agreement, dated as of August 15, 2005, among Vanguard Health Holding Company I, LLC, Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the lenders party to the Credit Agreement referred to therein, and Bank of America, N.A. as administrative agent(9)
10.37	First Amendment to Credit Agreement, dated as of August 15, 2005, among Vanguard Health Holding Company I, LLC, Vanguard Health Holding Company II, LLC, Vanguard Holding Company II, Inc., the lenders party to the Credit Agreement referred to therein, and Bank of America, N.A. as administrative agent(11)
10.38	Contract Amendment Number 10, executed on September 7, 2005, but effective as of October 1, 2005, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(12)
10.39	Contract Amendment Number 11, executed on September 7, 2005, but effective as of September 1, 2005, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(12)
10.40	Amendment No. 2 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Charles N. Martin, Jr., dated as of December 1, 2005(3)(13)
10.41	Amendment No. 2 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Joseph D. Moore , dated as of December 1, 2005(3)(13)
10.42	Amendment No. 2 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Ronald P. Soltman, dated as of December 1, 2005(3)(13)
10.43	Amendment No. 2 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Keith B. Pitts, dated as of December 1, 2005(3)(13)
10.44	Amendment No. 1, dated as of November 3, 2005, to Amended and Restated Limited Liability Company Operating Agreement of VHS Holdings LLC(13)
10.45	Amendment Number 1 to the Vanguard Health Systems, Inc. 2004 Stock Incentive Plan, effective November 28, 2005(3)(13)
10.46	Contract Amendment Number 12, executed on December 21, 2005, but effective as of January 1, 2006, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(13)
10.47	Amendment Number 2 to the Vanguard Health Systems, Inc. 2004 Stock Incentive Plan, effective February 15, 2006(3)(14)

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10.48	Amendment Number 3 to the Vanguard Health Systems, Inc. 2004 Stock Incentive Plan, effective April 15, 2006(3)(14)
10.49	Contract Amendment Number 13, executed on April 4, 2006, but effective as of October 1, 2005, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(14)
10.50	Contract Amendment Number 14, executed on April 26, 2006, but effective as of October 1, 2005, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(14)
10.51	Contract Amendment Number 15, executed on September 5, 2006, but effective as of October 1, 2006, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System (16)
10.52	Amendment Number 4 to the Vanguard Health Systems, Inc. 2004 Stock Incentive Plan, effective November 13, 2006(3)(17)
10.53	Contract Amendment Number 16, executed on April 27, 2007, but effective as of October 1, 2006, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(18)
10.54	Contract Amendment Number 17, executed on September 6, 2006, but effective as of  October 1, 2007, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System(21)
10.55	Amendment No. 3 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Charles N. Martin, Jr., dated as of October 1, 2007(3)(22)
10.56	Amendment No. 3 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Keith B. Pitts, dated as of October 1, 2007(3)(22)
10.57	Amendment No. 3 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Joseph D. Moore, dated as of October 1, 2007(3)(22)
10.58	Amendment No. 4 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Joseph D. Moore, dated as of November 7, 2007(3)(22)
10.59	Amendment No. 3 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Ronald P. Soltman, dated as of October 1, 2007(3)(22)
10.60	Employment Agreement between Vanguard Health Systems, Inc. and Kent H. Wallace dated as of November 15, 2007(3)(22)
10.61	Employment Agreement between Vanguard Health Systems, Inc. and Phillip W. Roe dated as of November 15, 2007(3)(22)
10.62	Form of Amendment No. 1 to Severance Protection Agreement dated as of October 1, 2007, entered into between Vanguard Health Systems, Inc. and each of its executive officers (other than Messrs. Martin, Pitts, Moore, Soltman, Wallace and Roe who each have entered into employment agreements with the registrant)(3)(22)

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10.63	Amendment Number 5 to the Vanguard Health Systems, Inc. 2004 Stock Incentive Plan, effective May 6, 2008(3)(23)
10.64	Letter dated May 13, 2008, from the Arizona Health Care Cost Containment System to VHS Phoenix Health Plan, LLC, countersigned by VHS Phoenix Health Plan, LLC on May 13, 2008 awarding Contract No. YH09-0001-07(24)
10.65	Waiver No. 1 dated as of May 22, 2008, to Amended and Restated Limited Liability Company Operating Agreement of VHS Holdings LLC, dated as of September 23, 2004, as amended by Amendment No. 1, dated as of November 3, 2005
10.66	Amendment No. 5 to Amended and Restated Employment Agreement between Vanguard Health Systems, Inc. and Joseph D. Moore, dated as of June 30, 2008(3)
10.67	Form of Severance Protection Agreement of Vanguard Health Systems, Inc. in current use for Vice Presidents and above(3)
10.68	Contract Amendment Number 18, executed on May 5, 2008, but effective as of  April 1, 2008, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System
10.69	Contract Amendment Number 19, executed on May 5, 2008, but effective as of  June 1, 2008, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between VHS Phoenix Health Plan and the Arizona Health Care Cost Containment System
10.70	Arizona Health Care Cost Containment System Administration RFP re Contract No. YH09-0001-07 with VHS Phoenix Health Plan, LLC awarded May 13, 2008
10.71	Solicitation Amendments to RFP numbers One, Two, Three, Four and Five dated February 29, 2008, March 14, 2008, March 26, 2008, March 28, 2008 and April 10, 2008, respectively, to Arizona Health Care Cost Containment System Administration Contract No. YH09-0001-07 with VHS Phoenix Health Plan, LLC
12.1	Computation of Ratio of Earnings to Fixed Charges
21.1	Subsidiaries of Vanguard Health Systems, Inc.
31.1	Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

____________
(1)    Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Registration Statement on Form
        S-4 first filed on November 12, 2004 (Registration No. 333-120436).

(2)    Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Registration Statement on Form
        S-1 first filed on October 19, 2001 (Registration No. 333-71934).

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(3)    Management compensatory plan or arrangement.

(4)    Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Annual Report on Form 10-K for
        the annual period ended June 30, 2003, File No. 333-71934.

(5)    Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended September 30, 2003, File No. 333-71934.

(6)    Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended December 31, 2003, File No. 333-71934.

(7)   Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K dated
       January 14, 2003, File No. 333-71934.

(8)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
       for the quarterly period ended March 31, 2005, File No. 333-71934.

(9)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K
       dated August 26, 2005, File No. 333-71934.

(10)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Annual Report on Form 10-K for
        the annual period ended June 30, 2005, File No. 333-71934.

(11)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K dated
        September 27, 2005, File No. 333-71934.

(12)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended September 30, 2005, File No. 333-71934.

(13)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended December 31, 2005, File No. 333-71934.

(14)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended March 31, 2006, File No. 333-71934.

(15)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Annual Report on Form 10-K for
        the annual period ended June 30, 2006, File No. 333-71934.

(16)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K
        dated September 8, 2006, File No. 333-71934.

(17)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended December 31, 2006, File No. 333-71934.

(18)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended March 31, 2007, File No. 333-71934.

(19) Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Annual Report on Form 10-K for
        the annual period ended June 30, 2007, File No. 333-71934.

(20)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended September 30, 2007, File No. 333-71934.

(21) Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K
        dated September 7, 2007, File No. 333-71934.

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(22)  Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Quarterly Report on Form 10-Q
        for the quarterly period ended December 31, 2007, File No. 333-71934.

(23) Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K
        dated May 9, 2008, File No. 333-71934.

(24) Incorporated by reference from exhibits to Vanguard Health Systems, Inc.’s Current Report on Form 8-K
        dated May 16, 2008, File No. 333-71934.

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EX-10.65

EXHIBIT 10.65

WAIVER NO. 1

            This Waiver No. 1 (this “Waiver”), dated as of May 22, 2008, to AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT, dated as of September 23, 2004, as amended by Amendment No 1, dated as of November 3, 2005 (collectively, the "Agreement"), concerning VHS Holdings LLC (the "Company"), a Delaware limited liability company, is entered into by and among the Investor Members (as defined in the Agreement) and the Management Members (as defined in the Agreement).

            WHEREAS, the Investor Members and the Management Members entered into the Agreement in connection with consummation of the Merger (as defined in the Agreement);

            WHEREAS,for estate planning purposes, one of the Management Members, Charles N. Martin, Jr., wishes to transfer from time to time (collectively, the “Martin GRAT Transfers”) some or all of his Class A Units (as defined in the Agreement) in the Company to one or more grantor retained annuity trusts (collectively, the “CNM GRATS”), with each such grantor retained annuity trust being expected to have Charles N. Martin, Jr. as the sole trustee;

            WHEREAS, the principal beneficiaries of each of the CNM GRATS are expected to be solely (i) Charles N. Martin, Jr., (ii) a trust for the benefit of his sister and (iii) a trust for the benefit of his issue, and since his sister and his issue are members of his Family Group (as defined in the Agreement), they each are Permitted Transferees (as defined in the Agreement) of Class A Units under the Agreement; and

            WHEREAS, Charles N. Martin, Jr. also wishes to provide in the CNM GRATS that, in the unlikely event he has no living issue at the time of the termination of any of the CNM GRATS, that the contingent beneficiary of the CNM GRATS be the Martin Foundation, a private foundation of which he is the trustee and whose grantees can only be organizations exempt from federal taxation under Section 501(c)(3) of the Code (as defined in the Agreement), but that under the Agreement the Martin Foundation is not a Permitted Transferee of Class A Units, absent this Waiver; and

            WHEREAS, the Investor Members and the Management Members wish to waive the provisions of the Agreement that prohibit the Martin Foundation from being a contingent beneficiary of the CNM GRATS and otherwise approve the Martin GRAT Transfers.

            NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the parties to this Waiver hereby agree as follows:

            1.         Capitalized Terms. Unless otherwise defined herein, capitalized terms used herein and defined in the Agreement are as defined in the Agreement.

1

            2.         Waiver.  Any and all provisions of the Agreement that prohibit the Martin  GRAT Transfers and/or the Martin Foundation from being a contingent beneficiary of the CNM GRATS are hereby waived, and each of the Martin GRAT Transfers and the Martin Foundation being a potential Transferee (as defined in the Agreement) of Class A Units from the CNM GRATS are hereby approved by the parties hereto.

            3.         Governing Law. THIS WAIVER SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES WHICH WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.

            4.         Counterparts. This Waiver may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute a single instrument.

            IN WITNESS WHEREOF, the parties hereto have executed this Waiver as of the date set forth above.

                                                VHS HOLDINGS LLC

                                                By:       /s/ Charles N. Martin, Jr.                     
                                                            Name: Charles N. Martin, Jr.
                                                            Title: Chairman & Chief Executive Officer

                                                BLACKSTONE FCH CAPITAL PARTNERS IV L.P.

                                                By:       Blackstone Management Associates IV L.L.C.,
                                                                        as a General Partner

                                                By:       /s/ Neil Simpkins                                  
                                                            Name:  Neil Simpkins
                                                            Title:     Senior Managing Director

                                                BLACKSTONE HEALTH COMMITMENT PARTNERS L.P.

                                                By:       Blackstone Management Associates IV L.L.C.,
                                                                        as a General Partner

                                                By:       /s/ Neil Simpkins                      
                                                            Name:  Neil Simpkins
                                                            Title:     Senior Managing Director

2

                                                BLACKSTONE CAPITAL PARTNERS IV – A L.P.

                                    By:       Blackstone Management Associates IV L.L.C.,
                                                                        as a General Partner

                                                By:       /s/ Neil Simplins                                   
                                                            Name:  Neil Simpkins
                                                            Title:     Senior Managing Director

                                                BLACKSTONE FAMILY INVESTMENT PARTNERSHIP IV - A L.P.

                                                By:       Blackstone Management Associates IV L.L.C.,
                                                                        as a General Partner

                                                By:       /s/ Neil Simpkins                                  
                                                            Name:  Neil Simpkins
                                                            Title:     Senior Managing Director

                                                MORGAN STANLEY CAPITAL PARTNERS III, L.P.

                                                MORGAN STANLEY CAPITAL INVESTORS, L.P.

                                                MSCP III 892 INVESTORS, L.P.

                                                By:       MSCP III, LLC,
                                                            as General Partner of each of the
                                                            limited partnerships named above

                                                By:       Metalmark Subadvisor LLC,
                                                            as attorney-in-fact

                                                By:       /s/ M. Fazle Husain                              
                                                            Name:  M. Fazle Husain
                                                            Title:     Managing Director

3

                                                MORGAN STANLEY DEAN WITTER CAPITAL
                                                PARTNERS IV, L.P.

                                                MORGAN STANLEY DEAN WITTER CAPITAL
                                                INVESTORS IV, L.P.

                                                MSDW IV 892 INVESTORS, L.P.

                                                By:       MSDW Capital Partners IV, LLC,
                                                            as General Partner of each of the
                                                            limited partnerships named above

                                                By:       Metalmark Subadvisor LLC,
                                                            as attorney-in-fact

                                                By:       /s/ M. Fazle Husain                              
                                                            Name:  M. Fazle Husain
                                                            Title:     Managing Director

                                                FOR ALL MANAGEMENT MEMBERS

                                                /s/ Charles N. Martin, Jr.                                 
                                                Charles N. Martin, Jr.,
                                                Individually and as Proxyholder for the
                                                Management Members listed on Exhibit
                                                A hereto, pursuant to Section 3.11 of the
                                                Amended and Restated Limited Liability
                                                Operating Agreement of VHS Holdings LLC

4

EXHIBIT A

Cliff Adlerz
Carol A. Bailey
Reginald M. Ballantyne, III
Jonathan Bartlett
Carole Beauchamp
James C. Bonnette, M.D.
Mary A. Botticella
Bruce Buchanan
Bruce Chafin
Carl F. & Juanita B. Chafin
Mark Clayton
Alan N. Cranford
Dave Culberson
Jack Cumber
Ray Denson
Dominic Dominguez
Bruce Eady
Roger Faculak
Pamela Farrell
Debra Flores
Richard Francis
Robert Galloway
John Geer
John Geer, a/c/f Kathleen Cates Geer
John Geer, a/c/f Alene Hawkins Geer
John Geer, a/c/f James Oliver Geer
John Geer, a/c/f Emily Kathleen Roesel
John Geer, a/c/f Cloe Marguerite Roesel
Sonja Hagel
John Harrington
Andrew Harris
Larry Hough
Hough Trust, Leslie J. Hough, Trustee, U.A. dated 3/27/98
Dennis Jacobs
John Luke McGuinness, Jr. Trust, dated 4/23/99
Jim Johnston
Victor Jordon
Steven King
Dennis Knox
Anthony C. Krayer
Anthony C. Krayer Revocable Trust
Robert M. Martin

1

Linn H. McCain
John R. McCaslin
Deborah T. McCormick
McPherson McMullan Associates, L.P.
Linda J. Mild
Elizabeth Minkoff
Joseph D. Moore
Carol Murdock
Nancy Novick
Stephen L. Page
Harold H. Pilgrim, Jr.
Harold H. Pilgrim, III
Keith Pitts
Jerry Pressley
Mark Price
Jeanette Rasmussen
Phillip W. Roe
Tracy Ann Rogers
Anne L. Sanford
Tony W. Simpson
Angela Skalla
Gene A. Smith
Ronald P. Soltman
Neal Somaney
James H. Spalding
Shelly Stocker
Keith L. Swinney
Alan G. Thomas
Suzanne Towry
Michael Brooks Turkel
Davis W. Turner
Kent H. Wallace
Nicke Lynn Waters
Thomas M. Ways
William V.B. Webb
Beverly F. Weber
Baptist Health Services

2

EX-10.66

EXHIBIT 10.66

AMENDMENT NO. 5
TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT

            This Amendment No. 5 (this “Amendment’) to Amended and Restated Employment Agreement, dated as of June 30, 2008, but effective as of July 1, 2008 (the “Effective Date”), is made by and between Vanguard Health Systems, Inc., a Delaware corporation (the “Company”), and Joseph D. Moore (the “Executive”).

            WHEREAS, the Company and the Executive executed a certain Amended and Restated Employment Agreement dated as of September 23, 2004; as amended by Amendment No. 1 dated as of December  1, 2004; as further amended by Amendment No. 2 dated as of December 1, 2005; as further amended by Amendment No. 3 dated as of October 1, 2007 but such Amendment No. 3 effective as of December 31, 2007;  and as further amended by Amendment No. 4 dated as of November 7, 2007 (collectively, the “EA”),  to secure the services of the Executive initially  as the Company’s Chief Financial Officer, Treasurer and Executive Vice President and on and after November 7, 2007, as  an Executive Vice President of the Company; and

            WHEREAS, the Company and the Executive wish to further amend the EA to reflect the Executive’s wish to reduce his hourly commitment of employment services to the Company under the EA.

            NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree that the EA is further amended as follows, such amendments effective as of the Effective Date:

            1.         Defined Terms.  Except for those terms defined above, the definitions of capitalized terms used in this Amendment are as provided in the EA.

            2.         Amendment to Section 4.  Section 4 of the EA entitled “Duties and Reporting Relationship” is hereby amended by adding the following new sentence at the end thereof:

                        The term “full time basis”, as used in the previous sentence of this Section
                        4 shall mean 1,664 hours per year (or an average of 32 hours per week).

            3          Amendment to Section 6(a).  Section 6(a) of the EA entitled “Base Salary” is hereby deleted and replaced with the following new Section 6(a):

                        (a).  Base Salary.  Commencing July 1, 2008, the Executive’s base salary
                        hereunder shall be $466,796 per year, payable semi-monthly. The Board
                        shall review such base salary at least annually and make such adjustments
                        from time to time as it may deem advisable, but the base salary shall not at

1

                        any time be reduced from the base salary in effect from time to time on
                        and July 1, 2008.

              4.        Amendment to Subsection (i) of Section 10(d).  The number “$550,000” found at the end of Subsection (i) of Section 10(d) of the EA (which Section 10(d) is entitled “Termination by the Executive”) is hereby deleted and replaced with the number “$466,796”.

            5.         Ratification.  All other provisions of the EA remain unchanged and are hereby ratified by the Company and the Executive.

            IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its duly authorized officer and the Executive has executed this Amendment, each as of the day and year first set forth above.

                                                                        Vanguard Health Systems, Inc.

                                                                        By:       /s/ Ronald P. Soltman              
                                                                                    Ronald P. Soltman
                                                                                    Executive Vice President

                                                                        Executive:

/s/ Joseph D. Moore                            
                                                                        Joseph D. Moore

2

EX-10.67

EXHIBIT 10.67

FORM OF SEVERANCE PROTECTION AGREEMENT

            THIS SEVERANCE PROTECTION AGREEMENT(this “Agreement”) dated as of ______________, is made by and between Vanguard Health Systems, Inc., a Delaware corporation (the “Company”), ______________________(the “Executive”)

            WHEREAS, the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel;

            WHEREAS, the Board of the Company (the “Board”) recognizes that the possibility of a Change in Control (as defined in the last Section hereof) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and

            WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control.

            NOW THEREFORE, in consideration of the promises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:

            1.         Defined Terms.  Except for those terms defined above, the definition of capitalized terms used in this Agreement is provided in the last Section hereof.

            2.         Term of Agreement.  This Agreement shall commence on the date hereof and shall continue in effect through December 31, 2008; provided, however, that commencing on January 1, 2009 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company shall have given notice not to extend this Agreement; and provided however, that if a Change in Control shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of not less than thirty-six (36) months beyond the month in which such Change in Control occurred.  Furthermore, if the Executive’s employment with the Company shall be terminated prior to a Change in Control, this Agreement shall automatically expire.

            3.         Company’s Covenants Summarized.  In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive’s covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments described in Section 6.1 hereof and the other payments and benefits described herein in the event the Executive’s employment with the Company is terminated following a Change in Control and during the term of this Agreement.  No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive’s employment with the Company following a Change in Control.  This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing

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between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.

            4.         The Executive’s Covenants.  The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive’s employment for Good Reason (determined by treating the Potential Change in Control as a Change in Control in applying the definition of Good Reason), or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive’s employment for any reason.

            5.         Compensation Other Than Severance Payments.

                        5.1       Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive’s full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive’s full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive’s employment is terminated by the Company for Disability.

                        5.2       If the Executive’s employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive’s full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period.

                        5.3       If the Executive’s employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any incentive plan but has not yet been paid (pursuant to Section 5.2 hereof or otherwise), and (ii) a pro rata portion to the Date of Termination of the value of any contingent incentive compensation award to the Executive for all uncompleted periods under the plan for the year (or other measuring period) in which the Date of Termination occurs calculated by multiplying the target amount the Executive could have earned under such plan by a fraction, the numerator of which is the number of full months the Executive was employed by the Company during the fiscal year of the Company in which the Date of Termination occurs and the denominator of which is 12.

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                        5.4       If the Executive’s employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive’s normal post-termination compensation and benefits to the Executive as such payments become due.  Such post-termination compensation and benefits shall be determined under, and paid in accordance with the provisions of, the Company’s compensation or benefit plans, programs and arrangements.

            6.         Severance Payments.

                        6.1       Subject to Section 6.2 hereof, the Company shall pay the Executive the payments described in this Section 6.1 (the “Severance Payments”) upon the termination of the Executive’s employment following a Change in Control and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason.  To be a valid termination of employment by the Executive under this Agreement for Good Reason, the date of the actual termination of the Executive’s employment due to any of the Good Reason acts or conditions set forth in Sections 14.11(a) through 14.11(f) below must occur within a period of two years following the initial existence of such Good Reason act or condition which arose without the consent of the Executive.  The Executive’s employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason if the Executive’s employment is terminated prior to a Change in Control without Cause at the direction of a Person who (i) has entered into an agreement with the Company the consummation of which will constitute a Change in Control or (ii) has caused a Potential Change in Control to occur, or if the Executive terminates his employment with Good Reason prior to a Change in Control (determined by treating a Potential Change in Control as a Change in Control in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the direction of such Person.

                                    (a)        In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to [200%][250%]of the sum of (i) the higher of the Executive’s annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or in effect immediately prior to the Change in Control, and (ii) the higher of the target amount which the Executive could have earned under the Company’s annual incentive plan in the year in which the Date of Termination occurs or such target amount in the year in which the Change in Control occurs.

                                    (b)        For an eighteen (18) month period after the Date of Termination, the Company shall, at its cost (provided that Executive shall continue to be responsible to pay the standard employee portion of such cost), arrange to provide the Executive with life, disability, accident, health and dental insurance benefits substantially similar to those which the Executive is receiving immediately prior

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to the Notice of Termination (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction constitutes Good Reason).  Benefits otherwise receivable by the Executive pursuant to this Section 6.1(b) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive by a new employer of the Executive without cost during the eighteen (18) month period following the Executive’s termination of employment (and any such benefits actually received by the Executive shall be reported to the Company by the Executive).  If the benefits provided to the Executive under this Section 6.1(b) shall result in a decrease, pursuant to Section 6.2, in the Severance Payments and these Section 6.1(b) benefits are thereafter reduced pursuant to the immediately preceding sentence because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (A) the amount of the decrease made in the Severance Payments pursuant to Section 6.2, or (B) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of Section 280G of the Code.

                        6.2       Notwithstanding any other provisions of this Agreement (except the provisions of Section 6.5 below), in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called “Total Payments”) would not be deductible (in whole or part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of Section 280G of the Code, then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement), (A) the cash Severance Payments shall first be reduced (if necessary, to zero), and (B) all other non-cash Severance Payments shall next be reduced (if necessary, to zero).  For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company’s independent auditors and reasonably acceptable to the Executive does not constitute a “parachute payment” within the meaning of Section 280G(b)(2) of the Code, including by reason of Section 280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company’s independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code.

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                        If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 6.2, the aggregate “parachute payments” paid to or for the Executive’s benefit are in an amount that would result in any portion of such “parachute payments” not being deductible by reason of Section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the excess of the aggregate “parachute payments” paid to or for the Executive’s benefit over the aggregate “parachute payments” that could have been paid to or for the Executive’s benefit without any portion of such “parachute payments” not being deductible by reason of Section 280G of the Code.

                        6.3       The payments provided for in Section 6.1 (other than Section 6.1(b)) hereof shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination.  In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall be paid by the Executive to the Company, no later than the thirtieth (30th) business day after demand by the Company. At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

                        6.4       Following a Change in Control (or a termination described in the second sentence of Section 6.1), the Company also shall pay to the Executive all legal fees and related expenses (including costs of experts, evidence and counsel) incurred by the Executive as a result of any dispute in connection with a termination of the Executive’s employment, whether or not such dispute is resolved in the Executive’s favor, but only if the dispute is pursued by the Executive in good faith (including all such fees and expenses, if any, incurred in respect of a dispute relating to any such termination or in the Executive seeking in good faith to obtain or enforce any benefit or right provided by this Agreement (or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits) or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder).  Such payments shall be made to the Executive within five (5) business days after delivery of the Executive’s written requests for payment accompanied by evidence of fees and expenses incurred.

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            7.         Termination Procedures and Compensation During Dispute.

                        7.1       Notice of Termination.  After a Change in Control and during the term of this Agreement, any purported termination of the Executive’s employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof.  For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision or provisions in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated.  In respect of a Notice of Termination sent by the Executive as  a result of any of the Good Reason acts or conditions set forth in Sections 14.11(a) through 14.11(f) below, it  must be sent by the Executive to the Company within 90 days following the initial existence of such Good Reason act or condition which arose without the consent of the Executive and if not sent within such 90 days, it shall not be a valid Notice of Termination.

                        7.2       Date of Termination.  “Date of Termination”, with respect to any purported termination of the Executive’s employment after a Change in Control and during the term of this Agreement, shall mean (i) if the Executive’s employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties during such thirty (30) day period), and (ii) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than thirty (30) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided, that in the case of a termination for Cause, nothing herein shall prevent the Company from immediately terminating the Executive’s employment, so long as the Company continues to meet all of its responsibilities hereunder with respect to payment of salary, benefits and other obligations during the minimum notice period described in this Section 7.2 (and for purposes of measuring such obligations, the Date of Termination shall be deemed to be the end of such minimum notice period).

                        7.3       Dispute Concerning Termination.  If within fifteen (15) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the dispute shall be resolved promptly, either by mutual written agreement of the parties or by a final court judgment or order.  Any court action brought by a party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Davidson County, in the State of Tennessee, and the parties hereto hereby consent to the jurisdiction of such courts.

                        7.4       Interest After Dispute Settled.  If a purported termination occurs following a Change in Control and during the term of this Agreement, and such termination is disputed in accordance with Section 7.3 hereof, then if such dispute is resolved by

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payment to the Executive of any cash payment, the Company shall in addition pay the Executive interest at 10% per annum on all such cash ultimately paid to the Executive as a result of settlement of any such dispute from the Date of Termination.

            8.         No Mitigation.  The Company agrees that, if the Executive’s employment by the Company is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6.  Further, the amount of any payment or benefit provided for in Section 6 (other than Section 6.1(b)) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

            9.         Successors; Binding Agreement.

                        9.1       In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company (the “Successor”) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided if the Company is acquired by merger with a subsidiary of a Person, then such Person shall be the Successor unless such Person principally does its hospital management business in such subsidiary or in another subsidiary of such Person in which case the subsidiary principally doing the hospital management company business of the Person shall be the Successor.  Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession, after notice by the Executive to the Company and, if practicable, a reasonable opportunity to cure such failure, shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive’s employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

                        9.2       This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.  If the Executive shall die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive’s estate.

            10.       Notices.  For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by United States certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other

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address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

                        To the Company:

                        Vanguard Health Systems, Inc.
                        20 Burton Hills Boulevard
                        Suite 100
                        Nashville, TN  37215
                        Attention:  Chief Executive Officer

                        with a copy to:

                        VHS Holdings LLC
                        c/o Blackstone Management Associates IV LLC
                        345 Park Avenue
                        New York, NY 10154
                        Attention: Neil Simpkins

                        and a copy to:

                        Simpson Thacher & Bartlett LLP
                        425 Lexington Avenue
                        New York, NY 10017-3954
                        Attention: Brian Robbins

                        To the Executive:

                        ______________
                        ______________
                        ______________

            11.       Miscellaneous.  No provision of this Agreement may be modified, waived or discharged (collectively a “Waiver”) unless the Waiver is agreed to in writing and signed by the Executive and an officer of the Company and sets forth in reasonable detail the facts and circumstances which are the subject of the Waiver.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.  The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennessee, without regard to such state’s conflict of laws rules.  All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections.  Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional

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withholding to which the Executive has agreed.  The obligations of the Company and the Executive under Sections 6 and 7 shall survive the expiration of the term of this Agreement.

            12.       Validity.  The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

            13.       Counterparts.  This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

            14.       Definitions.  For purposes of this Agreement, the following terms shall have the meanings indicated below:

                        14.1     “Beneficial Owner” shall have the meaning defined in Rule 13d-3 under the Exchange Act.

                        14.2     “Cause” for termination by the Company of the Executive’s employment, after any Change in Control, shall mean (i) the conviction of the Executive, by a court of competent jurisdiction and following the exhaustion of all possible appeals, of a criminal act classified as a felony or involving moral turpitude, (ii) the willful and continued failure by the Executive to substantially perform the Executive’s duties with the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) after a written demand for substantial performance is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has not substantially performed the Executive’s duties, or (iii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise.  For purposes of clauses (ii) and (iii) of this definition, no act, or failure to act, on the Executive’s part shall be deemed “willful” unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company.

                        14.3     “Board” shall mean the Board of Directors of the Company.

                        14.4     A “Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:

                                    (a)        any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding voting securities; or

                                    (b)        during any period of not more than two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other

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than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this paragraph) whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or

                                    (c)        the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing, directly or indirectly, to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity), 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation in which no Person acquires 50% or more of the combined voting power of the Company’s then outstanding securities; and (B) immediately after the consummation of such merger or consolidation described in clause (A)(i) or (A)(ii) above (and for at least 180 days thereafter) any one of the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer do not change from the people occupying such positions immediately prior to such merger or consolidation except as a result of their death or Disability and none of such officers shall have changed prior to such merger or consolidation at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or who has caused a Potential Change in Control to occur; or

                                    (d)        the shareholders of the Company approve (A) a plan of complete liquidation of the Company or (B) an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets (or other transaction having a similar effect); or

                                    (e)        any Potential Change in Control occurs and the Company within one (1) year thereafter gives notice to the Executive not to extend this Agreement as provided in Section 2.

            For purposes of Section 14.4(a), 14.4(c), and 14.4(d)(B) of this Agreement only, the “Company” shall mean any of Vanguard Health Systems, Inc., Vanguard Health Holding Company I, LLC, or Vanguard Health Holding Company II, LLC; provided that, any reorganization involving solely the “Company” and its subsidiaries shall not constitute a change in control under this agreement.  Notwithstanding any provision under Section 14.4 of this Agreement, a Change in Control shall not include any transaction where (i) all of the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer do not change both immediately after the Change in Control and for at least 180 days thereafter except as a result of their death or Disability and (ii) none of

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such officers shall have changed prior to the Change in Control at the direction of a Person who has entered into an agreement with the Company the consummation of which will constitute a Change in Control or who has caused a Potential Change in Control to occur.

                        14.5     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

                        14.6     “Company” shall mean Vanguard Health Systems, Inc. and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise including, without limitation, any Person required to assume this Agreement as the Successor pursuant to Section 9.1 (except in determining, under Section 14.4 hereof, whether or not any Change in Control of the Company has occurred in connection with such succession).

                        14.7     “Date of Termination” shall have the meaning stated in Section 7.2 hereof.

                        14.8     “Disability” shall be deemed the reason for the termination by the Company of the Executive’s employment, if, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive’s duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive’s duties.

                        14.9     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

                        14.10   “Executive” shall mean the individual named in the first paragraph of this Agreement.

                        14.11   “Good Reason” for termination by the Executive of the Executive’s employment shall mean the occurrence (without the Executive’s express written consent) of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:

                                    (a)        a material diminution in the Executive’s base compensation, except for across-the-board salary reductions similarly affecting all senior executives of the Company  and all senior executives of any Person in control of the Company;

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                                    (b)        a material diminution in the Executive’s authority, duties or responsibilities;

                                    (c)        a material diminution in the authority, duties or responsibilities of the supervisor to whom the Executive is required to report, including a requirement that the Executive’s supervisor report to a corporate officer or employee instead of reporting directly to the Board of Directors of the Company;

                                    (d)        a material diminution in the budget over which the Executive retains authority;

                                    (e)        a material change in the geographic location at which the Executive must perform services, except for required travel on the Company’s business to an extent substantially consistent with his business travel obligations prior to the Change in Control; or

                                    (f)         any other action or inaction that constitutes a material breach by the Company of the terms of this Agreement.

            The Executive’s right to terminate the Executive’s employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness, unless Executive shall have incurred a Disability; provided, that the temporary assignment of the Executive’s responsibilities to another employee of the Company during the period of the Executive’s incapacity shall not itself constitute Good Reason.  The Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.

                        14.12   “Notice of Termination” shall have the meaning stated in Section 7.1 hereof.

                        14.13   “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) any entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company’s common stock, (v) any person or entity that is a stockholder of the Company as of the date hereof and any affiliates of such person or entity, or (vi) Blackstone (as defined in the Company’s 2004 Stock Incentive Plan) or its affiliates.

                        14.14   “Potential Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:

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                                    (a)        the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

                                    (b)        the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

                                    (c)        any Person who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company’s then outstanding securities increases such Person’s beneficial ownership of such securities by 5% or more of the combined voting power of the Company’s then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company); or

                                    (d)        the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

                        14.15   ‘Retirement” shall be deemed the reason for the termination by the Company or the Executive of the Executive’s employment if such employment is terminated in accordance with the Company’s retirement policy or qualified retirement plan, not including early retirement, generally applicable to its salaried employees, as in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive’s consent with respect to the Executive.

                        14.16   “Severance Payments” shall mean those payments described in Section 6.1 hereof.

                        14.17   “Successor” is defined in Section 9.1.

                        14.18   “Total Payments” shall mean those payments described in Section 6.2 hereof.

                        “14.19  “Waiver” is defined in Section 11.

[Remainder of this page intentionally left blank]

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            IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement, each as of the day and year first set forth above.

                                                                        VANGUARD HEALTH SYSTEMS, INC.

                                                                        By:                                                                  
                                                                                    Ronald P. Soltman
                                                                                    Executive Vice President

                                                                        EXECUTIVE:

                                                                                                                                               
                                                                        Name

14

EX-10.68

EXHIBIT 10.68

ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION
DIVISION OF BUSINESS AND FINANCE
CONTRACT AMENDMENT

1. AMENDMENT NUMBER:     18	2.  CONTRACT NO.:      YH04-0001-06	3.  EFFECTIVE DATE OF MODIFICATION:      April 1, 2008	4.  PROGRAM:      DHCM-ACUTE
5. CONTRACTOR/PROVIDER NAME AND ADDRESS: Phoenix Health Plan, LLC 7878 North 16th Street, Suite 105 Phoenix, Arizona  85020
6. PURPOSE:  To amend Sections B Capitation Rates; Section C, Definitions; Section D, Program Requirements; Section F, Index of Section D; Attachment B, Minimum Network Standards; Attachment G, Auto Assignment Algorithm; and Attachment H(1), Enrollee Grievance System Standards and Policy.

7.	The above referenced contract is amended as follows:
	A.	SECTION B, CAPITATION RATES-See Contract B for specifics.
	B.	SECTION C, DEFINITIONS-For Liable Party and Third Party Liability
	C.	SECTION D, PROGRAM REQUIREMENTS-See Contract Section D. for specifics.
	D.	SECTION F, INDEX OF SECTION D-Reserved Section
	E.	ATTACHMENT B, MINIMUM NETWORK STANDARDS-Removed reference to Hospital Subcontracting and Reimbursement PILOT Program.
	F.	ATTACHMENT G, AUTO ASSIGNMENT ALGORITUM-Added language clarifying algorithm considerations for the end of the Contract term
	G.	ATTACHMENT H(1), ENROLLEE GRIEVANCE SYSTEM STANDARDS AND POLICY-Amended #20 to read that all notifications to providers must be in writing.

NOTE:  Please sign, date and return one original to:
Philip Baldwin
AHCCCS Contracts and Purchasing
701 E Jefferson Street, MD 5700
Phoenix, AZ  85034

8. EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT NOT HERETOFORE CHANGED AND/OR AMENDED REMAIN UNCHANGED AND IN FULL EFFECT. IN WITNESS WHEREOF THE PARTIES HERETO SIGN THEIR NAMES IN AGREEMENT.
9. NAME OF CONTRACTOR:     Phoenix Health Plan, LLC	10. ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
SIGNATURE OF AUTHORIZED INDIVIDUAL: /s/ Nancy Novick                                    NANCY NOVICK CHIEF EXECUTIVE OFFICER	SIGNATURE: /s/ Michael Veit                                        MICHAEL VEIT CONTRACTS & PURCHASING ADMINISTRATOR
DATE:  5/5/08	DATE:  APR 23, 2008

EX-10.69

EXHIBIT 10.69

ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION
DIVISION OF BUSINESS AND FINANCE
CONTRACT AMENDMENT

1. AMENDMENT NUMBER:     19	2.  CONTRACT NO.:      YH04-0001-06	3.  EFFECTIVE DATE OF MODIFICATION:      June 1, 2008	4.  PROGRAM:      DHCM-ACUTE
5. CONTRACTOR/PROVIDER NAME AND ADDRESS: Phoenix Health Plan, LLC 7878 North 16th Street, Suite 105 Phoenix, Arizona  85020
6. PURPOSE:  To amend Sections B Capitation Rates; Section D, Program Requirements.

7.	The contract referenced above is amended as follows:
	A.	ADD to Section B, CAPITATION RATES after first subparagraph add the following language:
		“The Contractor will be paid the attached Contractor specific capitation rates retroactively, per member per month, for the period of October 1, 2007 through December 31, 2007. Only the impacted rates are included on the attachment. All other rates remain unchanged. The Administration requires that the Contractor then make one-time payments to each rural hospital as prescribed on the attached schedule, pursuant to ARS §36-2905.02, to increase inpatient reimbursement to these small rural hospitals
		The retroactive capitation rate payment will be paid in June 2008. The Contractor shall make the prescribed payments to the rural hospitals by June 30, 2008 and submit proof of payment to the rural hospitals to the Assistant Director for the Finance Unit of the Division of Health Care Management by July 18, 2008.
		The capitation rates for the period January 1, 2008, through September 30, 2008, are not impacted by this amendment.”
	B.	AMENDSection D. ¶3, ENROLLMENT AND DISENROLLMENT, last two sentences of first subparagraph under the heading Health Plan Choice should now read as follows:
		“Once assigned, AHCCCS send a choice notice to the member and gives them 30 days to choose a different contractor from the auto-assigned contractor. See Section D, Paragraph 6, Auto-Assignment Algorithm, for further explanation.”
	C.	AMENDSection D. ¶3, ENROLLMENT AND DISENROLLMENT, last sentence of fifth subparagraph under the heading Health Plan Choice should read as follows:
		“The member may then change plans no later than 30 days from the date the choice notice is sent.”
	D.	AMENDSection D. ¶6, AUTO-ASSIGNMENT ALGORITHM, first sentence of first subparagraph should now read as follows:
		“Once auto-assigned, AHCCCS sends a choice notice to member and gives them 30 days to choose a different contractor from the auto-assigned contractor.”

-1-

NOTE:  Please sign, date and return one original to:
Philip Baldwin
AHCCCS Contracts and Purchasing
701 E Jefferson Street, MD 5700
Phoenix, AZ  85034

8. EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT NOT HERETOFORE CHANGED AND/OR AMENDED REMAIN UNCHANGED AND IN FULL EFFECT. IN WITNESS WHEREOF THE PARTIES HERETO SIGN THEIR NAMES IN AGREEMENT.
9. NAME OF CONTRACTOR:     Phoenix Health Plan, LLC	10. ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
SIGNATURE OF AUTHORIZED INDIVIDUAL: /s/ Nancy Novick                                    NANCY NOVICK CHIEF EXECUTIVE OFFICER	SIGNATURE: /s/ Michael Veit                                        MICHAEL VEIT CONTRACTS & PURCHASING ADMINISTRATOR
DATE:  5/5/08	DATE:

-2-

EX-10.70

EXHIBIT 10.70

[AHCCCS
LOGO]  Notice of Request for Proposal
  SOLICITATION NO.: YH09-0001 PAGE 
1 
OF 
175 
(AHCCCS)
  Arizona Health Care Cost
Containment System
  701 East Jefferson, MD 5700
  Phoenix, Arizona 85034

SECTION A: SOLICITATION, OFFER AND AWARD

Solicitation Contact Person:

Michael Veit                                                                          Telephone: (602) 417-4762
Contracts and Purchasing Section                                    Telefax: (602) 417-5957
701 E. Jefferson, MD5700                                                   E-Mail: Michael.Veit@azahcccs.gov
Phoenix, Arizona 85034                                                       Issue Date: February 1, 2008

LOCATION:        ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION
(AHCCCS)

                                Contracts and Purchasing Section (First Floor)
                                701 E. Jefferson, MD5700
                                Phoenix, Arizona 85034

DESCRIPTION:                                    ACUTE CARE SERVICES
PROPOSAL DUE DATE:                    March 28, 2008 AT 3:00 P.M. MST

Offeror’s Conference:
A Prospective Offeror’s Conference and Technical Assistance Session has been scheduled on February 11, 2008 from 8:30 AM to 12:00 PM, and a Information Technology (IT) PMMIS Technical Interface Meeting from 1:00 PM to 5:00 PM. in the Gold Room, at AHCCCS, 701 E. Jefferson, Phoenix, AZ 85034.

Persons with a disability may request a reasonable accommodation, such as a sign language interpreter, by contacting the person named above. Requests should be made as early as possible to allow time to arrange the accommodation.

QUESTIONS CONCERNING THIS SOLICITATION SHALL BE SUBMITTED IN THE FORMAT DESCRIBED IN SECTION I, INSTRUCTIONS TO OFFERORS, TO THE SOLICITATION CONTACT PERSON NAMED ABOVE, IN WRITING VIA E-MAIL ONLY BY 5:00 PM ON FEBRUARY 15, 2008.

Competitive sealed proposals will be received at the above specified location, until the time and date cited. Proposals received by the correct time and date will be opened and the name of each offeror will be publicly read.

Proposals must be in the actual possession of AHCCCS on or prior to the time and date and at the location indicated above. Late proposals shall not be considered.

Proposals must be submitted in a sealed envelope or package with the Solicitation Number and the offeror’s name and address clearly indicated on the envelope or package. All proposals must be typewritten. Additional instructions for preparing a proposal are included in this solicitation document.

OFFERORS ARE STRONGLY ENCOURAGED TO CAREFULLY READ THE ENTIRE SOLICITATION.

OFFER

The undersigned Offeror hereby agrees to provide all services in accordance with the terms and requirements stated herein, including all exhibits, amendments, and final proposal revisions (if any). Signature also acknowledges receipt of all pages indicated in the Table of Contents.

Arizona Transaction (Sales) Privilege Tax License No.:                N/A
Federal Employer Identification No.:                                                62-1831567
E-Mail Address: Fax:                                                                           nnovick@abrazohealth.com
VHS Phoenix Health Plan, LLC
7878 North 16^th Street, Suite 105
Phoenix, AZ  85020

For clarification of this offer, contact:                                              Nancy Novick
                                                                                                                Phone: 602-824-3810
                                                                                                                Fax: 602-824-3857
                                                                                                                /s/ Nancy Novick                                                
                                                                                                                Signature of Person Authorized to Sign Offer
                                                                                                                Nancy Novick, CEO

CERTIFICATION
By signature in the Offer section above, the bidder certifies:

1.    The submission of the offer did not involve collusion or other anti-competitive practices.
2.    The bidder shall not discriminate against any employee or applicant for employment in violation of Federal Executive
       Order 11246, State Executive Order 99-4 or A.R.S. §§ 41-1461 through 1465.
3.    The bidder has not given, offered to give, nor intends to give at any time hereafter any economic opportunity, future
       employment, gift, loan, gratuity, special discount, trip, favor, or service to a public servant in connection with the
       submitted offer. Failure to provide a valid signature affirming the stipulations required by this clause shall result in
       rejection of the offer. Signing the offer with a false statement shall void the offer, any resulting contract and may be
       subject to legal remedies provided by law.
4.    The bidder certifies that the above referenced organization ___ is/ X  is not a small business with less than 100
       employees or has gross revenues of $4 million or less.

ACCEPTANCE OF OFFER (to be completed by AHCCCS)

Your offer, including all exhibits, amendments and final proposal revisions (if any), contained herein, is accepted.

The Contractor is now bound to provide all services listed by the attached contract and based upon the solicitation, including all terms, conditions, specifications, amendments, etc., and the Contractor’s Offer as accepted by AHCCCS.

This contract shall henceforth be referred to as Contract No.YH09 - 0001

Awarded this 1^st day of May 2008

/s/ Michael Veit                                                   
Michael Veit, as AHCCCS Contracting Officer and not personally

TABLE OF CONTENTS

SECTION B: CAPITATION RATES...........................................................................................................................
SECTION C: DEFINITIONS.........................................................................................................................................
SECTION D: PROGRAM REQUIREMENTS.............................................................................................................
INTRODUCTION...........................................................................................................................................................
        1.  TERM OF CONTRACT AND OPTION TO RENEW..................................................................................
        2.  ELIGIBILITY CATEGORIES............................................................................................................................
        3.  ENROLLMENT AND DISENROLLMENT....................................................................................................
        4.  ANNUAL ENROLLMENT CHOICE..............................................................................................................
        5.  ENROLLMENT AFTER CONTRACT AWARD..........................................................................................
        6.  AUTO-ASSIGNMENT ALGORITHM...........................................................................................................
        7.  AHCCCS MEMBER IDENTIFICATION CARDS........................................................................................
        8.  MAINSTREAMING OF AHCCCS MEMBERS............................................................................................
        9.  TRANSITION OF MEMBERS........................................................................................................................
        10. SCOPE OF SERVICES.....................................................................................................................................
        11. SPECIAL HEALTH CARE NEEDS................................................................................................................
        12. BEHAVIORAL HEALTH SERVICES............................................................................................................
        13. AHCCCS GUIDELINES, POLICIES AND MANUALS..............................................................................
        14. MEDICAID SCHOOL BASED CLAIMING PROGRAM (MSBC)............................................................
        15. PEDIATRIC IMMUNIZATIONS AND THE VACCINES FOR CHILDREN  PROGRAM.....................
        16. STAFF REQUIREMENTS AND SUPPORT SERVICES.............................................................................
        17. WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS.........................................................
        18. MEMBER INFORMATION...........................................................................................................................
        19. SURVEYS..........................................................................................................................................................
        20. CULTURAL COMPETENCY.........................................................................................................................
        21. MEDICAL RECORDS.....................................................................................................................................
        22. ADVANCE DIRECTIVES...............................................................................................................................
        23. QUALITY MANAGEMENT (QM)...............................................................................................................
        24. MEDICAL MANAGEMENT (MM)..............................................................................................................
        25. ADMINISTRATIVE PERFORMANCE STANDARDS..............................................................................
        26. GRIEVANCE SYSTEM....................................................................................................................................
        27. NETWORK DEVELOPMENT........................................................................................................................
        28. PROVIDER AFFILIATION TRANSMISSION............................................................................................
        29. NETWORK MANAGEMENT.......................................................................................................................
        30. PRIMARY CARE PROVIDER  STANDARDS............................................................................................
        31. MATERNITY CARE PROVIDER STANDARDS........................................................................................
        32. REFERRAL MANAGEMENT PROCEDURES AND STANDARDS.......................................................
        33. APPOINTMENT STANDARDS...................................................................................................................
        34. FEDERALLY QUALIFIED HEALTH CENTERS AND RURAL HEALTH CLINICS.............................
        34. FEDERALLY QUALIFIED HEALTH CENTERS AND RURAL HEALTH CLINICS.............................
        35. PROVIDER MANUAL....................................................................................................................................
        36. PROVIDER REGISTRATION.........................................................................................................................
        37. SUBCONTRACTS...........................................................................................................................................
        38. CLAIMS PAYMENT/HEALTH INFORMATION SYSTEM ....................................................................
        39. SPECIALTY CONTRACTS............................................................................................................................
        40. HOSPITAL SUBCONTRACTING AND REIMBURSEMENT..................................................................
        41. RESPONSIBILITY FOR NURSING FACILITY REIMBURSEMENT........................................................
        42. PHYSICIAN INCENTIVES/PAY FOR PERFORMANCE ..........................................................................
        43. MANAGEMENT SERVICES AGREEMENT AND COST ALLOCATION PLAN.................................
        44. RESERVED........................................................................................................................................................
        45. RESERVED........................................................................................................................................................
        46. PERFORMANCE BOND OR BOND SUBSTITUTE...................................................................................
        47. AMOUNT OF PERFORMANCE BOND......................................................................................................
        48. ACCUMULATED FUND DEFICIT ..............................................................................................................
        49. ADVANCES, DISTRIBUTIONS, LOANS AND INVESTMENTS............................................................
        50. FINANCIAL VIABILITY STANDARDS ....................................................................................................
        51. SEPARATE INCORPORATION....................................................................................................................
        52. MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP .......................................................
        53. COMPENSATION...........................................................................................................................................
        54. PAYMENTS TO CONTRACTORS...............................................................................................................
        55. CAPITATION ADJUSTMENTS ..................................................................................................................
        56. RESERVED........................................................................................................................................................
        57. REINSURANCE...............................................................................................................................................
        58. COORDINATION OF BENEFITS..................................................................................................................
        59. COPAYMENTS ...............................................................................................................................................
        60. MEDICARE SERVICES AND COST SHARING ........................................................................................
        61. MARKETING ..................................................................................................................................................
        62. CORPORATE COMPLIANCE.......................................................................................................................
        63. RECORDS RETENTION.................................................................................................................................
        64. DATA EXCHANGE REQUIREMENTS .......................................................................................................
        65. ENCOUNTER DATA REPORTING .............................................................................................................
        66. ENROLLMENT AND CAPITATION TRANSACTION UPDATES........................................................
        67. PERIODIC REPORT REQUIREMENTS........................................................................................................
        68. REQUESTS FOR INFORMATION................................................................................................................
        69. DISSEMINATION OF INFORMATION......................................................................................................
        70. OPERATIONAL AND FINANCIAL READINESS REVIEWS..................................................................
        71. OPERATIONAL AND FINANCIAL REVIEWS..........................................................................................
        72. SANCTIONS....................................................................................................................................................
        73. BUSINESS CONTINUITY AND RECOVERY PLAN..................................................................................
        74. TECHNOLOGICAL ADVANCEMENT .......................................................................................................
        75. PENDING LEGISLATIVE / OTHER ISSUES................................................................................................
        76. SUPPORT OF ARIZONA BASED TRANSLATIONAL AND CLINICAL RESEARCH ......................
        77. RESERVED........................................................................................................................................................
        78. RESERVED........................................................................................................................................................

SECTION E: CONTRACT CLAUSES.........................................................................................................................

        1) APPLICABLE LAW..........................................................................................................................................
        2) AUTHORITY.....................................................................................................................................................
        3) ORDER OF PRECEDENCE...............................................................................................................................
        4) CONTRACT INTERPRETATION AND AMENDMENT ...........................................................................
        5) SEVERABILITY.................................................................................................................................................
        6) RELATIONSHIP OF PARTIES .......................................................................................................................
        7) ASSIGNMENT AND DELEGATION.............................................................................................................
        8) INDEMNIFICATION........................................................................................................................................
        9) INDEMNIFICATION -- PATENT AND COPYRIGHT ................................................................................
        10) COMPLIANCE WITH APPLICABLE LAWS, RULES AND REGULATIONS .....................................
        11) ADVERTISING AND PROMOTION OF CONTRACT..............................................................................
        12) PROPERTY OF THE STATE ........................................................................................................................
        13) THIRD PARTY ANTITRUST VIOLATIONS..............................................................................................
        14) RIGHT TO ASSURANCE...............................................................................................................................
        15) TERMINATION FOR CONFLICT OF INTEREST......................................................................................
        16) GRATUITIES...................................................................................................................................................
        17) SUSPENSION OR DEBARMENT ................................................................................................................
        18) TERMINATION FOR CONVENIENCE .......................................................................................................
        19) TEMPORARY MANAGEMENT/OPERATION OF A CONTRACTOR AND TERMINATION.........
        20) TERMINATION - AVAILABILITY OF FUNDS.........................................................................................
        21) RIGHT OF OFFSET ........................................................................................................................................
        22) NON-EXCLUSIVE REMEDIES......................................................................................................................
        23) NON-DISCRIMINATION .............................................................................................................................
        24) EFFECTIVE DATE..........................................................................................................................................
        25) INSURANCE....................................................................................................................................................
        26) DISPUTES........................................................................................................................................................
        27) RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS.........................................................................
        28) INCORPORATION BY REFERENCE............................................................................................................
        29) COVENANT AGAINST CONTINGENT FEES............................................................................................
        30) CHANGES........................................................................................................................................................
        31) TYPE OF CONTRACT ...................................................................................................................................
        32) AMERICANS WITH DISABILITIES ACT.................................................................................................
        33) WARRANTY OF SERVICES.........................................................................................................................
        34) NO GUARANTEED QUANTITIES .............................................................................................................
        35) CONFLICT OF INTEREST ............................................................................................................................
        36) CONFIDENTIALITY AND DISCLOSURE OF CONFIDENTIAL INFORMATION..............................
        37) COOPERATION WITH OTHER CONTRACTORS ...................................................................................
        38) ASSIGNMENT OF CONTRACT AND BANKRUPTCY...........................................................................
        39) OWNERSHIP OF INFORMATION AND DATA ......................................................................................
        40) AUDITS AND INSPECTIONS .....................................................................................................................
        41) LOBBYING.......................................................................................................................................................
        42) CHOICE OF FORUM......................................................................................................................................
        43) DATA CERTIFICATION ..............................................................................................................................
        44) OFF SHORE PERFORMANCE OF WORK PROHIBITED........................................................................
        45) FEDERAL IMMIGRATION AND NATIONALITY ACT.........................................................................
        46) IRS W-9 FORM................................................................................................................................................
        47) CONTINUATION OF PERFORMANCE THROUGH TERMINATION..................................................

SECTION F: RESERVED...............................................................................................................................................

SECTION G: REPRESENTATIONS AND CERTIFICATIONS OF OFFEROR......................................................

SECTION H: EVALUATION FACTORS AND SELECTION PROCESS................................................................

SECTION I: INSTRUCTIONS TO OFFERORS..........................................................................................................

SECTION J: LIST OF ATTACHMENTS....................................................................................................................

ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS.........................................................................

        1. ASSIGNMENT AND DELEGATION OF RIGHTS AND RESPONSIBILITIES ........................................
        2. AWARDS OF OTHER SUBCONTRACTS....................................................................................................
        3. CERTIFICATION OF COMPLIANCE – ANTI-KICKBACK AND LABORATORY TESTING.............
        4. CERTIFICATION OF TRUTHFULNESS OF REPRESENTATION............................................................
        5. CLINICAL LABORATORY IMPROVEMENT AMENDMENTS OF 1988................................................
        6. COMPLIANCE WITH AHCCCS RULES RELATING TO AUDIT AND INSPECTION..........................
        7. COMPLIANCE WITH LAWS AND OTHER REQUIREMENTS ...............................................................
        8. CONFIDENTIALITY REQUIREMENT ..........................................................................................................
        9. CONFLICT IN INTERPRETATION OF PROVISIONS ................................................................................
        10. CONTRACT CLAIMS AND DISPUTES .....................................................................................................
        11. ENCOUNTER DATA REQUIREMENT .......................................................................................................
        12. EVALUATION OF QUALITY, APPROPRIATENESS, OR TIMELINESS OF SERVICES ...................
        13. FRAUD AND ABUSE.....................................................................................................................................
        14. GENERAL INDEMNIFICATION ..................................................................................................................
        15. INSURANCE....................................................................................................................................................
        16. LIMITATIONS ON BILLING AND COLLECTION PRACTICES ............................................................
        17. MAINTENANCE OF REQUIREMENTS TO DO BUSINESS AND PROVIDE SERVICES....................
        18. NON-DISCRIMINATION REQUIREMENTS..............................................................................................
        19. PRIOR AUTHORIZATION AND UTILIZATION MANAGEMENT .....................................................
        20. RECORDS RETENTION.................................................................................................................................
        21. SEVERABILITY...............................................................................................................................................
        22. SUBJECTION OF SUBCONTRACT.............................................................................................................
        23. TERMINATION OF SUBCONTRACT.........................................................................................................
        24. VOIDABILITY OF SUBCONTRACT............................................................................................................
        25. WARRANTY OF SERVICES.........................................................................................................................
        26. OFF-SHORE PERFORMANCE OF WORK PROHIBITED .......................................................................
        27. FEDERAL IMMIGRATION AND NATIONALITY ACT..........................................................................

ATTACHMENT B: MINIMUM NETWORK STANDARDS (BY GEOGRAPHIC SERVICE AREA)..............

ATTACHMENT C: RESERVED .................................................................................................................................

ATTACHMENT D: SAMPLE LETTER OF INTENT ..............................................................................................

ATTACHMENT E: INSTRUCTIONS FOR PREPARING CAPITATION PROPOSAL.......................................

ATTACHMENT F: PERIODIC REPORT REQUIREMENTS...................................................................................

ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM....................................................................................

ATTACHMENT H(1): ENROLLEE GRIEVANCE SYSTEM STANDARDS AND POLICY................................

ATTACHMENT H(2): PROVIDER CLAIM DISPUTE STANDARDS AND POLICY.........................................

ATTACHMENT I: RESERVED....................................................................................................................................

ATTACHMENT J: OFFEROR’S CHECKLIST..........................................................................................................

ATTACHMENT K: COST SHARING COPAYMENTS............................................................................................. 7
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SECTION B: CAPITATION RATES

The Contractor shall provide services as described in this contract. In consideration for these services, the Contractor
will be paid Contractor-specific rates per member per month for the term October 1, 2008 through September 30,
2009. See Attachment E, Instructions for Preparing Capitation Proposal, for more information.

SECTION C:        DEFINITIONS

638 TRIBAL FACILITY
A facility that is operated by an Indian tribe and that is authorized to provide
services pursuant to Public Law (P.L.) 93-638, as amended.

1931 (also referred to as TANF related)
Eligible individuals and families under Section 1931 of the Social Security Act,
with household income levels at or below 100% of the federal poverty level
(FPL).

ACOM
AHCCCS Contractor Operations Manual, available on the AHCCCS website at
www.azahcccs.gov.

ADHS
Arizona Department of Health Services, the state agency mandated to serve the
public health needs of all Arizona citizens.

ADHS BEHAVIORAL HEALTH RECIPIENT
A Title XIX or Title XXI acute care member who is eligible for and is receiving
behavioral health services through ADHS and its subcontractors.

ADJUDICATED CLAIMS
Claims that have been received and processed by the Contractor, and which
resulted in a payment or denial of payment

AGENT
Any person who has been delegated the authority to obligate or act on behalf of
another person or entity on who has been delegated the authority to obligate or
act on behalf of another person or entity.

AHCCCS
Arizona Health Care Cost Containment System, which is composed of the
Administration, Contractors, and other arrangements through which health care
services are provided to an eligible person, as defined by A.R.S. § 36-2902, et
seq.

AHCCCS BENEFITS
See “COVERED SERVICES”.

AHCCCS CARE
Eligible individuals and childless adults whose income is less than 100% of the
FPL, and who are not categorically linked to another Title XIX program. Also
known as “NON MEDICAL EXPENSE DEDUCTION MEMBER (NONMED)”

AHCCCS MEMBER
See “MEMBER”.

ALTCS
The Arizona Long Term Care System, a program under AHCCCS that delivers
long-term, acute, behavioral health and case management services to members, as
authorized by A.R.S. § 36-2932.

AMBULATORY CARE
Preventive, diagnostic and treatment services provided on an outpatient basis by
physicians, nurse practitioners, physician assistants and other health care
providers.

AMERICAN INDIAN HEALTH PROGRAM (AIHP)
The program that delivers health care to the eligible Native American population
living on reservations through the Indian Health Service (IHS). Formerly known
as AHCCCS IHS FFS Program.

AMPM
AHCCCS Medical Policy Manual, available on the AHCCCS website at
www.azahcccs.gov.

ANNUAL ENROLLMENT CHOICE (AEC)
The opportunity, given each member annually, to change to another Contractor in
their GSA.

APPEAL RESOLUTION
The written determination by the Contractor concerning an appeal.

ARIZONA ADMINISTRATIVE CODE (A.A.C.)
State regulations established pursuant to relevant statutes. For purposes of this
solicitation, the relevant sections of the A.A.C. are referred to throughout this
document as “AHCCCS Rules”.

A.R.S.
Arizona Revised Statutes.

BBA
The Balanced Budget Act of 1997.

BIDDER’S LIBRARY
A repository of manuals, statutes, rules and other reference material located on
the AHCCCS website at www.azahcccs.gov.

BOARD CERTIFIED
An individual who has successfully completed all prerequisites of the respective
specialty board and successfully passed the required examination for
certification.

BORDER COMMUNITIES
Cities, towns or municipalities located in Arizona and within a designated
geographic service area whose residents typically receive primary or emergency
care in adjacent Geographic Service Areas (GSA) or neighboring states,
excluding neighboring countries, due to service availability or distance. (R9-22-
201.F, R9-22-201.G, R9-22-101.B)

BREAST AND CERVICAL CANCER TREATMENT PROGRAM (BCCTP)
Eligible individuals under the Title XIX expansion program for women with
income up to 250% of the FPL, who are diagnosed with and need treatment for
breast and/or cervical cancer or cervical lesions and are not eligible for other
Title XIX programs providing full Title XIX services. Qualifying individuals
cannot have other creditable health insurance coverage, including Medicare.

CAPITATION
Payment to a Contractor by AHCCCS of a fixed monthly payment per person in
advance, for which the Contractor provides a full range of covered services as
authorized under A.R.S. § 36-2904 and § 36-2907.

CATEGORICALLY LINKED TITLE XIX MEMBER
Member eligible for Medicaid under Title XIX of the Social Security Act
including those eligible under 1931 provisions of the Social Security Act, Sixth
Omnibus Budget Reconciliation Act (SOBRA), Supplemental Security Income
(SSI), and SSI-related groups. To be categorically linked, the member must be
aged 65 or over, blind, disabled, a child under age 19, a parent of a dependent
child, or pregnant.

CLAIM DISPUTE
A dispute, filed by a provider or Contractor, whichever is applicable, involving a
payment of a claim, denial of a claim, imposition of a sanction or reinsurance.

CLEAN CLAIM
A claim that may be processed without obtaining additional information from the
provider of service or from a third party, but does not include a claim under
investigation for fraud or abuse or under review for medical necessity.

CMS
Centers for Medicare and Medicaid Services, an organization within the U.S.
Department of Health and Human Services, which administers the Medicare and
Medicaid programs and the State Children’s Health Insurance Program.

COMPETITIVE BID PROCESS
A state procurement system used to select Contractors to provide covered
services on a geographic basis.

CONTINUING OFFEROR (INCUMBENT)
An AHCCCS Contractor during CYE ‘08 that submits a proposal pursuant to this
solicitation.

CONTRACT SERVICES
See “COVERED SERVICES”.

CONTRACT YEAR (CY)
Corresponds to the federal fiscal year (October 1 through September 30).

CONTRACTOR
An organization or entity agreeing through a direct contracting relationship with
AHCCCS to provide the goods and services specified by this contract in
conformance with the stated contract requirements, AHCCCS statute and rules,
and federal law and regulations.

CONVICTED
A judgment of conviction has been entered by a federal, state or local court,
regardless of whether an appeal from that judgment is pending.

COPAYMENT
A monetary amount specified by the Director that the member pays directly to a
Contractor or provider at the time covered services are rendered, as defined in
R9-22-701.

COVERED SERVICES
Health care services to be delivered by a Contractor, which are designated in
Section D of this contract; AHCCCS Rules R9-22, Article 2, and R9-31, Article
2, and the AMPM [42 CFR 438.210(a)(4)].

CRS
The Children's Rehabilitative Services administered by ADHS, as defined in R9-
22-1401.

CRS-ELIGIBLE
An individual who has completed the CRS application process, as delineated in
the CRS Policy and Procedure Manual, and has met all applicable criteria to be
eligible to receive CRS-related services.

CY
See “CONTRACT YEAR”.

CYE
Contract Year Ending; same as “CONTRACT YEAR”.

DAYS
Calendar days, unless otherwise specified as defined in the text, as defined in
R9-22-101.

DELEGATED AGREEMENT
A type of subcontract with a qualified organization or person to perform one or
more functions required to be provided by the Contractor pursuant to this
contract.

DIRECTOR
The Director of AHCCCS.

DISENROLLMENT
The discontinuance of a member’s ability to receive covered services through a
Contractor.

DME
Durable medical equipment, which is an item or appliance that can withstand
repeated use, is designated to serve a medical purpose, and is not generally useful
to a person in the absence of a medical condition, illness or injury as defined in
R9-22-101.

DUAL ELIGIBLE
A member who is eligible for both Medicare and Medicaid.

ELIGIBILITY DETERMINATION
A process of determining, through a written application and required
documentation, whether an applicant meets the qualifications for Title XIX or
Title XXI.

EMERGENCY MEDICAL CONDITION
A medical condition manifesting itself by acute symptoms of sufficient severity
(including severe pain) such that a prudent layperson who possesses an average
knowledge of health and medicine could reasonably expect the absence of
immediate medical attention to result in: a) placing the patient’s health (or, with
respect to a pregnant woman, the health of the woman or her unborn child) in
serious jeopardy, b) serious impairment to bodily functions, or c) serious
dysfunction of any bodily organ or part [42 CFR 438.114(a)].

EMERGENCY MEDICAL SERVICE
Covered inpatient and outpatient services provided after the sudden onset of an
emergency medical condition as defined above. These services must be furnished
by a qualified provider, and must be necessary to evaluate or stabilize the
emergency medical condition [42 CFR 438.114(a)].

ENCOUNTER
A record of a health care-related service rendered by a provider or providers
registered with AHCCCS to a member who is enrolled with a Contractor on the
date of service.

ENROLLEE
An eligible person who is enrolled in AHCCCS, as defined in A.R.S. § 36-2901,
A.R.S. § 36-2981, A.R.S. § 36-2901.01, and 42 CFR 438.10(a).

ENROLLMENT
The process by which an eligible person becomes a member of a Contractor’s
plan.

EPSDT
Early and Periodic Screening, Diagnosis and Treatment; services for persons
under 21 years of age, as described in AHCCCS Rules R9-22, Article 2.

FAMILY PLANNING SERVICES EXTENSION PROGRAM
A program that provides only family planning services for a maximum of two
consecutive 12-month periods to a SOBRA woman whose pregnancy has ended
and who is not otherwise eligible for full Title XIX services.

FEDERALLY QUALIFIED HEALTH CENTER (FQHC)
An entity that meets the requirements and receives a grant and funding pursuant
to Section 330 of the Public Health Service Act. An FQHC includes an
outpatient health program or facility operated by a tribe or tribal organization
under the Indian Self-Determination and Education Assistance Act (P.L. 93-638)
or an urban Indian organization receiving funds under Title V of the Indian
Health Care Improvement Act (P.L. 94-437).

FEE-FOR-SERVICE (FFS)
A method of payment to registered providers on an amount per-service basis.

FES
Federal Emergency Services program covered under R9-22-217, to treat an
emergency medical condition for a member who is determined eligible under
A.R.S. § 36-2903.03 (D).

FFP
Federal financial participation (FFP) refers to the contribution that the federal
government makes to the Title XIX and Title XXI program portions of
AHCCCS, as defined in 42 CFR 400.203.

FISCAL YEAR (FY)
The budget year - federal fiscal year: October 1 through September 30; State
fiscal year: July 1 through June 30.

FREEDOM OF CHOICE (FC)
The opportunity given to each member who does not specify a Contractor
preference at the time of enrollment to choose between the Contractors available
within the Geographic Service Area in which the member is enrolled.

FREEDOM TO WORK (TICKET TO WORK)
Eligible individuals under the Title XIX expansion program that extends
eligibility to individuals 16 through 64 years old who meet SSI disability criteria;
whose earned income, after allowable deduction, is at or below 250% of the FPL
and who are not eligible for any other Medicaid program.

GEOGRAPHIC SERVICE AREA (GSA)
A specific county or defined grouping of counties designated by AHCCCS
within which a Contractor provides, directly or through subcontract, covered
health care to members enrolled with that Contractor.

GRIEVANCE SYSTEM
A system that includes a process for enrollee grievances, enrollee appeals,
provider claim disputes, and access to the state fair hearing system.

HEALTHCARE GROUP OF ARIZONA (HCG)
A prepaid medical coverage plan marketed to small, uninsured businesses and
political subdivisions within the state.

HEALTH PLAN
See “CONTRACTOR”.

HIFA
The CMS Health Insurance Flexibility and Accountability Demonstration
Initiative , which targets State Children's Health Insurance Program (Title XXI)
funding for populations with incomes at or below 200 % of the FPL.

HIFA PARENTS
Parents of Medicaid-(SOBRA) and KidsCare-eligible children who are not
otherwise eligible for Medicaid. All eligible parents except Native Americans
must pay an enrollment fee and a monthly premium based on household income.

HIPAA
The Health Insurance Portability and Accountability Act (P.L. 104-191); also
known as the Kennedy-Kassebaum Act, signed August 21, 1996.

IBNR
Incurred but not reported: liability for services rendered for which claims have
not been received.

HIS
Indian Health Service authorized as a federal agency pursuant to 25 U.S.C. 1661.

KIDSCARE
A program for individuals under the age of 19 years, who are eligible under the
SCHIP program, in households with income at or below 200% FPL. All
members, except Native American members, are required to pay a premium
amount based on the number of children in the family and the gross family
income. Also referred to as “Title XXI”.

LIABLE PARTY
A person or entity that is or may be, by agreement, circumstance or otherwise,
liable to pay all or part of the medical expenses incurred by an AHCCCS
applicant or member.

LIEN
A legal claim, filed with the County Recorder’s office in the county in which a
member resides and/or in the county an injury was sustained, for the purpose of
ensuring that AHCCCS receives reimbursement for medical services paid. The
lien is attached to any settlement the member may receive as a result of an injury.

MANAGED CARE
Systems that integrate the financing and delivery of health care services to
covered individuals by means of arrangements with selected providers to furnish
comprehensive services to members; establish explicit criteria for the selection of
health care providers; have financial incentives for members to use providers and
procedures associated with the plan; and have formal programs for quality,
utilization management and the coordination of care.

MANAGEMENT SERVICES AGREEMENT
A type of subcontract with an entity in which the owner of the Contractor
delegates some or all of the comprehensive management and administrative
services necessary for the operation of the Contractor.

MANAGEMENT SERVICES SUBCONTRACTOR
An entity to which the Contractor delegates the comprehensive management and
administrative services necessary for the operation of the Contractor

MANAGING EMPLOYEE
A general manager, business manager, administrator, director, or other individual
who exercises operational or managerial control over or who directly or
indirectly conducts the day-to-day operation of an institution, organization or
agency.

MATERIAL OMISSION
Facts, data or other information excluded from a report, contract, etc.; the
absence of which could lead to erroneous conclusions following reasonable
review of such report, contract, etc.

MAJOR UPGRADE
Any upgrade or changes that may result in a disruption to the following: loading
of contracts, providers or members, issuing prior authorizations or the
adjudication of claims.

MEDICAID
A federal/state program authorized by Title XIX of the Social Security Act, as
amended.

MEDICAL EXPENSE DEDUCTION (MED)
Title XIX waiver member whose family income exceeds the limits of all other
Title XIX categories (except ALTCS) and has family medical expenses that
reduce income to or below 40% of the FPL. MED members may or may not
have a categorical link to Title XIX.

MEDICAL MANAGEMENT
An integrated process or system that is designed to assure appropriate utilization
of health care resources, in the amount and duration necessary to achieve desired
health outcomes, across the continuum of care (from prevention to end of life
care).

MEDICARE
A federal program authorized by Title XVIII of the Social Security Act, as
amended.

MEDICARE MANAGED CARE PLAN
A managed care entity that has a Medicare contract with CMS to provide services
to Medicare beneficiaries, including Medicare Advantage Plan (MAP), Medicare
Advantage Prescription Drug Plan (MAPDP), MAPDP Special Needs Plan, or
Medicare Prescription Drug Plan

MEDICARE PART DEXCLUDED DRUGS
Medicare Part D is the prescription drug coverage option available to Medicare
beneficiaries, including those also eligible for Medicaid. Medications that are
available under this benefit are not covered by AHCCCS. Certain drugs that are
excluded from coverage by Medicare continue to be covered by AHCCCS.
Those medications are barbiturates, benzodiazepines, and over-the-counter
medication as defined in the AMPM. Prescription medications that are covered
under Medicare, but are not on a Part D health plan’s formulary are not
considered excluded drugs, and are not covered by AHCCCS.

MEMBER
See “ENROLLEE”.

NON-CONTRACTING PROVIDER
A person or entity that provides services as prescribed in A.R.S. § 36-2901, but
does not have a subcontract with an AHCCCS Contractor.

NON-MEDICAL EXPENSE DEDUCTION (NON MED) MEMBER
See “AHCCCS CARE”.

NPI
National Provider Identifier assigned by the CMS contracted national
enumerator.

OFFEROR
An organization or other entity that submits a proposal to the Administration in
response to this RFP, as defined in R9-22-101.

PERFORMANCE STANDARDS
A set of standardized measures designed to assist AHCCCS in evaluating,
comparing and improving the performance of its Contractors.

PMMIS
AHCCCS’s Prepaid Medical Management Information System.

POST STABILIZATION SERVICES
Medically necessary services, related to an emergency medical condition,
provided after the member’s condition is sufficiently stabilized in order to
maintain, improve or resolve the member’s condition so that the member could
be safely discharged or transferred to another location [42 CFR 438-114(a)].

POTENTIAL ENROLLEE
A Medicaid-eligible recipient who is not yet enrolled with a Contractor [42 CFR
438.10(a)].

PRIMARY CARE PROVIDER (PCP)
An individual who meets the requirements of A.R.S. § 36-2901, and who is
responsible for the management of a member’s health care. A PCP may be a
physician defined as a person licensed as an allopathic or osteopathic physician
according to A.R.S. Title 32, Chapter 13 or Chapter 17, or a practitioner defined
as a physician assistant licensed under A.R.S. Title 32, Chapter 25, or a certified
nurse practitioner licensed under A.R.S. Title 32, Chapter 15.

PRIOR PERIOD
The period of time, prior to a member’s enrollment, during which the member is
eligible for covered services. The time frame is from the effective date of
eligibility to the day a member is enrolled with a Contractor.

PROVIDER
Any person or entity that contracts with AHCCCS or a Contractor for the
provision of covered services to members according to the provisions A.R.S. §
36-2901 or any subcontractor of a provider delivering services pursuant to A.R.S.
§ 36-2901.

QUALIFIED MEDICARE BENEFICIARY DUAL ELIGIBLE (QMB DUAL)
A person, eligible under A.R.S. § 36-2971(6), who is entitled to Medicare Part A
insurance and meets certain income and residency requirements of the Qualified
Medicare Beneficiary program. A QMB who is also eligible for Medicaid, is
commonly referred to as a QMB dual eligible.

RATE CODE
Eligibility classification for capitation payment purposes.

REGIONAL BEHAVIORAL HEALTH AUTHORITY (RBHA)
An organization under contract with ADHS, that administers covered behavioral
health services in a geographically specific area of the state. Tribal governments,
through an agreement with ADHS, may operate a tribal regional behavioral
health authority (TRBHA) for the provision of behavioral health services to
Native American members living on-reservation.

REINSURANCE
A risk-sharing program provided by AHCCCS to Contractors for the
reimbursement of certain contract service costs incurred for a member beyond a
predetermined monetary threshold.

RELATED PARTY
A party that has, or may have, the ability to control or significantly influence a
Contractor, or a party that is, or may be, controlled or significantly influenced by
a Contractor. "Related parties" include, but are not limited to, agents, managing
employees, persons with an ownership or controlling interest in the Offeror and
their immediate families, subcontractors, wholly-owned subsidiaries or suppliers,
parent companies, sister companies, holding companies, and other entities
controlled or managed by any such entities or persons.

RISK GROUP
Grouping of rate codes that are paid at the same capitation rate.

RFP
Request For Proposal is a document prepared by AHCCCS, which describes the
services required and instructs prospective Offerors about how to prepare a
response (proposal), as defined in R9-22-101.

RURAL HEALTH CLINIC (RHC)
A clinic located in an area designated by the Bureau of Census as rural, and by
the Secretary of the DHHS as medically underserved or having an insufficient
number of physicians, which meets the requirements under 42 CFR 491.

SCHIP
State Children’s Health Insurance Program under Title XXI of the Social
Security Act. The Arizona version of SCHIP is referred to as “KidsCare”. See
“KIDSCARE”.

SCOPE OF SERVICES See “COVERED SERVICES”.

SERVICE LEVEL AGREEMENT
A type of subcontract with a corporate owner or any of its divisions or subsidiaries
that requires specific levels of service for administrative functions or services for
the Contractor, specifically related to fulfilling the Contractor’s obligations to
AHCCCS under the terms of this contract.

SOBRA
Eligible pregnant women under Section 9401 of the Sixth Omnibus Budget and
Reconciliation Act of 1986, amended by the Medicare Catastrophic Coverage
Act of 1988, 42 U.S.C. 1396a(a)(10)(A)(ii)(IX), November 5, 1990, with
individually budgeted incomes at or below 150% of the FPL, and children in
families with individually budgeted incomes ranging from below 100% to 140%
of the FPL, depending on the age of the child.

SOBRA FAMILY PLANNING
Female members eligible for family planning services only, for a maximum of
two consecutive 12-month periods following the loss of SOBRA eligibility.

SPECIAL HEALTH CARE NEEDS
Members with special health care needs are those members who have serious and
chronic physical, developmental or behavioral conditions, and who also require
medically necessary health and related services of a type or amount beyond that
generally required by members.

STATE
The State of Arizona.

STATE ONLY TRANSPLANT MEMBERS
Individuals who are eligible under one of the Title XIX eligibility categories and
found eligible for a transplant, but subsequently lose Title XIX eligibility due to
excess income become eligible for one of two extended eligibility options as
specified in A.R.S. 36-2907.10 and A.R.S. 36-2907.11.

STATE PLAN
The written agreements between the State and CMS, which describe how the
AHCCCS program meets CMS requirements for participation in the Medicaid
program and the State Children’s Health Insurance Program.

SUBCONTRACT
An agreement entered into by the Contractor with a provider of health care
services, who agrees to furnish covered services to members, or with any other
organization or person who agrees to perform any administrative function or
service for the Contractor specifically related to fulfilling the Contractor's
obligations to AHCCCS under the terms of this contract, as defined in R9-22-
101.

SUBCONTRACTOR
(1) A provider of health care who agrees to furnish covered services to members.
(2) A person, agency or organization with which the Contractor has contracted or
delegated some of its management/administrative functions or responsibilities.
(3) A person, agency or organization with which a fiscal agent has entered into a
contract, agreement, purchase order or lease (or leases of real property) to obtain
space, supplies, equipment or services provided under the AHCCCS agreement.

SUPPLEMENTAL SECURITY INCOME (SSI) AND SSI RELATED GROUPS
Eligible individuals receiving income through federal cash assistance programs
under Title XVI of the Social Security Act who are aged, blind or disabled and
have household income levels at or below 100% of the FPL.

SUPPLEMENTAL SECURITY DISABILITY INSURANCE TEMPORARY
MEDICAL COVERAGE (SSDITMC)
Eligible individuals who have been enrolled in AHCCCS at any time within the
most recent 24 months and became ineligible for AHCCCS coverage due to
excess income; and who are not covered by creditable health insurance, including
Medicare.

TEMPORARY ASSISTANCE TO NEEDY FAMILIES (TANF)
A federal cash assistance program under Title IV of the Social Security Act
established by the Personal Responsibility and Work Opportunity Reconciliation
Act of 1996 (P.L. 104-193). It replaced Aid To Families With Dependent
Children (AFDC).

THIRD PARTY LIABILITY (TPL)
See “LIABLE PARTY”.

TITLE XIX MEMBER
A member eligible for federally funded Medicaid programs under Title XIX of
the Social Security Act including those eligible under 1931 provisions of the
Social Security Act, Sixth Omnibus Budget Reconciliation Act (SOBRA),
Supplemental Security Income (SSI), SSI-related groups, Title XIX Waiver
groups, Medicare Cost Sharing groups, Breast and Cervical Cancer Treatment
program and Freedom to Work program.

TITLE XIX WAIVER GROUP (TWG)MEMBER
All AHCCCS Care (Non-MED) and MED members who do not meet the
requirements of a categorically linked Medicaid program.

TITLE XXI MEMBER
A member eligible for acute care services under Title XXI of the Social Security
Act, referred to in Federal legislation as the “State Children’s Health Insurance
Program” (SCHIP and HIFA). The Arizona version of SCHIP is referred to as
“KidsCare.”

WWHP
Well Woman Health-Check Program, administered by the Arizona Department
of Health Services and funded by the Centers for Disease Control and Prevention.
(See AMPM Chapter 400)

YEAR
See “CONTRACT YEAR”.

YOUNG ADULT TRANSITIONAL INSURANCE (YATI)
Eligible individuals, between 18 and 21 years of age who were formerly enrolled
through the foster care program.

[END OF DEFINITIONS]

SECTION D: PROGRAM REQUIREMENTS

INTRODUCTION

The Arizona Health Care Cost Containment System (AHCCCS) Administration is the single state agency for the
Medicaid and SCHIP programs. AHCCCS has operated under an 1115 Research and Demonstration Waiver since
1982 when it became the first statewide Medicaid managed care system in the nation. The program is a model
public-private collaboration that includes the state and its counties, the federal government, and managed care
contractors and providers from both the public and private sectors. AHCCCS has remained a leader in Medicaid
Managed Care through the diligent pursuit of excellence and cost effectiveness by Managed Care Contractors
(MCOs) in collaboration with the AHCCCS Administration.

In order to continue this collaboration, Contractors must continue to add value to the program. A Contractor adds
value when it:

            • Recognizes that Medicaid members are entitled to care and assistance navigating the service delivery
                  system and demonstrates special effort to assure members receive necessary services, including
                  prevention and screening services.
                • Recognizes that Medicaid members with special health care needs or chronic health conditions require
                  care coordination, and provides that coordination. This is particularly true if a member must receive
                  services from other AHCCCS Contractors in addition to the Contractor.
                • Recognizes that Medicaid members have the right to contact their elected officials in an effort to
                  secure necessary services and assist members in order to reduce their need to contact elected officials.
                  The Contractor provides information to elected officials to help them respond to the member.
                • Recognizes that health care providers are an essential partner in the delivery of health care services,
                  and operates in a manner that is efficient and effective for health care providers as well as the
                  Contractor.
                • Avoids administrative practices that place unnecessary burdens on providers with little or no impact
                  on quality of care or cost containment.
                • Recognizes that performance improvement is both clinical and operational in nature and self monitors
                  and self corrects as necessary to improve contract compliance or operational excellence.
                • Recognizes that the program is publicly funded, and as such is subject to public scrutiny and behaves
                  in a manner that is supported by the general public.
                • Recognizes that the program is subject to significant regulation and operates in compliance with those
                  regulations.

AHCCCS encourages Contractor innovation and application of best practices. The AHCCCS administration is
always looking for ways to reduce administrative costs and improve program efficiency. Over the term of the
contract, AHCCCS will work collaboratively with contractors to evaluate ways to reduce program complexity,
improve chronic disease management, reduce administrative burdens, leverage joint purchasing power, and
reduce unnecessary Medicaid/SCHIP administrative and medical costs.

1. TERM OF CONTRACT AND OPTION TO RENEW

The initial term of this contract shall be 10/1/08 through 9/30/11, with two additional one-year options to renew.
All contract renewals shall be through contract amendment. AHCCCS shall issue amendments prior to the end
date of the contract when there is an adjustment to capitation rates and/or changes to the scope of services
contained herein. Changes to the scope of services include, but are not limited, to changes in the enrolled
population, changes in covered services and changes in GSAs.

If the Contractor has been awarded a contract in more than one GSA, each such contract will be considered
separately renewable. AHCCCS may renew the Contractor’s contract in one GSA, but not in another. In
capping of the Contractor’s enrollment in all GSAs. Further, AHCCCS may require the Contractor to renew all
currently awarded GSAs, or may terminate the contract if the Contractor does not agree to renew all currently
awarded GSAs.

When AHCCCS issues an amendment to the contract, the provisions of such renewal will be deemed to have
been accepted 60 days after the date of mailing by AHCCCS, even if the amendment has not been signed by the
Contractor, unless within that time the Contractor notifies AHCCCS in writing that it refuses to sign the renewal
amendment. If the Contractor provides such notification, AHCCCS will initiate contract termination
proceedings.

Contractor’s Notice of Intent Not To Renew: If the Contractor chooses not to renew this contract, the
Contractor may be liable for certain costs associated with the transition of its members to a different Contractor.
If the Contractor provides AHCCCS written notice of its intent not to renew this contract at least 180 days before
its expiration, this liability for transition costs may be waived by AHCCCS.

Contract Termination: In the event that the contract or any portion thereof is terminated for any reason, or
expires, the Contractor shall assist AHCCCS in the transition of its members to other Contractors, and shall
abide by standards and protocols set forth in Paragraph 9, Transition of Members. In addition, AHCCCS
reserves the right to extend the term of the contract on a month-to-month basis to assist in any transition of
members. The Contractor shall make provision for continuing all management and administrative services
until the transition of all members is completed and all other requirements of this contract are satisfied. The
Contractor shall be responsible for providing all reports set forth in this contract and necessary for the
transition process, and shall be responsible for the following:

a. Notification of subcontractors and members.
b. Payment of all outstanding obligations for medical care rendered to members. Until AHCCCS is satisfied
that the Contractor has paid all such obligations, the Contractor shall provide the following reports to
AHCCCS on a monthly basis (due the 15th day of the month, for the preceding month):
                (1) A monthly claims aging report by provider/creditor including IBNR amounts;
                (2) A monthly summary of cash disbursements and provider/creditor settlements;
                (3) A monthly accounting of Member Grievances and Provider Claim Disputes and their disposition;
                (4) Additional reporting as requested in the termination letter issued by AHCCCS.
c. Quarterly and Audited Financial Statements up to the date of contract termination. The financial statement
requirement will not be absolved without an official release from AHCCCS.
d. Encounter reporting until all services rendered prior to contract termination have reached adjudicated status
and data validation of the information has been completed, as communicated by a letter of release from
AHCCCS.
e. Cooperation with reinsurance audit activities on prior contract years until release has been granted by
AHCCCS.
f. Cooperation with any open reconciliation activities including, but not limited to, PPC or SSDI-TMC until
release has been granted by AHCCCS.
g. Quarterly Quality Management and Medical Management reports will be submitted as required by Section
D, Paragraphs 23, Quality Management, and 24, Medical Management, as appropriate to provide AHCCCS
with information on services rendered up to the date of Contract termination. This will include quality of care
(QOC) concern reporting based on the date of service, as opposed to the date of reporting, for a period of 3
months after contract termination.
h. Performance Bond will be required until remaining AHCCCS liabilities are less than $50,000.
i. In the event of termination or suspension of the contract by AHCCCS, such termination or suspension shall
not affect the obligation of the Contractor to indemnify AHCCCS for any claim by any third party against the
State or AHCCCS arising from the Contractor's performance of this contract and for which the Contractor
would otherwise be liable under this contract.
j. Any dispute by the Contractor, with respect to termination or suspension of this contract by AHCCCS, shall
   be exclusively governed by the provisions of Section E, Paragraph 26, Disputes.
k. Any funds advanced to the Contractor for coverage of members for periods after the date of termination shall
   be returned to AHCCCS within 30 days of termination of the contract.
l. Record retention requirements, as described in Section D Paragraph 63; Section E, Paragraph 40 and
   Attachment A, Paragraph 20, will apply.

2. ELIGIBILITY CATEGORIES

AHCCCS is Arizona’s Title XIX Medicaid program operating under an 1115 Waiver and Title XXI program
operating under Title XXI State Plan authority. Arizona has the authority to require mandatory enrollment in
managed care. All Acute Care Program members eligible for AHCCCS benefits, with exceptions as identified
below, are enrolled with Acute Care Contractors that are paid on a capitated basis. AHCCCS pays for health
care expenses on a fee-for-service (FFS) basis for Title XIX- and Title XXI- eligible members who receive
services through the Indian Health Service; for Title XIX eligible members who are entitled to emergency
services under the Federal Emergency Services (FES) program; and for Medicare cost sharing beneficiaries
under QMB programs.

The following describes the eligibility groups enrolled in the managed care program and covered under this
contract [42 CFR 434.6(a)(2)].

Title XIX

1931 (Also referred to as TANF-related): Eligible individuals and families under the 1931 provision of
the Social Security Act, with household income levels at or below 100% of the FPL.

SSI and SSI Related Groups: Eligible individuals receiving income through federal cash assistance
programs under Title XVI of the Social Security Act who are aged, blind or disabled and have
household income levels at or below 100% of the FPL.

Freedom to Work (Ticket to Work): Eligible individuals under the Title XIX expansion program that
extends eligibility to individuals 16 through 64 years old who meet SSI disability criteria, and whose
earned income after allowable deductions is at or below 250% of the FPL, and who are not eligible for
any other Medicaid program. These members must pay a premium to AHCCCS, depending on income.

SOBRA: Under the Sixth Omnibus Budget Reconciliation Act of 1986, eligible pregnant women, with
individually budgeted income at or below 150% of the FPL, and children in families with individually
budgeted incomes ranging from below 100% to 140% of the FPL, depending on the age of the child.

SOBRA Family Planning: Family planning extension program that covers the costs for family
planning services only, for a maximum of two consecutive 12-month periods following the loss of
SOBRA eligibility.

Breast and Cervical Cancer Treatment Program (BCCTP): Eligible individuals under the Title XIX
expansion program for women with incomes up to 250% of the FPL, who are diagnosed with and need
treatment for breast and/or cervical cancer or cervical lesions and are not eligible for other Title XIX
programs. Eligible members cannot have other creditable health insurance coverage, including
Medicare.

Young Adult Transitional Insurance (YATI): Former foster care children between 18 and 21 years of
age.

Title XIX Waiver Group

AHCCCS Care (Non-MED): Eligible individuals and couples whose income is at or below 100% of the
FPL, and who are not categorically linked to another Title XIX program. Also known as Non-MED
members.

MED: Title XIX waiver member whose family income exceeds the limits of all other Title XIX
categories (except ALTCS) and has family medical expenses that reduce income to at or below 40% of
the FPL. MED members may or may not have a categorical link to Title XIX.

Title XXI

KidsCare: Individuals under the age of 19 years, eligible under the SCHIP program, who are in
households with incomes at or below 200% FPL. All members except Native American members are
required to pay a premium amount based on the number of children in the family and the gross family
income. Also referred to as Title XXI.

HIFA Parents: Non-Title XIX-eligible parents of KidsCare children or parents of Title XIX SOBRAeligible
children who are eligible under the HIFA demonstration initiative waiver. HIFA parents (except
Native American members) are required to pay a one-time enrollment fee and a monthly premium to
AHCCCS, based on household income. Due to funding considerations, this program has an enrollment
cap.

State-Only

Social Security Disability Insurance Temporary Medical Coverage (SSDI-TMC): Laws 2006, Chapter
373 established a Temporary Medical Coverage Program. SSDI-TMC provides health care coverage to
persons who:

1. Are citizens or qualified immigrants and residents who have been enrolled in AHCCCS at any time
   within the last 24 months; and
2. Become ineligible for AHCCCS coverage due to excess income making them over income for
   Medicaid; and
3. Are not yet eligible for Medicare; and
4. Are not covered by creditable health insurance.

In order to participate in SSDI-TMC, eligible persons must pay a premium. Participants become
ineligible for SSDI-TMC once they become eligible for Medicare. SSDI-TMC is funded entirely by the
State. Contractors will be capitated for these members under unique rate codes. SSDI-TMC members
are not eligible for prior period coverage, any supplemental payments or reinsurance. Members are
entitled to all AHCCCS Acute Care covered services. This program is subject to the availability of funds
and enrollment may be capped and/or frozen.

State-Only Transplants: Title XIX individuals, for whom medical necessity for a transplant has been
established and who subsequently lose Title XIX eligibility may become eligible for and select one of
two extended eligibility options as specified in A.R.S. 36-2907.10 and A.R.S. 36-2907.11. The extended
eligibility is authorized only for those individuals who have met all of the following conditions:

                1. The individual has been determined ineligible for Title XIX due to excess income;
                2. The individual has been placed on a donor waiting list before eligibility expired;
                3. The individual has entered into a contractual arrangement with the transplant facility to pay the
                   amount of income which is in excess of the eligibility income standards (referred to as
                   transplant share of cost).

The following options for extended eligibility are available to these members:

Option 1: Extended eligibility is for one 12-month period immediately following the loss of AHCCCS
eligibility. The member is eligible for all AHCCCS covered services as long as they continue to be
medically eligible for a transplant. If determined medically ineligible for a transplant at any time during
the period, eligibility will terminate at the end of the calendar month in which the determination is
made.

Option 2: As long as medical eligibility for a transplant (status on a transplant waiting list) is
maintained, at the time that the transplant is scheduled to be performed the transplant candidate will be
re-enrolled with his/her previous Contractor to receive all covered transplant services. Option 2-eligible
individuals are not eligible for any non-transplant related health care services from AHCCCS.

3. ENROLLMENT AND DISENROLLMENT

AHCCCS has the exclusive authority to enroll and disenroll members. The Contractor shall not disenroll any
member for any reason unless directed to do so by AHCCCS. The Contractor may request AHCCCS to
change the member’s enrollment in accordance with the ACOM Enrollment Choice and Change of Contractor
Policy. The Contractor may not request disenrollment because of an adverse change in the member’s health
status or because of the member’s utilization of medical services, diminished mental capacity, or
uncooperative or disruptive behavior resulting from his or her special needs. An AHCCCS member may
request disenrollment from the Contractor for cause at any time. Requests due to situations defined in Section
A (1) of the ACOM Change of Plan Policy should be referred to AHCCCS Member Services via mail or at
(602) 417-4000 or (800) 962-6690. For medical continuity requests, the Contractor shall follow the
procedures outlined in the ACOM Change of Plan Policy, before notifying AHCCCS. AHCCCS will disenroll
the member through the ACOM Change of Plan Policy when the member:

                1. Becomes ineligible for the AHCCCS program;
                2. Moves out of the Contractor’s service areas;
                3. Changes contractors during the member’s open enrollment/annual enrollment choice period;
                4. The Contractor does not, because of moral or religious objections, cover the service the member seeks; or
                5. When approved for a Contractor change [42 CFR 438.56].

Members may submit plan change requests to the Contractor or the AHCCCS Administration. A denial of any
plan change request must include a description of the member’s right to appeal the denial.

Eligibility for the various AHCCCS coverage groups is determined by one of the following agencies:

Social Security Administration (SSA)
SSA determines eligibility for the Supplemental Security Income
(SSI) cash program. SSI cash recipients are automatically
eligible for AHCCCS coverage.

Department of Economic Security (DES)
DES determines eligibility for families with children under
section 1931 of the Social Security Act, pregnant women and
children under SOBRA, the Adoption Subsidy Program, Title IVE
foster care children, Young Adult Transitional Insurance
Program, the Federal Emergency Services program (FES), HIFA
parents of SOBRA-eligible children and Title XIX Waiver
Members.

AHCCCS
AHCCCS determines eligibility for the SSI/Medical Assistance
Only groups, including the FES program for this population
(aged, disabled, blind), the Arizona Long Term Care System
(ALTCS), the Qualified Medicare Beneficiary program and other
Medicare cost sharing programs, BCCTP, the Freedom to Work
program, the Title XXI KidsCare program, HIFA parents of
KidsCare children, the SSDI-TMC program, and the State-Only
Transplant program.

AHCCCS Acute Care members are enrolled with Contractors in accordance with the rules set forth in A.A.C
R9-22, Article 17, A.A.C. R9-31, Articles 3 and 17.

Member Choice of Contractor
All AHCCCS members eligible for services covered under this contract have a choice of available Contractors.
Information about these Contractors will be given to each applicant during the application process for
AHCCCS benefits. If there is only one Contractor available for the applicant’s Geographic Service Area, no
choice is offered as long as the Contractor offers the member a choice of PCPs. Members who do not choose a
Contractor prior to AHCCCS being notified of their eligibility are automatically assigned to a Contractor based
on family continuity or the auto-assignment algorithm. Once assigned, AHCCCS sends a Freedom of Choice
notice to the member and gives them 30 days to choose a different Contractor from the auto-assigned
Contractor. See Section D, Paragraph 6, Auto-Assignment Algorithm, for further explanation.

The Contractor will share with AHCCCS the cost of providing information about the Acute Care Contractors
to potential members and to those eligible for annual enrollment choice.

Exceptions to the above enrollment policies for Title XIX members include previously enrolled members who
have been disenrolled for less than 90 days. These members will be automatically enrolled with the same
Contractor, if still available. Women who become eligible for the Family Planning Services Extension
Program, will remain assigned to their current Contractor.

The effective date of enrollment for a new Title XIX member with the Contractor is the day AHCCCS takes
the enrollment action. The Contractor is responsible for payment of medically necessary covered services
retroactive to the member’s beginning date of eligibility, as reflected in PMMIS.

SSDI-Temporary Medical Coverage and KidsCare Title XXI members must select a Contractor prior to being
determined eligible, and therefore will not be auto-assigned. HIFA parents who do not choose a Contractor
will be enrolled with their child’s Contractor following the enrollment rules set forth in R9-31-1719.

When a member is transferred from Title XIX to Title XXI and has not made a Contractor choice for Title
XXI, the member will remain with his/her current Contractor and a Freedom of Choice notice will be sent to
the member. The member may then change plans no later than 30 days from the date the Freedom of Choice
notice is sent.

The effective date of enrollment for a Title XXI member (including HIFA parents) and SSDI-Temporary
Medical Coverage members will be the first day of the month following notification to the Contractor. In the
event that eligibility is determined on or after the 25th day of the month, eligibility will begin on the 1st day of
the second month following the determination.

Prior Period Coverage: AHCCCS provides prior period coverage for the period of time prior to the Title XIX
member’s enrollment during which the member is eligible for covered services. The time frame is from the
effective date of eligibility to the day the member is enrolled with the Contractor. The Contractor receives
notification from the Administration of the member’s enrollment. The Contractor is responsible for payment of
all claims for medically necessary covered services, including all behavioral health services, provided to
members during prior period coverage. This may include services provided prior to the contract year (See
Section D, Paragraph 53, Compensation, for a description of the Contractor’s reimbursement from AHCCCS
for this eligibility time period).

For behavioral health services, the 72-hour maximum liability period specified in A.A.C. R9-22-210.01 does
NOT apply to services provided during prior period coverage. Additionally, behavioral health services
provided during the PPC period are not considered in the calculation of the maximum of 72 hours of inpatient
emergency behavioral health services as described in the rule. Pursuant to A.R.S. 36-545 et seq., court-ordered
behavioral health screening and evaluation services are the responsibility of the county. Refer also to Section
D, Paragraph 12, Behavioral Health Services.

Newborns: Newborns born to AHCCCS eligible mothers enrolled at the time of the child's birth will be
enrolled with the mother's Contractor, when newborn notification is received by AHCCCS. The Contractor is
responsible for notifying AHCCCS of a child’s birth to an enrolled member. Capitation for the newborn will
begin on the date notification is received by AHCCCS. The effective date of AHCCCS eligibility will be the
newborn’s date of birth, and the Contractor is responsible for all covered services to the newborn, whether or
not AHCCCS has received notification of the child’s birth. AHCCCS is currently available to receive
notification 24 hours a day, 7 days a week via phone or the AHCCCS website. Each eligible mother of a
newborn is sent a letter advising her of her right to choose a different Contractor for her child; the date of the
change will be the date of processing the request from the mother. If the mother does not request a change, the
child will remain with the mother's Contractor.

Newborns of FES mothers are auto-assigned to a Contractor and mothers of these newborns sent letters
advising them of their right to choose a different Contractor for their children. In the event the FES mother
chooses a different Contractor, AHCCCS will recoup all capitation paid to the originally assigned Contractor
and the baby will be enrolled retroactive to the date of birth with the second Contractor. The second
Contractor will receive prior period capitation from the date of birth to the day before assignment and
prospective capitation from the date of assignment forward. The second Contractor will be responsible for all
covered services to the newborn from date of birth.

Enrollment Guarantees: Upon initial capitated enrollment as a Title XIX-eligible member, the member is
guaranteed a minimum of five full months of continuous enrollment. Upon initial capitated enrollment as a
Title XXI-eligible member, the member is guaranteed a minimum of 12 full months of continuous enrollment.
Enrollment guarantees do not apply to HIFA parents and SSDI-Temporary Medical Coverage members. The
enrollment guarantee is a one-time benefit. If a member changes from one Contractor to another within the
enrollment guarantee period, the remainder of the guarantee period applies to the new Contractor. The
enrollment guarantee may not be granted or may be terminated if the member is incarcerated, or if a minor
child is adopted. AHCCCS Rules R9-22, Article 17, and R9-31, Article 3, describes other reasons for which
the enrollment guarantee may not apply.

Native Americans: Native Americans, on- or off-reservation, may choose to receive services from Indian
Health Service (IHS), a P.L. 93-638 tribal facility or any available Contractor. If a choice is not made within
the specified time limit, Native American Title XIX members living on-reservation will be assigned to the
AHCCCS American Indian Health Program (AIHP) as FFS members. The designation of a zip code as a
‘reservation zip code’, not the physical location of the residence, is the factor that determines whether a
member is considered on or off-reservation for these purposes. Further, if the member resides in a zip code that
contains land on both sides of a reservation boundary and the zip code is assigned as off-reservation, the
physical location of the residence does not change the off-reservation designation for the member. Native
American Title XIX members living off-reservation who do not make a Contractor choice will be assigned to
an available Contractor using the AHCCCS protocol for family continuity and the auto-assignment algorithm.
Native American Title XXI members must make a choice prior to being determined eligible. Title XXI HIFA
parent members’ enrollment will follow the Title XIX enrollment rules. Native Americans may change from
AHCCCS AIHP FFS to a Contractor or from a Contractor to AHCCCS AIHP FFS at any time.

4. ANNUAL ENROLLMENT CHOICE

AHCCCS conducts an Annual Enrollment Choice (AEC) for members on their annual anniversary date [42
CFR 438.56(c)(2)(ii)]. AHCCCS may hold an open enrollment in any GSA or combination of GSAs, as
deemed necessary. During AEC, members may change Contractors subject to the availability of other
Contractors within their Geographic Service Area. A members is mailed a printed enrollment form and other
information required by the Balanced Budget Act of 1997 (BBA) 60 days prior to his/her AEC date and may
choose a new Contractor by contacting AHCCCS to complete the enrollment process. If the member does not
participate in the AEC, no change of Contractor will be made (except for approved changes under the ACOM
Change of Plan Policy) during the new anniversary year. This holds true if a Contractor’s contract is renewed
and the member continues to live in a Contractor’s service area. The Contractor shall comply with the ACOM
Member Transition for Annual Enrollment Choice Policy, Open Enrollment and Other Plan Changes Policy,
and the AMPM.

5. ENROLLMENT AFTER CONTRACT AWARD

In the event that AHCCCS does not award a CYE ’09 contract to an incumbent contractor, AHCCCS will
direct enrollment effective October 1, 2008, for those members enrolled with an exiting Contractor. Members
will be auto assigned to all or select Contractors utilizing the auto assignment algorithm found in the
Conversion Group Assignment section of Attachment G, Auto-Assignment Algorithm. The members in the
Conversion Group will have the opportunity to choose an alternate Contractor, according to the details in
Attachment G, Auto-Assignment Algorithm.

AHCCCS will also use an enhanced auto-assignment algorithm in certain GSAs for new Contractors or those
incumbent Contractors defined as small Contractors. This enhanced algorithm may be in effect beginning
October 1, 2008, for a period of no less than three months and no more than six months. Those Contractors not
defined as new or small Contractors in a GSA may not receive auto-assigned members during the enhanced
algorithm period. See Attachment G, Auto-Assignment Algorithm, for details.

In addition to auto-assignment, AHCCCS will make changes to both annual enrollment choice materials and
new enrollee materials prior to October 1, 2008, to reflect the change in available contractors. The auto
assignment algorithm will be adjusted to exclude auto assignment of new enrollees to exiting Contractor(s)
effective August 1, 2008.

6. AUTO-ASSIGNMENT ALGORITHM

Members who do not exercise their right to choose and do not have family continuity are assigned to a Contractor
through an auto-assignment algorithm. Once auto-assigned, AHCCCS sends a Freedom of Choice notice to the
member and gives him/her 30 days to choose a different Contractor from the auto-assigned Contractor. The
algorithm is a mathematical formula used to distribute members to the various Contractors in a manner that is
predictable and consistent with AHCCCS goals. The algorithm favors those Contractors with lower capitation
rates and higher Program scores in this procurement and as described below. For further details on the AHCCCS
Auto-Assignment Algorithm, refer to Attachment G. AHCCCS may change the algorithm at any time during the
term of the contract in response to Contractor-specific issues (e.g. imposition of an enrollment cap).

In future contract years, AHCCCS may adjust the auto-assignment algorithm in consideration of Contractors’
clinical performance measure results when calculating target percentages. Ranking in the algorithm may be
weighted, based on the number of Performance Measures for which a Contractor is meeting the current AHCCCS
Minimum Performance Standard (MPS) as a percentage of the total number of measures utilized in the
calculation. AHCCCS will determine and communicate the Performance Measures to be used to evaluate
Contractor performance prior to the beginning of the contract year to be measured.

7. AHCCCS MEMBER IDENTIFICATION CARDS

The Contractor is responsible for paying the costs of producing AHCCCS member identification cards. The
Contractor will receive an invoice the month following the issue date of the identification card.

8. MAINSTREAMING OF AHCCCS MEMBERS

To ensure mainstreaming of AHCCCS members, the Contractor shall take affirmative action so that members
are provided covered services without regard to payer source, race, color, creed, gender, religion, age, national
origin (to include those with limited English proficiency), ancestry, marital status, sexual preference, genetic
information, or physical or mental handicap, except where medically indicated. The Contractor must take into
account a member’s literacy and culture when addressing members and their concerns, and must take
reasonable steps to encourage subcontractors to do the same. The Contractor must make interpreters, including
assistance for the vision- or hearing- impaired, available free of charge for all members to ensure appropriate
delivery of covered services. The Contractor must provide members with information instructing them how to
access these services.

Prohibited practices include, but are not limited to, the following, in accordance with Title VI of the US Civil
Rights Act of 1964, 42 USC, Section 2001, Executive Order 13166, and rules and regulation promulgated
according to, or as otherwise provided by law:

a. Denying or not providing a member any covered service or access to an available facility.
b. Providing to a member any covered service which is different, or is provided in a different manner or at a
   different time from that provided to other members, other public or private patients or the public at large,
   except where medically necessary.
c. Subjecting a member to segregation or separate treatment in any manner related to the receipt of any
   covered service; restricting a member in any way in his or her enjoyment of any advantage or privilege
   enjoyed by others receiving any covered service.
d. The assignment of times or places for the provision of services on the basis of the race, color, creed,
   religion, age, sex, national origin, ancestry, marital status, sexual preference, income status, AHCCCS
   membership, or physical or mental handicap of the participants to be served.

If the Contractor knowingly executes a subcontract with a provider with the intent of allowing or permitting
the subcontractor to implement barriers to care (i.e., the terms of the subcontract act to discourage the full
utilization of services by some members); the Contractor will be in default of its contract.

If the Contractor identifies a problem involving discrimination by one of its providers, it shall promptly
intervene and implement a corrective action plan. Failure to take prompt corrective measures may place the
Contractor in default of its contract.

9. TRANSITION OF MEMBERS

The Contractor shall comply with the AMPM and the ACOM Member Transition for Annual Enrollment
Choice, Open Enrollment and Other Plan Changes Policy standards for member transitions between
Contractors or GSAs, participation in or discharge from CRS or CMDP, to or from an ALTCS Contractor, and
upon termination or expiration of a contract. AHCCCS may discontinue enrollment of members with the
Contractor three months prior to the contract termination date. The Contractor shall develop and implement
policies and procedures which comply with these policies to address transition of:

a. Members with significant medical conditions such as a high-risk pregnancy or pregnancy within the last
   30 days, the need for organ or tissue transplantation, chronic illness resulting in hospitalization or nursing
   facility placement, etc.;
b. Members who are receiving ongoing services such as dialysis, home health, chemotherapy and/or radiation
   therapy, or who are hospitalized at the time of transition;
c. Members who have conditions requiring ongoing monitoring or screening such as elevated blood lead
   levels and members who were in the NICU after birth.
d. Members who frequently contact AHCCCS, state and local officials, the Governor’s Office and/or the media.
e. Members who have received prior authorization for services such as scheduled surgeries, out-of-area
   specialty services, or nursing home admission;
f. Prescriptions, DME and medically necessary transportation ordered for the transitioning member by the
   relinquishing Contractor; and
g. Medical records of the transitioning member (the cost, if any, of reproducing and forwarding medical
   records shall be the responsibility of the relinquishing AHCCCS Contractor).
h. Any members transitioning to CMDP.

When relinquishing members, the Contractor is responsible for timely notification to the receiving Contractor
regarding pertinent information related to any special needs of transitioning members. The Contractor, when
receiving a transitioning member with special needs, is responsible for coordinating care with the relinquishing
Contractor in order that services are not interrupted, and for providing the new member with Contractor and
service information, emergency numbers and instructions about how to obtain services.

10. SCOPE OF SERVICES

The Contractor shall provide covered services to AHCCCS members in accordance with all applicable federal
and state laws regulations and policies, including those listed by reference in attachments and this contract.
The services are described in detail in AHCCCS Rules R9-22, Article 2, the AHCCCS Medical Policy Manual
(AMPM) and the AHCCCS Contractor Operations Manual (ACOM), all of which are incorporated herein by
reference, except for provisions specific to the Fee-for-Service program, and may be found on the AHCCCS
website (http://www.azahcccs.gov/) [42 CFR 438.210(a)(1)]. To be covered, services must be medically
necessary and cost effective. The covered services are briefly described below. Except for annual well woman
exams, behavioral health and children’s dental services, covered services must be provided by or coordinated
with a primary care provider.

The Contractor shall coordinate all services it provides to a member with any services the member receives
from other entities, including behavioral health services the member receives through an ADHS/RBHA
provider and Children’s Rehabilitative Services (CRS) provided through ADHS/CRSA. The Contractor shall
ensure that, in the process of coordinating care, each member’s privacy is protected in accordance with the
privacy requirements in 45 CFR Parts 160 and 164, Subparts A and E, to the extent that they are applicable [42
CFR 438.208(b)(4) and 438.224].

Services must be rendered by providers that are appropriately licensed or certified, operating within their scope
of practice, and registered as an AHCCCS provider. The Contractor shall provide the same standard of care
for all members, regardless of the member's eligibility category. The Contractor shall ensure that the services
are sufficient in amount, duration and scope to reasonably be expected to achieve the purpose for which the
services are furnished. The Contractor shall not arbitrarily deny or reduce the amount, duration, or scope of a
required service solely because of diagnosis, type of illness, or condition of the member. The Contractor may
place appropriate limits on a service on the basis of criteria such as medical necessity; or for utilization control,
provided the services furnished can reasonably be expected to achieve their purpose [42 CFR 438.210(a)(3)].

If the Contractor does not, because of a moral or religious objection, cover one or more of the services listed in
this contract, it must notify AHCCCS of the objection. The Contractor must arrange for those services to be
provided by another entity. Any alternative arrangement must be approved in advance by AHCCCS. Requests
for approval must be submitted to the Division of Health Care Management, Acute Care Operations Unit, 90
days prior to implementation.

Authorization of Services: For the processing of requests for initial and continuing authorizations of services,
the Contractor shall have in place and follow written policies and procedures. The Contractor shall have
mechanisms in place to ensure consistent application of review criteria for authorization decisions. Any
decision to deny a service authorization request or to authorize a service in an amount, duration or scope that is
less than requested, shall be made by a health care professional who has appropriate clinical expertise in
treating the member’s condition or disease [42 CFR 438.210(b)].

Notice of Action: The Contractor shall notify the requesting provider and give the member written notice of
any decision by the Contractor to deny, reduce, suspend or terminate a service authorization request, or to
authorize a service in an amount, duration, or scope that is less than requested. The notice shall meet the
requirements of 42 CFR 438.404, AHCCCS Rules and ACOM Notice of Action Policy. The notice to the
provider must also be in writing as specified in Attachment H(1) of this contract.

The Contractor shall ensure that its providers are not restricted or inhibited in any way from communicating
freely with members regarding their health care, medical needs and treatment options, even if needed services
are not covered by the Contractor.

Ambulatory Surgery: The Contractor shall provide surgical services for either emergency or scheduled
surgeries when provided in an ambulatory or outpatient setting, such as a freestanding surgical center or a
hospital-based outpatient surgical setting.

American Indian Health Program (AIHP): AHCCCS will reimburse claims on a FFS basis for acute care
services that are medically necessary, eligible for 100% Federal reimbursement, and are provided to Title XIX
members enrolled with the Contractor in an IHS or a 638 tribal facility. Encounters for Title XIX services in
IHS or tribal facilities will not be accepted by AHCCCS or considered in capitation rate development.

The Contractor is responsible for reimbursement to IHS or tribal facilities for services provided to Title XXI
Native American members enrolled with the Contractor. The Contractor may choose to subcontract with an
IHS or 638 tribal facility as part of its provider network for the delivery of Title XXI covered services.
Expenses incurred by the Contractor for Title XXI services delivered in an IHS or 638 tribal facility shall be
encountered and considered in capitation rate development.

Anti-hemophilic Agents and Related Services: The Contractor shall provide services for the treatment of
hemophilia and Von Willebrand’s disease (See Section D, Paragraph 57, Reinsurance, Catastrophic
Reinsurance).

Audiology: The Contractor shall provide audiology services to members under the age of 21 years, including
the identification and evaluation of hearing loss and rehabilitation of the hearing loss through medical or
surgical means. i.e., Only the identification and evaluation of hearing loss are covered for members 21 years of
age and older unless the hearing loss is due to an accident or injury-related emergent condition. Pursuant to
A.A.C. R9-22-212, hearing aids are not covered for members 21 and older.

Behavioral Health: The Contractor shall provide behavioral health services as described in Section D,
Paragraph 12, Behavioral Health Services. Also refer to Prior Period Coverage in Section D, Paragraph 3,
Enrollment and Disenrollment.

Children's Rehabilitative Services (CRS): The program for children with CRS-covered conditions is
administered by the Arizona Department of Health Services (ADHS) for children who meet CRS eligibility
criteria. The Contractor shall refer children to the CRS program who are potentially eligible for services
related to CRS-covered conditions, as specified in R9-22, Article 2, and A.R.S. Title 36, Chapter 2, Article 3.
The Contractor is responsible for care of members until Children’s Rehabilitative Services Administration
(CRSA) determines those members eligible. In addition, the Contractor is responsible for covered services for
CRS-eligible members unless and until the Contractor has received written confirmation from CRSA that
CRSA will provide the requested service. The Contractor shall require the member’s Primary Care Provider
(PCP) to coordinate the member’s care with the CRS Program. For more detailed information regarding
eligibility criteria, referral practices, and Contractor-CRS coordination issues, refer to the CRS Policy and
Procedures Manual located on the Arizona Department of Health Services website at http://www.azdhs.gov/
and the related ACOM policy.

The Contractor shall respond to requests for services potentially covered by CRSA in accordance with the
related ACOM policy. The Contractor is responsible for addressing prior authorization requests if CRSA fails
to comply with the timeframes specified in the related ACOM policy. The Contractor remains ultimately
responsible for the provision of all covered services to its members, including emergency services not related
to a CRS condition, emergency services related to a CRS condition rendered outside the CRS network, and
AHCCCS-covered services denied by CRSA for the reason that it is not a service related to a CRS condition.

Referral to CRSA does not relieve the Contractor of the responsibility for providing timely medically
necessary AHCCCS services not covered by CRSA. In the event that CRSA denies a medically necessary
AHCCCS service for the reason that it is not related to a CRS condition, the Contractor must promptly respond
to the service authorization request and authorize the provision of medically necessary services. CRSA cannot
contest the Contractor prior authorization determination if CRSA fails to timely respond to a service
authorization request. The Contractor, through its Medical Director, may request review from the CRS
Regional Medical Director when it denies a service for the reason that it is not covered by the CRS Program.
The Contractor may also request a hearing with the Administration if it is dissatisfied with the CRSA
determination. If the AHCCCS Hearing Decision determines that the service should have been provided by
CRSA, CRSA shall be financially responsible for the costs incurred by the Contractor in providing the service.

A member with private insurance is not required to utilize CRSA. This includes members with Medicare
whether they are enrolled in Medicare FFS or a Medicare Managed Care plan. If a member uses the private
insurance network or Medicare for a CRS-covered condition, the Contractor is responsible for all applicable
deductibles and copayments. If the member is on Medicare, the ACOM Medicare Cost Sharing for Members
in Traditional Fee for Service Medicare Policy and Medicare Cost Sharing for Members in Medicare
Managed Care Plans Policy shall apply. When the private insurance or Medicare is exhausted, or certain
annual or lifetime limits are reached with respect to CRS-covered conditions, the Contractor shall refer the
member to CRSA for determination of eligibility for CRS services. If the member with private insurance or
Medicare chooses to enroll with CRS, CRS becomes the secondary payer responsible for all applicable
deductibles and copayments. The Contractor is not responsible to provide services in instances when the
CRS-eligible member who has no primary insurance or Medicare refuses to receive CRS-covered services through
the CRS program. If the Contractor becomes aware that a member with a CRS-covered condition refuses to
participate in the CRS application process or refuses to receive services through the CRS Program, the member
may be billed by the provider in accordance with AHCCCS regulations regarding billing for unauthorized
services.

Chiropractic Services: The Contractor shall provide chiropractic services to members under age 21 when
prescribed by the member’s PCP and approved by the Contractor in order to ameliorate the member’s medical
condition. Medicare approved chiropractic services for any member shall also be covered, subject to
limitations specified in 42 CFR 410.22, for Qualified Medicare Beneficiaries if prescribed by the member’s
PCP and approved by the Contractor.

Dialysis: The Contractor shall provide medically necessary dialysis, supplies, diagnostic testing and
medication for all members when provided by Medicare-certified hospitals or Medicare-certified end stage
renal disease (ESRD) providers. Services may be provided on an outpatient basis or on an inpatient basis if the
hospital admission is not solely to provide chronic dialysis services.

Early and Periodic Screening, Diagnosis and Treatment (EPSDT): The Contractor shall provide
comprehensive health care services through primary prevention, early intervention, diagnosis and medically
necessary treatment to correct or ameliorate defects and physical or mental illness discovered by the screenings
for members under age 21. The Contractor shall ensure that these members receive required health screenings,
including those for developmental/behavioral health, in compliance with the AHCCCS periodicity schedule.
The Contractor shall submit all EPSDT reports to the AHCCCS Division of Health Care Management, as
required by the AMPM. The Contractor is required to meet specific participation/utilization rates for members
as described in Section D, Paragraph 23, Quality Management.

The Contractor shall ensure the initiation and coordination of a referral to the ADHS/RBHA system for
members in need of behavioral health services. The Contractor shall follow up with the RBHA to monitor
whether members have received these health services.

The Contractor is encouraged to assign EPSDT-aged members to providers that are trained on and who use
AHCCCS-approved developmental screening tools.

Early Detection Health Risk Assessment, Screening, Treatment and Primary Prevention: The Contractor
shall provide primary prevention education to adult members. The Contractor shall provide health care services
through screening, diagnosis and medically necessary treatment for members 21 years of age and older. These
services include, but are not limited to, screening and treatment for hypertension; elevated cholesterol; colon
cancer; sexually transmitted diseases; tuberculosis; HIV/AIDS; breast and cervical cancer; and prostate cancer.
Nutritional assessment and treatment are covered when medically necessary to meet the nutritional needs of
members who may have a chronic debilitating disease. Physical examinations, diagnostic work-ups and
medically necessary immunizations are also covered as found in Arizona Administrative Code Section R9-22-
205. Required assessment and screening services for members under age 21 are specified in the AHCCCS
EPSDT periodicity schedule.

Emergency Services: The Contractor shall have and/or provide the following as a minimum:

a. Emergency services facilities adequately staffed by qualified medical professionals to provide prehospital,
    emergency care on a 24-hour-a-day, 7-day-a-week basis, for the sudden onset of a medically
    emergent condition. Emergency medical services are covered without prior authorization. The
    Contractor is encouraged to contract with emergency service facilities for the provision of emergency
    services. The Contractor shall be responsible for educating members and providers regarding
    appropriate utilization of emergency room services including behavioral health emergencies. The
    Contractor shall monitor emergency service utilization (by both provider and member) and shall have
    guidelines for implementing corrective action for inappropriate utilization;
b. All medical services necessary to rule out an emergency condition; and
c. Emergency transportation.

Per the Balanced Budget Act of 1997, 42 CFR 438.114, the following conditions apply with respect to
coverage and payment of emergency services:

The Contractor must cover and pay for emergency services regardless of whether the provider that furnishes
the service has a contract with the Contractor.

The Contractor may not deny payment for treatment obtained under either of the following circumstances:

1. A member had an emergency medical condition, including cases in which the absence of medical
   attention would not have resulted in the outcomes identified in the definition of emergency medical
   condition under 42 CFR 438.114.
2. A representative of the Contractor (an employee or subcontracting provider) instructs the member to
   seek emergency medical services.

Additionally, the Contractor may not:

1. Limit what constitutes an emergency medical condition as defined in 42 CFR 438.114, on the basis of
   lists of diagnoses or symptoms.
2. Refuse to cover emergency services based on the failure of the emergency room provider, hospital, or
   fiscal agent to notify the Contractor of the member’s screening and treatment within 10 calendar days
   of presentation for emergency services. Claims submission by the hospital within 10 calendar days of
   presentation for the emergency services constitutes notice to the Contractor. This notification
   stipulation is only related to the provision of emergency services.
3. Require notification of Emergency Department treat and release visits as a condition of payment
   unless the plan has prior approval of the AHCCCS Administration.

A member who has an emergency medical condition may not be held liable for payment of subsequent
screening and treatment needed to diagnose the specific condition or stabilize the patient.
The attending emergency physician, or the provider actually treating the member, is responsible for
determining when the member is sufficiently stabilized for transfer or discharge, and such determination is
binding on the Contractor responsible for coverage and payment. The Contractor shall comply with BBA
guidelines regarding the coordination of post-stabilization care.

For additional information and requirements regarding emergency services, refer to AHCCCS Rules R9-22-201
et seq. and 42 CFR 438.114.

Family Planning: The Contractor shall provide family planning services in accordance with the AMPM, for
all members who choose to delay or prevent pregnancy. These include medical, surgical, pharmacological and
laboratory services, as well as contraceptive devices. Information and counseling, which allow members to
make informed decisions regarding family planning methods, shall also be included. If the Contractor does not
provide family planning services, it must contract for these services through another health care delivery
system.

The Contractor shall provide services to members enrolled in the Family Planning Services Extension
Program, a program that provides family planning services only, for a maximum of two consecutive 12-month
periods, to women whose SOBRA eligibility has terminated. The Contractor is also responsible for notifying
AHCCCS when a SOBRA woman is sterilized to prevent inappropriate enrollment in the SOBRA Family
Planning Services Extension Program. Notification should be made at the time the newborn is reported or
after the sterilization procedure is completed.

Home and Community Based Services (HCBS): Assisted living facility, alternative residential setting, or
home and community based services (HCBS) as defined in R9-22, Article 2, and R9-28, Article 2 that meet the
provider standards described in R9-28, Article 5, and subject to the limitations set forth in the AMPM. These
services are covered in lieu of a nursing facility.

Home Health: This service shall be provided under the direction of a physician to prevent hospitalization or
institutionalization and may include nursing, therapies, supplies and home health aide services. It shall be
provided on a part-time or intermittent basis.

Hospice: These services are covered for members who are certified by a physician as being terminally ill and
having six months or less to live. See the AMPM for details on covered hospice services.

Hospital: Inpatient services include semi-private accommodations for routine care, intensive and coronary
care, surgical care, obstetrics and newborn nurseries, and behavioral health emergency/crisis services. If the
member’s medical condition requires isolation, private inpatient accommodations are covered. Nursing
services, dietary services and ancillary services such as laboratory, radiology, pharmaceuticals, medical
supplies, blood and blood derivatives, etc. are also covered. Outpatient hospital services include any of the
above, which may be appropriately provided on an outpatient or ambulatory basis (i.e., laboratory, radiology,
therapies, ambulatory surgery, etc.). Observation services may be provided on an outpatient basis, if
determined reasonable and necessary, when deciding whether the member should be admitted for inpatient
care. Observation services include the use of a bed and periodic monitoring by hospital nursing staff and/or
other staff to evaluate, stabilize or treat medical conditions of a significant degree of instability and/or
disability.

Immunizations: The Contractor shall provide immunizations for adults (21 years of age and older) to include
but not limited to: diphtheria-tetanus, influenza, pneumococcus, rubella, measles and hepatitis-B and others as
medically indicated. For all members under the age of 21, immunization requirements include but are not
limited to: diphtheria, tetanus, pertussis vaccine (DTaP), inactivated polio vaccine (IPV), measles, mumps,
rubella (MMR) vaccine, H. influenza, type B (HIB) vaccine, hepatitis B (Hep B) vaccine, varicella zoster virus
(VZV) vaccine and pneumococcal conjugate vaccine (PCV) (see Section D, Paragraph 15, Pediatric
Immunizations and the Vaccines for Children Program). The Contractor is required to meet specific
immunization rates for members under the age of 21, which are described in Section D, Paragraph 23, Quality
Management. (Please refer to the AMPM for current immunization requirements.)

Incontinence Supplies: The Contractor shall cover incontinence supplies as specified in AHCCCS Rule
A.A.C. R9-22-212 and the AMPM.

Laboratory: Laboratory services for diagnostic, screening and monitoring purposes are covered when
provided by a CLIA (Clinical Laboratory Improvement Act) approved free-standing laboratory, hospital,
clinic, physician office or other health care facility laboratory.

Upon written request, the Contractor may obtain laboratory test data on members from a freestanding
laboratory or hospital- based laboratory subject to the requirements specified in A.R.S. § 36-2903(Q) and (R).
The data shall be used exclusively for quality improvement activities and health care outcome studies required
and/or approved by the Administration.

Maternity: The Contractor shall provide pre-conception counseling, pregnancy identification, prenatal care,
treatment of pregnancy related conditions, labor and delivery services, and postpartum care for members.
Services may be provided by physicians, physician assistants, nurse practitioners, or certified nurse midwives.
Members may select or be assigned to a PCP specializing in obstetrics. All members, anticipated to have a
low-risk delivery, may elect to receive labor and delivery services in their home, if this setting is included in
the allowable settings of the Contractor and the Contractor has providers in its network that offer home labor
and delivery services. All members anticipated to have a low-risk prenatal course and delivery may elect to
receive prenatal care, labor and delivery and postpartum care provided by certified nurse midwives, if these
providers are in the Contractor’s network. Members receiving maternity services from a certified nurse
midwife must also be assigned to a PCP for other health care and medical services. The Contractor shall allow
women and their newborns to receive up to 48 hours of inpatient hospital care after a routine vaginal delivery
and up to 96 hours of inpatient care after a cesarean delivery. The attending health care provider, in
consultation with the mother, may discharge the mother or newborn prior to the minimum length of stay. A
normal newborn may be granted an extended stay in the hospital of birth when the mother’s continued stay in
the hospital is beyond the 48 or 96 hour stay.

The Contractor shall inform all assigned AHCCCS pregnant women of voluntary prenatal HIV testing and the
availability of medical counseling if the test is positive. The Contractor shall provide information in the
member handbook and annually in the member newsletter, which encourages pregnant women to be tested and
provides instructions about where testing is available. Semi-annually, the Contractor shall report to AHCCCS
the number of pregnant women who have been identified as HIV/AIDS-positive. This report is due no later
than 30 days after the end of the second and fourth quarters of the contract year.

Medical Foods: Medical foods are covered within limitations defined in the AMPM for members diagnosed
with a metabolic condition included under the ADHS Newborn Screening Program and specified in the
AMPM. The medical foods, including metabolic formula and modified low protein foods, must be prescribed
or ordered under the supervision of a physician.

Medical Supplies, Durable Medical Equipment (DME), Orthotic and Prosthetic Devices: These services are
covered when prescribed by the member’s PCP, attending physician, practitioner, or by a dentist. Medical
equipment may be rented or purchased only if other sources, which provide the items at no cost, are not
available. The total cost of the rental must not exceed the purchase price of the item. Reasonable repairs or
adjustments of purchased equipment are covered to make the equipment serviceable and/or when the repair
cost is less than renting or purchasing another unit.

Nursing Facility: The Contractor shall provide services in nursing facilities, including religious non-medical
health care institutions, for members who require short-term convalescent care not to exceed 90 days per
contract year. In lieu of a nursing facility, the member may be placed in an assisted living facility, an
alternative residential setting, or receive home and community based services (HCBS) as defined in R9-22,
Article 2 and R9-28, Article 2 that meet the provider standards described in R9-28, Article 5, and subject to the
limitations set forth in the AMPM.

Nursing facility services must be provided in a dually-certified Medicare/Medicaid nursing facility, which
includes in the per-diem rate: nursing services; basic patient care equipment and sickroom supplies; dietary
services; administrative physician visits; non-customized DME; necessary maintenance and rehabilitation
therapies; over-the-counter medications; social, recreational and spiritual activities; and administrative,
operational medical direction services. See Section D, Paragraph 41, Responsibility for Nursing Facility
Reimbursement, for further details.

The Contractor shall notify the Assistant Director of the Division of Member Services, by Email, when a
member has been residing in a nursing facility for 75 days. This will allow AHCCCS time to follow-up on the
status of the ALTCS application and to consider potential fee-for-service coverage, if the stay goes beyond the
90-day per contract year maximum. The notice should be sent via e-mail to
HealthPlan75DayNotice@azahcccs.gov.

                Notifications must include:
                1. Member Name
                2. AHCCCS ID
                3. Date of Birth
                4. Name of Facility
                5. Admission Date to the Facility
                6. Date they reach the 75 days
                7. Name of Contractor of enrollment

Nutrition: Nutritional assessments may be conducted as a part of the EPSDT screenings for members under
age 21, and to assist members 21 years of age and older whose health status may improve with nutritional
intervention. Assessment of nutritional status on a periodic basis may be provided as determined necessary,
and as a part of the health risk assessment and screening services provided by the member’s PCP. AHCCCS
covers nutritional therapy on an enteral, parenteral or oral basis, when determined medically necessary to
provide either complete daily dietary requirements or to supplement a member’s daily nutritional and caloric
intake and when AHCCCS criteria specified in the AMPM are met.

Oral Health: The Contractor shall provide all members under the age of 21 years with all medically necessary
dental services including emergency dental services, dental screening and preventive services in accordance
with the AHCCCS periodicity schedule, as well as therapeutic dental services, dentures, and pretransplantation
dental services. The Contractor shall monitor compliance with the EPSDT periodicity schedule
for dental screening services. The Contractor is required to meet specific utilization rates for members as
described in Section D, Paragraph 23, Quality Management. The Contractor shall ensure that members are
notified when dental screenings are due if the member has not been scheduled for a visit. If a dental screening
is not received by the member, a second notice must be sent. Members under the age of 21 may request dental
services without referral and may choose a dental provider from the Contractor’s provider network. For
members who are 21 years of age and older, the Contractor shall provide emergency dental care, medically
necessary dentures and dental services for transplantation services as specified in the AMPM.

Physician: The Contractor shall provide physician services to include medical assessment, treatments and
surgical services provided by licensed allopathic or osteopathic physicians.

Podiatry: The Contractor shall provide podiatry services to include bunionectomies, casting for the purpose of
constructing or accommodating orthotics, medically necessary orthopedic shoes that are an integral part of a
brace, and medically necessary routine foot care for patients with a severe systemic disease that prohibits care
by a nonprofessional person.

Post-stabilization Care Services Coverage and Payment: Pursuant to AHCCCS Rule A.A.C. R9-22-210 and
42 CFR 438.114, 422.113(c) and 422.133, the following conditions apply with respect to coverage and
payment of emergency and of post-stabilization care services, except where otherwise noted in the contract:

The Contractor must cover and pay for post-stabilization care services without authorization, regardless of
whether the provider that furnishes the service has a contract with the Contractor, for the following situations:

1. Post-stabilization care services that were pre-approved by the Contractor; or
2. Post-stabilization care services were not pre-approved by the Contractor because the Contractor
   did not respond to the treating provider’s request for pre-approval within one hour after being
   requested to approve such care or could not be contacted for pre-approval.
3. The Contractor representative and the treating physician cannot reach agreement concerning the
   member’s care and a Contractor physician is not available for consultation. In this situation, the
   Contractor must give the treating physician the opportunity to consult with a Contractor physician
   and the treating physician may continue with care of the patient until a Contractor physician is
   reached or one of the criteria in 42 CFR 422.113(c)(3) is met.

Pursuant to 42 CFR 422.113(c)(3), the Contractor’s financial responsibility for post-stabilization care services
that have not been pre-approved ends when:

1. A Contractor physician with privileges at the treating hospital assumes responsibility for the
   member’s care;
2. A Contractor physician assumes responsibility for the member’s care through transfer;
3. A Contractor representative and the treating physician reach an agreement concerning the
   member’s care; or
4. The member is discharged.

Pregnancy Terminations: AHCCCS covers pregnancy termination if the pregnant member suffers from a
physical disorder, physical injury, or physical illness, including a life endangering physical condition caused
by or arising from the pregnancy itself, that would, as certified by a physician, place the member in danger of
death unless the pregnancy is terminated, or the pregnancy is a result of rape or incest.

The attending physician must acknowledge that a pregnancy termination has been determined medically
necessary by submitting the Certificate of Necessity for Pregnancy Termination. This certificate must be
submitted to the Contractor’s Medical Director. The Certificate must certify that, in the physician's
professional judgment, one or more of the previously mentioned criteria have been met.

Prescription Drugs: Medications ordered by a PCP, attending physician, dentist or other authorized prescriber
and dispensed under the direction of a licensed pharmacist are covered subject to limitations related to
prescription supply amounts, Contractor formularies and prior authorization requirements. The Contractor
may include over-the-counter medications in the formulary, as defined in the AMPM. An appropriate overthe-
counter medication may be prescribed, when it is determined to be a lower-cost alternative to prescription
drugs.

Medicare Part D: AHCCCS covers those drugs ordered by a PCP, attending physician, dentist or other
authorized prescriber and dispensed under the direction of a licensed pharmacist subject to limitations related
to prescription supply amounts, and the Contractor’s prior authorization requirements if they are excluded from
Medicare Part D coverage. Medications that are covered by Part D, but are not on a specific Part D Health
Plan’s formulary are not considered excluded drugs and will not be covered by AHCCCS.

Primary Care Provider (PCP): PCP services are covered when provided by a physician, physician assistant or
nurse practitioner selected by, or assigned to, the member. The PCP provides primary health care and serves
as a coordinator in referring the member for specialty medical services [42 CFR 438.208(b)]. The PCP is
responsible for maintaining the member’s primary medical record, which contains documentation of all health
risk assessments and health care services of which they are aware whether or not they were provided by the
PCP.

Radiology and Medical Imaging: These services are covered when ordered by the member’s PCP, attending
physician or dentist and are provided for diagnosis, prevention, treatment or assessment of a medical condition.
Services are generally provided in hospitals, clinics, physician offices and other health care facilities.

Rehabilitation Therapy: The Contractor shall provide occupational, physical and speech therapies. Therapies
must be prescribed by the member’s PCP or attending physician for an acute condition and the member must
have the potential for improvement due to the rehabilitation. Physical therapy for all members, and
occupational and speech therapies for members under the age of 21, are covered in both inpatient and
outpatient settings. For those members who are 21 and over, occupational and speech therapies are covered in
inpatient settings only.

Respiratory Therapy: This therapy is covered in inpatient and outpatient settings when prescribed by the
member’s PCP or attending physician, and is necessary to restore, maintain or improve respiratory functioning.

Transplantation of Organs and Tissue, and Related Immunosuppressant Drugs: These services are covered
within limitations defined in the AMPM for members diagnosed with specified medical conditions. Services
include pre-transplant inpatient or outpatient evaluation; donor search; organ/tissue harvesting or procurement;
preparation and transplantation services; and convalescent care. In addition, if a member receives, or has
received, a transplant covered by a source other than AHCCCS, medically necessary non-experimental
services are provided, within limitations, after the discharge from the acute care hospitalization for the
transplantation. AHCCCS has contracted with transplantation providers for the Contractor’s use or the
Contractor may select its own transplantation provider.

Transportation: These services include emergency and non-emergency medically necessary transportation.
Emergency transportation, including transportation initiated by an emergency response system such as 911,
may be provided by ground, air or water ambulance to manage an AHCCCS member’s emergency medical
condition at an emergency scene and transport the member to the nearest appropriate medical facility.
Non-emergency transportation shall be provided for members who are unable to provide their own transportation
for medically necessary services. The Contractor shall ensure that members have coordinated, reliable,
medically necessary transportation to ensure members arrive on-time for regularly scheduled appointments and
are picked up upon completion of the entire scheduled treatment.

Triage/Screening and Evaluation: These are covered services when provided by acute care hospitals, IHS
facilities, a PL 93-638 tribal facility and after-hours settings to determine whether or not an emergency exists,
assess the severity of the member’s medical condition and determine what services are necessary to alleviate or
stabilize the emergent condition. Triage/screening services must be reasonable, cost effective and meet the
criteria for severity of illness and intensity of service.

Vision Services/Ophthalmology/Optometry: The Contractor shall provide all medically necessary emergency
eye care, vision examinations, prescriptive lenses, and treatments for conditions of the eye for all members
under the age of 21. For members who are 21 years of age and older, the Contractor shall provide emergency
care for eye conditions which meet the definition of an emergency medical condition. Also covered for this
population is cataract removal, and medically necessary vision examinations and prescriptive lenses, if
required, following cataract removal and other eye conditions as specified in the AMPM.

Members shall have full freedom to choose, within the Contractor’s network, a practitioner in the field of eye
care, acting within the scope of their practice, to provide the examination, care or treatment for which the
member is eligible. A “practitioner in the field of eye care” is defined to be either an ophthalmologist or an
optometrist.

11. SPECIAL HEALTH CARE NEEDS

The Contractor shall have in place a mechanism to identify all members with special health care needs [42
CFR 438.240(b)(4)]. The Contractor shall implement mechanisms to assess each member identified as having
special health care needs, in order to identify any ongoing special conditions of the member which require a
course of treatment or regular care monitoring. The assessment mechanisms shall use appropriate health care
professionals [42 CFR 438.208(c)(2)]. The Contractor shall share with other entities providing services to that
member the results of its identification and assessment of that member’s needs so that those activities need not
be duplicated [42 CFR 438.208(b)(3)].

For members with special health care needs determined to need a specialized course of treatment or regular
care monitoring, the Contractor must have procedures in place to allow members to directly access a specialist
(for example through a standing referral or an approved number of visits) as appropriate for the member’s
condition and identified needs [42 CFR 438.208(c)(4)].

The Contractor shall have a methodology to identify providers willing to provide medical home services and
make reasonable efforts to offer access to these providers.

The American Academy of Pediatrics (AAP) describes care from a medical home as:
                • Accessible
                • Continuous
                • Coordinated
                • Family-centered
                • Comprehensive
                • Compassionate
                • Culturally effective

The Contractor shall ensure that populations with ongoing medical needs, including but not limited to dialysis,
radiation and chemotherapy, have coordinated, reliable, medically necessary transportation to ensure members
arrive on-time for regularly scheduled appointments and are picked up upon completion of the entire scheduled
treatment.

12. BEHAVIORAL HEALTH SERVICES

AHCCCS members, except for SOBRA Family Planning members, are eligible for comprehensive behavioral
health services. For SOBRA Family Planning members, there is no behavioral health coverage. With the
exception of the Contractor’s providers’ medical management of certain behavioral health conditions as
described under “Medication Management Services”, the behavioral health benefit for these members is
provided through the ADHS - Regional Behavioral Health Authority (RBHA) system. The Contractor shall be
responsible for member education regarding these benefits; provision of limited emergency inpatient services;
and screening and referral to the RBHA system of members identified as requiring behavioral health services.

Member Education: The Contractor shall be responsible for educating members in the member handbook and
other printed documents about covered behavioral health services and where and how to access services.
Covered services include:

a. Behavior Management (behavioral health personal care, family support/home care training, self-help/peer
   support)
b. Behavioral Health Case Management Services (limited)
c. Behavioral Health Nursing Services
d. Emergency Behavioral Health Care
e. Emergency and Non-Emergency Transportation
f. Evaluation and Assessment
g. Individual, Group and Family Therapy and Counseling
h. Inpatient Hospital Services (the Contractor may provide services in alternative inpatient settings that are
    licensed by the Arizona Department of Health Services, Division of Assurance and Licensure, the Office
    of Behavioral Health Licensure, in lieu of services in an inpatient hospital. These alternative settings must be
    lower cost than traditional inpatient settings. The cost of the alternative settings will be considered in
    capitation rate development)
i.  Non-Hospital Inpatient Psychiatric Facilities Services (Level I residential treatment centers and sub-acute
    facilities)
j.  Laboratory and Radiology Services for Psychotropic Medication Regulation and Diagnosis
k. Opioid Agonist Treatment
l.  Partial Care (Supervised day program, therapeutic day program and medical day program)
m. Psychosocial Rehabilitation (living skills training; health promotion; supportive employment services)
n. Psychotropic Medication
o. Psychotropic Medication Adjustment and Monitoring
p. Respite Care (with limitations)
q. Rural Substance Abuse Transitional Agency Services
r. Screening
s. Behavioral Health Therapeutic Home Care Services

Referrals: As specified in Section D, Paragraph 10, Scope of Services, EPSDT, the Contractor must provide
developmental/behavioral health screenings for members up to 21 years of age in compliance with the
AHCCCS periodicity schedule. The Contractor shall ensure the initiation and coordination of behavioral
health referrals of these members to the RBHA when determined necessary through the screening process.
The Contractor is responsible for RBHA referral and follow-up collaboration, as necessary, for other members
identified as needing behavioral health evaluation and treatment. Members may also access the RBHA system
for evaluation by self-referral or be referred by schools, State agencies or other service providers. The
Contractor is responsible for providing transportation to a member’s first RBHA evaluation appointment if a
member is unable to provide his/her own transportation.

Emergency Services: Once a member is enrolled, the Contractor is responsible for providing up to 72 hours
inpatient emergency behavioral health services to members with psychiatric or substance abuse diagnoses who
are not behavioral health recipients in accordance with AHCCCS Rule R9-22-210.01. These emergency
inpatient behavioral health services are in addition to a Contractor’s responsibility to reimburse all medically
necessary behavioral health services received during prior period coverage. Reimbursement for court ordered
screening and evaluation services is not the responsibility of the Contractor and instead falls to the county
pursuant to A.R.S. 36-545. For additional information regarding behavioral health services refer to Title 9
Chapter 22 Articles 2 and 12. It is expected that the Contractor initiate a referral to the RBHA for evaluation
and behavioral health recipient eligibility as soon as possible after admission.

When members present in an emergency room setting, the Contractor is responsible for all emergency medical
services including triage, physician assessment and diagnostic tests. For members who are not ADHS
behavioral health recipients, the Contractor is responsible to provide medically necessary psychiatric
consultations or psychological consultations in emergency room settings to help stabilize the member or
determine the need for inpatient behavioral health services. ADHS is responsible for medically necessary
psychiatric consultations provided to ADHS behavioral health recipients in emergency room settings.

Comorbidities: The Contractor must ensure that members with diabetes who are being discharged from the
Arizona State Hospital (AzSH) are issued the same brand and model of both glucometer and supplies they were
trained to use while in the facility. Care must be coordinated with the AzSH prior to discharge to ensure that all
supplies are authorized and available to the member upon discharge.

In the event that a member’s mental health status renders them incapable or unwilling to manage their medical
condition and the member has a skilled medical need, the Contractor must arrange ongoing medically necessary
nursing services.

Coordination of Care: The Contractor is responsible for ensuring that a medical record is established by the
PCP when behavioral health information is received from the RBHA or provider about an assigned member even
if the PCP has not yet seen the assigned member. In lieu of actually establishing a medical record, such
information may be kept in an appropriately labeled file but must be associated with the member’s medical record
as soon as one is established. The Contractor shall require the PCP to respond to RBHA/provider information
requests pertaining to ADHS behavioral health recipient members within 10 business days of receiving the
request. The response should include all pertinent information, including, but not limited to, current diagnoses,
medications, laboratory results, last PCP visit, and recent hospitalizations. The Contractor shall require the PCP to
document or initial signifying review of member behavioral health information received from a RBHA
behavioral health provider who is also treating the member. For prior period coverage, the Contractor is
responsible for payment of all claims for medically necessary covered behavioral health services.

Medication Management Services: The Contractor shall allow PCPs to provide medication management
services (prescriptions, medication monitoring visits, laboratory and other diagnostic tests necessary for
diagnosis and treatment of behavioral disorders) to members with diagnoses of depression, anxiety and
attention deficit hyperactivity disorder. The Contractor shall make available, on the Contractor’s formulary,
medications for the treatment of these disorders. AHCCCS has established a work group to identify best
practices and evidence-based practice guidelines for the treatment of anxiety, depression and ADHD disorders.
The Contractor shall be required to participate in the AHCCCS work group meetings. Decisions from the work
group shall be implemented by the Contractor, and may include, but are not limited to, assuring that PCPs are
trained on and follow AHCCCS-approved evidence-based practice guidelines, implementation of monitoring
processes and reporting of guidelines.

The Contractor may implement step therapy for behavioral health medications used for treating anxiety,
depression and ADHD disorders. If the RBHA/behavioral health provider provides documentation to the
Contractor that step therapy has already been completed, or is medically contraindicated, the Contractor shall
continue to provide the medication at the dosage at which the member has been stabilized, unless there is
subsequently a change in medical condition of the member.

The Contractor shall ensure that training and education are available to PCPs regarding behavioral health
referral and consultation procedures. The Contractor shall establish policies and procedures for referral and
consultation and shall describe them in its provider manual. Policies for referral must include, at a minimum,
criteria, processes, responsible parties and minimum requirements no less stringent than those specified in this
contract for the forwarding of member medical information.

Transfer of Care: When a PCP has initiated medication management services for a member to treat a
behavioral health disorder, and it is subsequently determined by the PCP or Contractor that the member should
be transferred to a RBHA prescriber for evaluation and/or continued medication management services, the
Contractor will require and ensure that the PCP or Contractor coordinates the transfer of care. All affected
subcontracts shall include this provision. The Contractor shall establish policies and procedures for the
transition of members who are referred to the RBHA for ongoing treatment. The Contractor shall ensure that
PCPs maintain continuity of care for these members. The policies and procedures must address, at a
minimum, the following:

1. Guidelines for when a transition of the member to the RBHA for ongoing treatment is indicated.
2. Protocols for notifying the RBHA of the member’s transfer, including reason for transfer, diagnostic
information, and medication history.
3. Protocols and guidelines for the transfer of medical records, including but not limited to which parts of
the medical record are to be copied, timeline for making the medical record available to the RBHA,
observance of confidentiality of the member’s medical record, and protocols for responding to RBHA
requests for additional medical record information.
4. Protocols for transition of prescription services, including but not limited to notification to the RBHA
of the member’s current medications and timeframes for dispensing and refilling medications during
the transition period. This coordination must ensure at a minimum, that the member does not run out
of prescribed medications prior to the first appointment with a RBHA prescriber and that all relevant
member pertinent medical information as outlined above and including the reason for transfer is
forwarded to the receiving RBHA prescriber prior to the member’s first scheduled appointment with
the RBHA prescriber.
5. Contractor activities to monitor to ensure that members are appropriately transitioned to the RBHA for
care.

The Contractor shall ensure that its quality management program incorporates monitoring of the PCP’s
management of behavioral health disorders and referral to, coordination of care with and transfer of care to
RBHA providers as required under this contract.

13. AHCCCS GUIDELINES, POLICIES AND MANUALS

All AHCCCS guidelines, policies and manuals are hereby incorporated by reference into this contract. All
guidelines, policies and manuals are available on the AHCCCS internet website, located at www.azahcccs.gov.
The Contractor is responsible for complying with the requirements set forth within. In addition, linkages to
AHCCCS Rules (Arizona Administrative Code), Statutes and other resources are also available to all
interested parties through the AHCCCS website. Upon adoption by AHCCCS, updates will be made available
to the Contractor. The Contractor shall be responsible for implementing these requirements and maintaining
current copies of updates.

14. MEDICAID SCHOOL BASED CLAIMING PROGRAM (MSBC)

Pursuant to an Intergovernmental Agreement with the Department of Education, and a contract with a Third
Party Administrator, AHCCCS reimburses participating school districts for specifically identified Medicaid
services when provided to Medicaid eligible children who are included under the Individuals with Disabilities
Education Act (IDEA). The Medicaid services must be identified in the member’s Individual Education Plan
(IEP) as medically necessary for the child to obtain a public school education.

MSBC services are provided in a school setting or other approved setting specifically to allow children to
receive a public school education. They do not replace medically necessary services provided outside the
school setting or other MSBC approved alternative setting. Currently, services include audiology, therapies
(OT, PT and speech/language); behavioral health evaluation and counseling; nursing and attendant care; and
specialized transportation. The Contractor’s evaluations and determinations of medical necessity shall be
made independent of the fact that the child is receiving MSBC services.

The Contractor and its providers must coordinate with schools and school districts that provide MSBC services
to the Contractor’s enrolled members. Services should not be duplicative. Contractor case managers, working
with special needs children, should coordinate with the appropriate school staff working with these members.
Transfer of member medical information and progress toward treatment goals between the Contractor and the
member’s school or school district is required as appropriate and should be used to enhance the services
provided to members.

15. PEDIATRIC IMMUNIZATIONS AND THE VACCINES FOR CHILDREN PROGRAM

Through the Vaccines for Children Program, the Federal and State governments purchase, and make available
to providers free of charge, vaccines for AHCCCS children under age 19. The Contractor shall not utilize
AHCCCS funding to purchase vaccines for members under the age of 19. If vaccines are not available through
the VFC Program, the Contractor shall contact the AHCCCS Division of Health Care Management, Clinical
Quality Management Unit. Any provider, licensed by the State to administer immunizations, may register with
ADHS as a "VFC provider" and receive free vaccines. The Contractor shall not reimburse providers for the
administration of the vaccines in excess of the maximum allowable as set by CMS, found in the AHCCCS fee
schedule. The Contractor shall comply with all VFC requirements and monitor its providers to ensure that, a
physician if acting as primary care physician (PCP) to AHCCCS members under the age of 19 is registered
with ADHS/VFC.

In some GSAs, providers may choose not to provide vaccinations due to low numbers of children in their
panels, etc. The Contractor must develop processes to ensure that vaccinations are available through a VFC
enrolled provider or through the county Health Department. In all instances, the antigens are to be provided
through the VFC program. The Contractor must develop processes to pay the administration fee to whoever
administers the vaccine regardless of their contract status with the Contractor.

Arizona State law requires the reporting of all immunizations given to children under the age of 19.
Immunizations must be reported at least monthly to the ADHS. Reported immunizations are held in a central
database known as ASIIS (Arizona State Immunization Information System), which can be accessed by
providers to obtain complete, accurate immunization records. Software is available from ADHS to assist
providers in meeting this reporting requirement. The Contractor must educate its provider network about these
reporting requirements and the use of this resource and monitor to ensure compliance.

16. STAFF REQUIREMENTS AND SUPPORT SERVICES

The Contractor shall have in place the organizational, operational, managerial and administrative systems
capable of fulfilling all contract requirements. For the purposes of this contract, the Contractor shall not
employ or contract with any individual who has been debarred, suspended or otherwise lawfully prohibited
from participating in any public procurement activity or from participating in non-procurement activities under
regulations issued under Executive Order No. 12549 or under guidelines implementing Executive Order 12549
[42 CFR 438.610 (a) & (b)].

The Contractor is responsible for maintaining a significant local (within the State of Arizona) presence. This
presence includes staff designated below with an asterisk (*). The Contractor must obtain approval from
AHCCCS prior to moving functions outside the State of Arizona. Such a request for approval must be
submitted to the Division of Health Care Management at least 60 days prior to the proposed change in
operations and must include a description of the processes in place that assure rapid responsiveness to effect
changes for contract compliance. The Contractor shall be responsible for any additional costs associated with
on-site audits or other oversight activities of required functions located outside of the State of Arizona. At the
beginning of each contract year the Contractor must provide, to the Division of Health Care Management, a
listing of all functions and their locations.

The Contractor must employ sufficient staffing and utilize appropriate resources to achieve contractual
compliance. The Contractor’s resource allocation must be adequate to achieve outcomes in all functional areas
within the organization. Adequacy will be evaluated based on outcomes and compliance with contractual and
AHCCCS policy requirements, including the requirement for providing culturally competent services. If the
Contractor does not achieve the desired outcomes or maintain compliance with contractual obligations,
additional monitoring and regulatory action may be employed by AHCCCS, up to and including actions
specified in Section D, Paragraph 72, Sanctions, of the Contract.

An individual staff member shall be limited to occupying a maximum of two of the Key Staff positions listed
below. The Contractor shall inform AHCCCS, Division of Health Care Management, in writing within seven
days, when an employee leaves one of the Key Staff positions listed below (this requirement does not apply to
Additional Required Staff, also listed below). The name of the interim contact person should be included with
the notification. The name and resume of the permanent employee should be submitted as soon as the new hire
has taken place. At a minimum, the following staff is required:

Key Staff

a. *Administrator/CEO/COO or designee must be available, full time, to fulfill the responsibilities of the
    position and to oversee the entire operation of the Contractor. The Administrator shall devote sufficient
    time to the Contractor’s operations to ensure adherence to program requirements and timely responses to
    AHCCCS Administration.

b. *Medical Director/CMO who shall be an Arizona-licensed physician. The Medical Director shall be
    actively involved in all-major clinical programs and QM and MM components of the Contractor. The
    Medical Director shall devote sufficient time to the Contractor to ensure timely medical decisions,
    including after-hours consultation as needed.
c. Chief Financial Officer/CFO who is available, full time, to fulfill the responsibilities of the position and
    to oversee the budget and accounting systems implemented by the Contractor.
d. Pharmacy Director/Coordinator who is an Arizona licensed pharmacist or physician who oversees and
    administers the prescription drug and pharmacy benefits. The Pharmacy Coordinator/Director may be an
    employee or Contractor of the Plan.
e. Dental Director/Coordinator who is responsible for coordinating dental activities of the health plan and
    providing required communication between the plan and AHCCCS. The Dental Director/Coordinator may
    be an employee or Contractor of the plan and must be licensed in Arizona if they are required to review or
    deny dental services.
f. *Compliance Officer who will implement and oversee the Contractor’s compliance program. The
    compliance officer shall be an on-site management official, available to all employees, with designated
    and recognized authority to access records and make independent referrals to the AHCCCS Office of
    Program Integrity. See Section D, Paragraph 62, Corporate Compliance
g. *Grievance Manager who will manage and adjudicate member and provider disputes arising under the
    Grievance System including member grievances, appeals, and requests for hearing and provider claim
    disputes.
h. Business Continuity Planning Coordinator as noted in the ACOM Business Continuity and Recovery
    Plan Policy
i. *Contract Compliance Officer who will serve as the primary point-of-contact for all Contractor
    operational issues.
    The primary functions of the Contract Compliance Officer are:
     –Coordinate the tracking and submission of all contract deliverables
     –Field and coordinate responses to AHCCCS inquiries
     –Coordinate the preparation and execution of contract requirements such as OFRS, random and
    periodic audits and ad hoc visits
j. *Quality Management Coordinator who is an Arizona-licensed registered nurse, physician or physician's
    assistant or a Certified Professional in Healthcare Quality (CPHQ). The QM Coordinator must have
    experience in quality management and quality improvement.
    The primary functions of the Quality Management Coordinator position are:
     –Ensure individual and systemic quality of care
     –Integrate quality throughout the organization
     –Implement process improvement
     –Resolve, track and trend quality of care grievances
     –Ensure a credentialed provider network
k. Performance/Quality Improvement Coordinator The Performance/Quality Improvement Coordinator will
    have a minimum qualification as a Certified Professional in Healthcare Quality (CPHQ) or comparable
    education and experience in data and outcomes measurement.
    The primary functions of the Performance/Quality Improvement Coordinator are:
     –Focus organizational efforts on improving clinical quality performance measures
     –Develop and implement performance improvement projects
     –Utilize data to develop intervention strategies to improve outcomes
     –Report quality improvement/performance outcomes
l. *Maternal Health/EPSDT (child health) Coordinator who shall be an Arizona licensed nurse, physician
    or physician's assistant; or have a Master's degree in health services, public health, health care
    administration or other related field, and/or a Certified Professional in Health Care Quality (CPHQ).
    Staffing under this position should be sufficient to meet quality and performance measure goals.
    The primary functions of the MCH/EPSDT Coordinator are:
     –Ensuring receipt of EPSDT services
     –Ensuring receipt of maternal and postpartum care
     –Promoting family planning services
     –Promoting preventive health strategies
     –Identification and coordination assistance for identified member needs
     –Interface with community partners
m. *Medical Management Coordinator who is an Arizona licensed registered nurse, physician or physician’s
    assistant if required to make medical necessity determinations; or have a Master’s degree in health
    services, health care administration, or business administration if not required to make medical necessity
    determination.
    The primary functions of the Medical Management Coordinator are:
     –Ensure adoption and consistent application of appropriate inpatient and outpatient medical necessity
    criteria.
     –Ensure appropriate concurrent review and discharge planning of inpatient stays is conducted.
     –Develop, implement and monitor the provision of care coordination, disease management and case
    management functions.
     –Monitor, analyze and implement appropriate interventioins based on utilization data, including
    identifying and correcting over or under utilization of services.
n. *Behavioral Health Coordinator who shall be a behavioral health professional as described in Health
    Services Rule R9-20. The Behavioral Health Coordinator shall devote sufficient time to ensure that the
    Contractor’s behavioral health referral and coordination activities are implemented per AHCCCS
    requirements.
    The primary functions of the Behavioral Health Coordinator are:
     –Coordinate member behavioral care needs with the RBHA system
     –Develop processes to coordinate behavioral health care between PCPs and RBHAs
     –Participate in the identification of best practices for behavioral health in a primary care setting
     –Coordinate behavioral care with medically necessary services
o. Member Services Manager who shall coordinate communications with members; serve in the role of
    member advocate; coordinate issues with appropriate areas within the organization; resolve member
    inquiries/problems and meet standards for resolution, telephone abandonment rates and telephone hold
    times.
p. *Provider Services Manager who shall coordinate communications between the Contractor, its
    subcontractors, IHS and tribally-operated health programs under P.L. 93-638 (Indian Self-Determination
    and Education Assistance Act); provide assistance to providers in resolving problems; respond to provider
    inquiries; educate providers about participation in the AHCCCS program and maintain a sufficient
    provider network.
q. Claims Administrator
    The primary functions of the Claims Administrator are:
     –Develop and implement claims processing systems capable of paying claims in accordance with state
    and federal requirements
     –Develop processes for cost avoidance
     –Ensure minimization of claims recoupments
     –Meet claims processing timelines
     –Meet AHCCCS encounter reporting requirements
r. *Provider Claims Educator (full-time equivalent employee for a Contractor with over 100,000 members)
    The position is fully integrated with the Contractor’s grievance, claims processing, and provider relations
    systems and facilitates the exchange of information between these systems and providers.
    The primary functions of the Provider Claims Educator are:
     –Educate contracted and non-contracted providers (i.e.: professional and institutional) regarding
    appropriate claims submission requirements, coding updates, electronic claims transactions and
    electronic fund transfer, and available Contractor resources such as provider manuals, website, fee
    schedules, etc.
     –Interfaces with the Contractor’s call center to compile, analyze, and disseminate information from
    provider calls
     –identifies trends and guides the development and implementation of strategies to improve provider
    satisfaction
     –Frequently communicates (i.e.: telephonic and on-site) with providers to assure the effective exchange
    of information and gain feedback regarding the extent to which providers are informed about
    appropriate claims submission practices

Additional Required Staff

s. Prior Authorization staff to authorize health care 24 hours per day, 7 days per week. This staff shall
    include an Arizona-licensed nurse, physician or physician's assistant. The staff will work under the
    direction of an Arizona-licensed registered nurse, physician, or physician’s assistant.
t. *Concurrent Review staff to conduct inpatient concurrent review. This staff shall consist of an Arizona-licensed
    nurse, physician, or physician's assistant. The staff will work under the direction of an Arizona-licensed
    nurse.
u. *Clerical and Support staff to ensure appropriate functioning of the Contractor's operation.
v. Member Services staff There shall be sufficient Member Service staff to enable members to receive
    prompt resolution of their inquiries/problems.
w. *Provider Services staff There shall be sufficient Provider Services staff to enable providers to receive
    prompt responses and assistance (See Section D, Paragraph 29, Network Management, for more
    information).
x. Claims Processing staff There shall be sufficient, appropriately trained, Claim Processing staff to ensure
    the timely and accurate processing of original claims, resubmissions and overall adjudication of claims.
y. Encounter Processing staff There shall be sufficient, appropriately trained, Encounter Processing staff to
    ensure the timely and accurate processing and submission to AHCCCS of encounter data and reports.

Staff Training and Meeting Attendance

The Contractor shall ensure that all staff members have appropriate training, education, experience and
orientation to fulfill the requirements of the position. AHCCCS may require additional staffing for a
Contractor that has substantially failed to maintain compliance with any provision of this contract and/or
AHCCCS policies.

The Contractor must provide initial and ongoing staff training that includes an overview of AHCCCS;
AHCCCS Policy and Procedure Manuals; Contract requirements and State and Federal requirements specific
to individual job functions. The Contractor shall ensure that all staff members having contact with members or
providers receive initial and ongoing training with regard to the appropriate identification and handling of
quality of care/service concerns.

New and existing transportation, prior authorization and member services representatives must be trained in
the geography of any/all GSA(s) in which the Contractor holds a contract and have access to mapping search
engines (e.g. MapQuest, Yahoo Maps, Google Maps, etc) for the purposes of authorizing services in;
recommending providers in; and transporting members to, the most geographically appropriate location.

The Contractor shall provide the appropriate staff representation for attendance and participation in meetings
and/or events scheduled by AHCCCS. All meetings shall be considered mandatory unless otherwise indicated.

17. WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS

The Contractor shall develop and maintain written policies, procedures and job descriptions for each functional
area of its plan, consistent in format and style. The Contractor shall maintain written guidelines for
developing, reviewing and approving all policies, procedures and job descriptions. All policies and procedures
shall be reviewed at least annually to ensure that the Contractor's written policies reflect current practices.
Reviewed policies shall be dated and signed by the Contractor's appropriate manager, coordinator, director or
administrator. Minutes reflecting the review and approval of the policies by an appropriate committee are also
acceptable documentation. All medical and quality management policies must be approved and signed by the
Contractor's Medical Director. Job descriptions shall be reviewed at least annually to ensure that current duties
performed by the employee reflect written requirements.

Based on provider or member feedback, if AHCCCS deems a Contractor policy or process to be inefficient
and/or place unnecessary burden on the members or providers, the Contractor will be required to work with
AHCCCS to change the policy or procedure within a time period specified by AHCCCS.

18. MEMBER INFORMATION

The Contractor shall be accessible by phone for general member information during normal business hours.
All enrolled members will have access to a toll free phone number. All informational materials, prepared by
the Contractor, shall be approved by AHCCCS prior to distribution to members. The reading level and name of
the evaluation methodology used should be included. The Contractor should refer to the ACOM Member
Information Policy for further information and requirements.

All materials shall be translated when the Contractor is aware that a language is spoken by 3,000 or 10%,
whichever is less, of the Contractor’s members, who also have limited English proficiency (LEP).

All vital materials shall be translated when the Contractor is aware that a language is spoken by 1,000 or 5%,
whichever is less, of the Contractor’s members, who also have LEP. Vital materials must include, at a
minimum, Notices of Action, vital information from the member handbooks and consent forms.

All written notices informing members of their right to interpretation and translation services in a language
shall be translated when the Contractor is aware that 1,000 or 5%, whichever is less, of the Contractor’s
members speak that language and have LEP [42 CFR 438.10(c)(3)].

Oral interpretation services must be available and free of charge to all members regardless of the prevalence of
the language. The Contractor must notify all members of their right to access oral interpretation services and
how to access them. Refer to the ACOM Member Information Policy [42 CFR 438.10(c)(4) and (5)].

The Contractor shall make every effort to ensure that all information prepared for distribution to members is
written using an easily understood language and format and as further described in the AHCCCS Member
Information Policy. Regardless of the format chosen by the Contractor, the member information must be
printed in a type, style and size, which can easily be read by members with varying degrees of visual
impairment. The Contractor must notify its members that alternative formats are available and how to access
them [42 CFR 438.10(d)].

When there are program changes, notification shall be provided to the affected members at least 30 days before
implementation.

The Contractor shall produce and provide the following printed information to each member or family within
10 days of receipt of notification of the enrollment date [42 CFR 438.10(f)(3)]:

I. A member handbook which, at a minimum, shall include the items listed in the ACOM Member
   Information Policy.

   The Contractor shall review and update the Member Handbook at least once a year. The handbook must be
   submitted to AHCCCS, Division of Health Care Management for approval by August 15th of each
   contract year, or within four weeks of receiving the annual renewal amendment, whichever is later.

II. A description of the Contractor’s provider network, which at a minimum, includes those items listed in the
   ACOM Member Information Policy.

The Contractor must give written notice about termination of a contracted provider, within 15 days after
receipt or issuance of the termination notice, to each member who received their primary care from, or is seen
on a regular basis by, the terminated provider. Affected members must be informed of any other changes in
the network 30 days prior to the implementation date of the change [42 CFR 438.10(f)(4) and (5)]. The
Contractor shall have information available for potential enrollees as described in the ACOM Member
Information Policy.

The Contractor must develop and distribute, at a minimum, quarterly newsletters during the contract year. The
following types of information are to be contained in the newsletter:

            • Educational information on chronic illnesses and ways to self-manage care
                • Reminders of flu shots and other prevention measures at appropriate times
                • Medicare Part D issues
                • Cultural Competency
                • Contractor specific issues
                • Tobacco cessation information
                • HIV/AIDS testing for pregnant women
                • Other information as required by the Administration

The Contractor will, on an annual basis, inform all members of their right to request the following information
[42 CFR 438.10(f)(6) and 42 CFR 438.100(a)(1) and (2)]:

                a. An updated member handbook at no cost to the member
                b. The network description as described in the ACOM Member Information Policy

This information may be sent in a separate written communication or included with other written information
such as in a member newsletter.

19. SURVEYS

The Contractor may be required to perform its own annual general or focused member survey. All such
Contractor surveys, along with a timeline for the project, shall be approved in advance by AHCCCS DHCM.
The results and the analysis of the results shall be submitted to the Acute Care Operations Unit within 45 days
of the completion of the project. AHCCCS may require inclusion of certain questions.

AHCCCS may periodically conduct surveys of a representative sample of the Contractor's membership and
providers. AHCCCS will consider suggestions from the Contractor for questions to be included in each
survey. The results of these surveys, conducted by AHCCCS, will become public information and available to
all interested parties upon request. The draft reports from the surveys will be shared with the Contractor prior
to finalization. The Contractor will be responsible for the cost of these surveys based on its share of AHCCCS
enrollment.

20. CULTURAL COMPETENCY

The Contractor shall have a Cultural Competency Plan that meets the requirements of the ACOM Cultural
Competency Policy. An annual assessment of the effectiveness of the plan, along with any modifications to the
plan, must be submitted to the Division of Health Care Management, no later than 45 days after the start of
each contract year. This plan should address all services and settings [42 CFR 438.206(c)(2)].

21. MEDICAL RECORDS

The member's medical record is the property of the provider who generates the record. Each member is entitled
to one copy of his or her medical record free of charge. The Contractor shall have written policies and
procedures to maintain the confidentiality of all medical records.

The Contractor is responsible for ensuring that a medical record is established when information is received about
a member. If the PCP has not yet seen the member, such information may be kept temporarily in an
appropriately labeled file, in lieu of establishing a medical record, but must be associated with the member’s
medical record as soon as one is established.

The Contractor shall have written policies and procedures for the maintenance of medical records so that those
records are documented accurately and in a timely manner, are readily accessible, and permit prompt and
systematic retrieval of information.

The Contractor shall have written standards for documentation on the medical record for legibility, accuracy and
plan of care, which comply with the AMPM.

The Contractor shall have written plans for providing training and evaluating providers' compliance with the
Contractor's medical records standards. Medical records shall be maintained in a detailed and comprehensive
manner, which conforms to good professional medical practice, permits effective professional medical review
and medical audit processes, and which facilitates an adequate system for follow-up treatment. Medical records
must be legible, signed and dated.

When a member changes PCPs, his or her medical records or copies of medical records must be forwarded to the
new PCP within 10 business days from receipt of the request for transfer of the medical records.

AHCCCS is not required to obtain written approval from a member, before requesting the member's medical
record from the PCP or any other agency. The Contractor may obtain a copy of a member's medical records
without written approval of the member, if the reason for such request is directly related to the administration of
the AHCCCS program. AHCCCS shall be afforded access to all members' medical records whether electronic or
paper within 20 business days of receipt of request.

Information related to fraud and abuse may be released so long as protected HIV-related information is not
disclosed (A.R.S. §36-664(I)).

22. ADVANCE DIRECTIVES

In accordance with 42 CFR 422.128, the Contractor shall maintain policies and procedures addressing
advanced directives for adult members that specify:

1. Each contract or agreement with a hospital, nursing facility, home health agency, hospice or organization
   responsible for providing personal care, must comply with Federal and State law regarding advance
   directives for adult members [42 CFR 438.6(i)(1)]. Requirements include:

a) Maintaining written policies that address the rights of adult members to make decisions about medical
   care, including the right to accept or refuse medical care, and the right to execute an advance directive.
   If the agency/organization has a conscientious objection to carrying out an advance directive, it must
   be explained in policies. (A health care provider is not prohibited from making such objection when
   made pursuant to A.R.S. § 36-3205.C.1.)
b) Provide written information to adult members regarding each individual’s rights under State law to
   make decisions regarding medical care, and the health care provider's written policies concerning
   advance directives (including any conscientious objections) [42 CFR 438.6(i)(3)]
c) Documenting in the member’s medical record whether or not the adult member has been provided the
   information and whether an advance directive has been executed.
d) Not discriminating against a member because of his or her decision to execute or not execute an
   advance directive, and not making it a condition for the provision of care.
e) Providing education to staff on issues concerning advance directives including notification of direct
   care providers of services, such as home health care and personal care, of any advanced directives
   executed by members to whom they are assigned to provide services.

2. The Contractor shall require subcontracted PCPs, which have agreements with the entities described in
   paragraph 1 above, to comply with the requirements of subparagraphs 1 (a) through (e) above. The
   Contractor shall also encourage health care providers specified in subparagraph a. to provide a copy of the
   member’s executed advanced directive, or documentation of refusal, to the member’s PCP for inclusion in
   the member’s medical record.

3. The Contractor shall provide written information to adult members that describe the following:

a) A member’s rights under State law, including a description of the applicable State law.
b) The organization’s policies respecting the implementation of those rights, including a statement of any
   limitation regarding the implementation of advance directives as a matter of conscience.
c) The member’s right to file complaints directly with AHCCCS.
d) Changes to State law as soon as possible, but no later than 90 days after the effective date of the
change [42 CFR 438.6(i)(4)].

23. QUALITY MANAGEMENT (QM)

The Contractor shall provide quality medical care and services to members, regardless of payer source or
eligibility category. The Contractor shall promote improvement in the quality of care provided to enrolled
members through established quality management and performance improvement processes. The Contractor
shall execute processes to assess, plan, implement and evaluate quality management and performance

improvement activities, as specified in the AMPM [42 CFR 438.240(a)(1) and (e)(2)].

The Contractor quality assessment and performance improvement programs, at a minimum, shall comply with
the requirements outlined in the AMPM and this Paragraph.

A. Quality Management Program:
The Conractor shall have an ongoing quality management program for the services it furnishes to members
that includes the requirements listed in AMPM Capter 900 and the following:
1. A written Quality Assessment and Performance Improvement (QA/PI) plan, an evaluation of the
   previous year’s QA/PI program, and Quarterly QA/PI reports that address its strategies for
   performance improvement and conducting the quality management activites.
2. QM/PI Program monitoring and evaluation activites that includes Peer Review and Quality
   Management Committees chaired by the Contractor’s Chief Medical Officer.
3. Protection of medical records and any other personal health and enrollment information that identifies
   a particular member or subset of members in accordance with Federal and State privacy requirements.
4. Member rights and responsibilities.
5. Uniform provisional credentialing, initial credentialing, re-credentialing and organizational credential
   verification [42 CFR 438.206(b)(6)]. The Contractor shall demonstrate that its providers are
   credentialed and reviewed through the Contractor’s Credentialing Committee that is chaired by the
   Contractor’s Medical Director [42 CFR 438.214]. The Contractor should refer to Section D, Paragraph
25, Administrative Performance Standards, and Attachement F, Periodic Report Requirements, for
   reporting requirements. The process:
                a. Shall follow a documented process for provisional credentialing, initial credentialing, recredentialing
                   and organizational credential verification of providers who have signed
                   contracts or participation agreements with the Contractor;
                b. Shall not discriminate against particular providers that serve high-risk populations or
                   specialize in conditions that require costly treatment;
                c. Shall not employ or contract with providers excluded from participation in Federal health care
                   programs.
6. Tracking and trending of member and provider issues, which includes investigation and analysis of
   quality of care issues, abuse, neglect and unexpected deaths. The resolution process must include:
                a. Acknowledgement letter to the originator of the concern;
                b. Documentation of all steps utilized during the investigation and resolution process;
                c. Follow-up with the member to assist in ensuring immediate health care needs are met;
                d. Closure/resolution letter that provides sufficient detail to ensure that the member has an
                   understanding of the resolution of their issue, any responsibilities they have in ensuring all
                   covered, medically necessary care needs are met, and a Contractor contact name/telephone
                   number to call for assistance or to express any unresolved concerns;
                e. Documentation of implemented corrective action plan(s) or action(s) taken to resolve the
                   concern;
                f. Analysis of the effectiveness of the interventions taken.
7. Mechanisms to assess the quality and appropriateness of care furnished to members with special
   health care needs.
8. Participation in community initiatives including applicable activities of the Medicare Quality
   Improvement Organization (QIO).
9. Performance improvement programs including performance measures and performance improvement
   projects.

B. Performance Improvement:
The Contractor’s quality management program shall be designed to achieve, through ongoing measurements
and intervention, significant improvement, sustained over time, in the areas of clinical care and non-clinical
care that are expected to have a favorable effect on health outcomes and member satisfaction. The Contractor
must [42 CFR 438.240(b)(2) and (c)]:
                1. Measure and report to the State its performance, using standard measures required by the State, or as
                   required by CMS;
                2. Submit to the State data specified by the State, that enables the State to measure the Contractor’s
                   performance; or
                3. Perform a combination of the activities.

I. Performance Measures:

The Contractor shall comply with AHCCCS quality management requirements to improve performance for all
AHCCCS established performance measures. Complete descriptions of the AHCCCS clinical quality
Performance Measure can be found in the most recently published reports of acute-care performance measures
located on the AHCCCS website. AHCCCS uses Healthcare Effectiveness Data and Information Set (also
known as the Health Plan Employer Data and Information Set, or HEDIS) technical specifications from the
National Committee for Quality Assurance (NCQA) for all clinical quality performance Measures. The only
exception to AHCCCS’ use of the HEDIS methodology is in the performance measure titled “EPSDT
Participation”. AHCCCS bases the measurement of EPSDT Participation on the methodology established in
CMS “Form 416” which can be found on the CMS website (www.cms.hhs.gov).

Contractors must comply with national performance measures and levels that may be identified and developed
by the Centers for Medicare and Medicaid Services in consultation with AHCCCS and/or other relevant
stakeholders. CMS has been working in partnership with states in developing core performance measures for
Medicaid and SCHIP programs. The current AHCCCS-established performance measures may be subject to
change when these core measures are finalized and implemented.

AHCCCS intends to implement a hybrid methodology for collecting and reporting Performance Measure rates,
as allowed by NCQA, for selected HEDIS measures. Contractors shall collect data from medical records and
provide these data with supporting documentation, as instructed by AHCCCS, for each hybrid measure as
requested. The number of records that each Contractor will be required to collect will be based on HEDIS
sampling guidelines and may be affected by the Contractor’s previous rate for the measure being collected.

AHCCCS may begin implementation of the hybrid methodology with the following measures: Adolescent
Immunizations, Cervical Cancer Screening and Timeliness of Prenatal Care. AHCCCS may implement hybrid
methodology for collecting and reporting additional measures in this, or future, contract years.

In addition, the Contractor must have in place a process for internal monitoring of Performance Measure rates,
using a standard methodology established or adopted by AHCCCS, for each required Performance Measure.
The Contractor’s Quality Assessment/Performance Improvement Program will report its performance on an
ongoing basis to its Administration. It also will report this Performance Measure data to AHCCCS in
conjunction with its Quarterly EPSDT and Adult Quarterly Monitoring Report.

The Contractor must meet AHCCCS stated Minimum Performance Standards for each population/eligibility
category for which AHCCCS reports results. However, it is equally important that the Contractor continually
improve performance measure outcomes from year to year. The Contractor shall strive to meet the goal
established by AHCCCS.

                Minimum Performance Standard – A Minimum Performance Standard (MPS) is the minimal
                expected level of performance by the Contractor. If a Contractor does not achieve this standard, the
                Contractor will be required to submit a corrective action plan and may be subject to a sanction of up to
                $100,000 dollars for each deficient measure.

                Goal – If the Contractor has already met or exceeded the AHCCCS Minimum Performance Standard
                for any measure, the Contractor must strive to meet the established Goal for the measure(s).

A Contractor must show demonstrable and sustained improvement toward meeting AHCCCS Performance
Standards. AHCCCS may impose sanctions on Contractors that do not show statistically significant
improvement in a measure rate and require the Contractor to demonstrate that they are allocating increased
administrative resources to improving rates for a particular measure or service area. AHCCCS also may
require a corrective action plan and may sanction any Contractor that shows a statistically significant decrease
in its rate, even if it meets or exceeds the Minimum Performance Standard.

An evidence-based corrective action plan must be received by AHCCCS within 30 days of receipt of
notification of the deficiency from AHCCCS. This plan must be approved by AHCCCS prior to
implementation. AHCCCS may conduct one or more follow-up on-site reviews to verify compliance with a
corrective action plan.

All Performance Measures apply to all member populations [42 CFR 438.240(a)(2), (b)(2) and (c)]. AHCCCS
may analyze and report results by line of business, by GSA or county, and/or applicable demographic factors.

AHCCCS has established standards for the measures listed below.

The following table identifies the Minimum Performance Standards (MPS) and Goals for each measure:

                                Acute-care Contractor Performance Standards

Performance Measure                       Minimum Performance Standard    Goal (Health People Goals)

Immunization of Two-year-olds
4:3:1:3:3:1 Series                                                   82%                                                        80%
4:3:1:3:3:1:4 Series                                                43%                                                        80%
DTaP - 4 doses                                                     85%                                                        90%
Polio - 3 doses (*)                                                90%                                                        90%
MMR - 1 dose (*)                                                90%                                                        90%
Hib - 3 doses (*)                                                   86%                                                        90%
HBV - 3 doses (*)                                                 90%                                                        90%
Varicella - 1 dose (*)                                            86%                                                        90%
PCV – 4 doses (*)                                                47%                                                        90%
Adolescent Immunizations(1)                            TBD                                                        90%

Children’s Dental Visits 2 to 21

Years                                                                      55%                                                        57%
Well-child Visits 15 Months                              65%                                                        90%
Well-child Visits 3 - 6 Years                               64%                                                        80%
Adolescent Well-care Visits                              41%                                                        50%
EPSDT Participation                                            68%                                                        80%
Children's Access to PCPs 24 Months             93%                                                        97%
Children's Access to PCPs 25
months-6 Years                                                    83%                                                        97%
Children’s Access to PCPs 7-11
Years                                                                      83%                                                        97%
Children's Access to PCPs 12-19 Years            81%                                                        97%
Cervical Cancer Screening                                  65%                                                        90%
Breast Cancer Screening                                     54%                                                        70%
Adult Preventive/Ambulatory
Care 20-44 Years                                                   78%                                                        96%
Adult Preventive/Ambulatory
Care 45-64 Years                                                   85%                                                        96%
Timeliness of Prenatal Care                                80%                                                        90%
Chlamydia Screening                                           51%                                                        62%
Appropriate Medications for Asthma              86%                                                        93%
Diabetes Care: Hb A1c Testing                         77%                                                        89%
Diabetes Care: Eye Exam                                     49%                                                        68%
Diabetes Care: LDL-C Screening                       81%                                                        91%

Notes:Contractor Performance is evaluated annually on the AHCCCS-reported rate for each measure. Rates
for measures that include only members under 21 years of age are reported and evaluated separately
for Title XIX and Title XXI eligibility groups.

The MPS is based on the national HEDIS Medicaid mean for 2006 as reported by NCQA or, if the
most recent AHCCCS statewide average is greater than the national Medicaid mean, the MPS is based
on the AHCCCS statewide average for Medicaid members.

Goals are based on Healthy People 2010 Objectives; if there was no comparable objective set for a
particular measure, the most recent HEDIS 90th percentile rate for Medicaid plans nationally was used
as the benchmark.

(*) AHCCCS will continue to measure and report results of these individual antigens; however, a
Contractor may not be held accountable for specific Performance Standards unless AHCCCS
determines that completion of a specific antigen or antigens is affecting overall completion of the
childhood immunization series.

(1) NCQA is in the process of making revisions to the measure, and current AHCCCS data is not yet
available.

The Contractor shall participate in immunization audits, at intervals specified by AHCCCS, based on random
sampling to verify the immunization status of members at 24 months of age. If records are missing for more
than 5 percent of the Contractor’s final sample, the Contractor is subject to sanctions by AHCCCS. An
External Quality Review Organization (EQRO) may conduct a study to validate the Contractor’s reported
rates.

In addition, AHCCCS shall measure and report the Contractor’s EPSDT Participation Rate, utilizing the CMS
416 methodology. The Contractor must take affirmative steps to increase member participation in the EPSDT
program. The EPSDT participation rate is the number of children younger than 21 years receiving at least one
medical screen during the contract year, compared to the number of children expected to receive at least one
medical screen. The number of children expected to receive at least one medical screen is based on the
AHCCCS EPSDT periodicity schedule and the average period of eligibility.

The Contractor must monitor rates for postpartum visits and low/very low birth weight deliveries and
implement interventions as necessary to improve or sustain these rates. These activities will be monitored by
AHCCCS during the Operational and Financial Review.

II. Performance Improvement Program:

The Contractor shall have an ongoing program of performance improvement projects that focus on clinical and
non-clinical areas as specified in the AMPM, and that involve the following [42 CFR 438.240(b)(1) and
(d)(1)]:

1. Measurement of performance using objective quality indicators.
2. Implementation of system interventions to achieve improvement in quality
3. Evaluation of the effectiveness of the interventions.
4. Planning and initiation of activities for increasing or sustaining improvement.

The Contractor shall report the status and results of each project to AHCCCCS as requested. Each
performance improvement project must be completed in a reasonable time period so as to generally allow
information on the success of performance improvement projects in the aggregate to produce new information
on quality of care every year [42 CFR 438.240(d)(2)].

III. Data Collection Procedures:

When requested, the Contractor must submit data for standardized Performance Measures and/or Performance
Improvement Projects as required by AHCCCS within specified timelines and according to AHCCCS
procedures for collecting and reporting the data. Contractor is responsible for collecting valid and reliable data
and using qualified staff and personnel to collect the data. Data collected for Performance Measures and/or
Performance Improvement Projects must be returned by the Contractor in the format and according to
instructions from AHCCCS, by the due date specified. Any extension for additional time to collect and report
data must be made in writing in advance of the initial due date. Failure to follow the data collection and
reporting instructions that accompany the data request may result in sanctions imposed on the Contractor.

24. MEDICAL MANAGEMENT (MM)

The Contractor shall execute processes to assess, plan, implement and evaluate medical management activities,
as specified in the AMPM Chapter 1000, Utilization Management, that include at least the following:

1. Pharmacy Management; including the evaluation, reporting, analysis and interventions based on the data
and reported through the MM Committee.
2. Prior authorization and Referral Management;
For the processing of requests for initial and continuing authorizations of services the Contractor shall:
                a) Have in effect mechanisms to ensure consistent application of review criteria for
                   authorization decisions;
                b) Consult with the requesting provider when appropriate [42 CFR 438.210(b)(2)];
                c) Monitor and ensure that all enrollees with special health care needs have direct access to care.
3. Development and/or Adoption of Practice Guidelines [42 CFR 438.236(b)], that
                a) Are based on valid and reliable clinical evidence or a consensus of health care professionals
                   in the particular field;
                b) Consider the needs of the Contractor’s members;
                c) Are adopted in consultation with contracting health care professionals;
                d) Are reviewed and updated periodically as appropriate;
                e) Are disseminated by the Contractor to all affected providers and, upon request, to enrollees
                   and potential enrollees [42 CFR 438.236(c)];
                f) Provide a basis for consistent decisions for utilization management, member education,
                   coverage of services, and other areas to which the guidelines apply [42 CFR 438.236(d)].
4. Concurrent review:
                a) Consistent application of review criteria; Provide a basis for consistent decisions for
                   utilization management, coverage of services, and other areas to which the guidelines apply;
                b) Discharge planning.
5. Continuity and coordination of care;
6. Monitoring and evaluation of over and/or under utilization of services [42 CFR 438-240(b)(3)];
7. Evaluation of new medical technologies, and new uses of existing technologies;
8. Disease Management or Chronic Care Program that reports results and provides for analysis of the program
   through the MM Committee; and
9. Quarterly Utilization Management Report (details in the AMPM)
10. Within the first two years of the contract term, the Contractor must review all prior authorization
   requirements for services, items or medications and submit a report to AHCCCS providing the rationale for the
   requirements. AHCCCS shall determine and provide a format for the report.

The Contractor shall have a process to report MM data and management activities through a MM Committee.
The Contractor’s MM committee will analyze the data, make recommendations for action, monitor the
effectiveness of actions and report these findings to the committee. The Contractor shall have in effect
mechanisms to assess the quality and appropriateness of care furnished to members with special health care
needs [42 CFR 438.240(b)(4)].

The Contractor will assess, monitor and report quarterly through the MM Committee medical decisions to
assure compliance with Notice of Action timeliness, language and content, and that the decisions comply with
all Contractor coverage criteria. This includes quarterly evaluation of all Notice of Action decisions that are
made by a subcontracted entity.

The Contractor shall maintain a written MM plan that addresses its plan for monitoring MM activities
described in this section. The plan must be submitted for review by AHCCCS Division of Health Care
Management within timelines specified in Attachment F.

In addition to care coordination as specified in this contract, the Contractor must proactively provide care
coordination for members who have multiple complaints regarding services or the AHCCCS Program. This
includes, but is not limited to, members who do not meet the Contractor's criteria for case management as well
as members who contact governmental entities for assistance, including AHCCCS.

25. ADMINISTRATIVE PERFORMANCE STANDARDS

This paragraph contains requirements for the Contractor’s Member Services, Provider Services and Claims
Services telephonic performance; as well as the measurement of credentialing timeliness. All reported data is
subject to validation through periodic audit and/or Operational and Financial Review.

Telephone Standards

The maximum allowable speed of answer (SOA) is 45 seconds. The SOA is defined as the on line wait time in
seconds that the member/provider waits from the moment the call is connected in the Contractor’s phone
switch until the call is picked up by a Contractor representative or Interactive Voice Recognition System
(IVR). If the Contractor has IVR capabilities, callers must be given the choice of completing their call by IVR
or by Contractor representative.

The Contractor shall meet the following standards for its member services and centralized provider telephone
line statistics. All calls to the line shall be included in the measure.
                a. The Monthly Average Abandonment Rate shall be 5% or less;
                b. First Contact Call Resolution shall be 70% or better; and
                c. The Monthly Average Service Level shall be 75% or better.

The Monthly Average Abandonment Rate (AR) is:

Number of calls abandoned in a 24-hour period
Total number of calls received in a 24-hour period

The ARs are then summed and divided by the number of days in the reporting period.

First Contact Call Resolution Rate (FCCR) is:

                Number of calls received in 24-hour period for which no follow up communication or internal
                phone transfer is needed, divided by Total number of calls received in 24-hour period

The daily FCCRs are then summed and divided by the number of days in the reporting period.

The Monthly Average Service Level (MASL) is:

Calls answered within 45 seconds for the month reported
Total of month’s answered calls + month’s abandoned calls + (if available) month’s calls receiving a busy signal

Note: Do not use average daily service levels divided by the days in the reporting period.

On a monthly basis the measures are to be reported for both the Member Services and Provider telephone lines.
For each of the Administrative Measures a. through c., the Contractor shall also report the number of days in
the reporting period that the standard was not met. The Contractor shall include in the report the instances of
down time for the centralized telephone lines, the dates of occurrence and the length of time they were out of
service. The reports should be sent to the Contractor's assigned Operations and Compliance Officer in the
Acute Care Operations Unit of the Division of Health Care Management. The deadline for submission of the
reports is the 15th day of the month following the reporting period (or the first business day following the
15th). Back up documentation for the report, to the level of measured segments in the 24-hour period, shall be
retained for a rolling 12-month period. AHCCCS will review the performance measure calculation procedures
and source data for this report.

Credentialing Timeliness

The Contractor is required to process credentialing applications in a timely manner. To assess the timeliness of
provisional and initial credentialing a Contractor will divide the number of complete applications processed
(approved/denied) during the time period by the number of complete applications that were received during the
time period, as follows:

Complete applications processed
Complete applications received

The standards for processing are listed by category below:

Type of Credentialing         14 days                  90 days                  120 days                                180 days
Provisional                            100%
Initial                                                                      90%                        95%                                        100%

The Contractor will also report the following information with regard to all credentialing applications on a
quarterly basis, as specified in Attachment F, Periodic Report Requirements:

                1. Number of applications received
                2. Number of completed applications received (separated by type: provisional, initial)
                3. Number of completed provisional credentialing applications approved
                4. Number of completed provisional credentialing applications denied
                5. Number of initial credentialing applications approved
                6. Number of initial credentialing applications denied
                7. Number of initial (include provisional in this number) applications processed within 90, 120, 180 days

26. GRIEVANCE SYSTEM

The Contractor shall have in place a written grievance system process for subcontractors, enrollees and non-
ontracted providers, which defines their rights regarding disputed matters with the Contractor. The
Contractor’s grievance system for enrollees includes a grievance process (the procedures for addressing
enrollee grievances), an appeals process and access to the state’s fair hearing process. The Contractor shall
provide the appropriate personnel to establish implement and maintain the necessary functions related to the
grievance systems process. Refer to Attachments H(1) and H(2) for Enrollee Grievance System and Provider
Grievance System Standards and Policy, respectively.

The Contractor may delegate the grievance system process to subcontractors, however, the Contractor must
ensure that the delegated entity complies with applicable Federal and State laws, regulations and policies,
including, but not limited to 42 CFR Part 438 Subpart F. The Contractor shall remain responsible for
compliance with all requirements. The Contractor shall also ensure that it timely provides written information
to both enrollees and providers, which clearly explains the grievance system requirements. This information
must include a description of: the right to a state fair hearing, the method for obtaining a state fair hearing, the
rules that govern representation at the hearing, the right to file grievances, appeals and claim disputes, the
requirements and timeframes for filing grievances, appeals and claim disputes, the availability of assistance in
the filing process, the toll-free numbers that the enrollee can use to file a grievance or appeal by phone, that
benefits will continue when requested by the enrollee in an appeal or state fair hearing request concerning
certain actions which are timely filed, that the enrollee may be required to pay the cost of services furnished
during the appeal/hearing process if the final decision is adverse to the enrollee, and that a provider may file an
appeal on behalf of an enrollee with the enrollee’s written consent. Information to enrollees must meet cultural
competency and limited English proficiency requirements as specified in Section D, Paragraph 18, Member
Information, and Section D, Paragraph 20, Cultural Competency.

The Contractor shall be responsible to provide the necessary professional, paraprofessional and clerical
services for the representation of the Contractor in all issues relating to the grievance system and any other
matters arising under this contract which rise to the level of administrative hearing or a judicial proceeding.
Unless there is an agreement with the State in advance, the Contractor shall be responsible for all attorney fees
and costs awarded to the claimant in a judicial proceeding.

The Contractor will provide reports on the Grievance System as required in the Grievance System Reporting
Guide available on the AHCCCS website.

27. NETWORK DEVELOPMENT

The Contractor shall develop and maintain a provider network that is designed to support a medical home for
members and sufficient to provide all covered services to AHCCCS members [42 CFR 438.206(b)(1)]. It shall
ensure covered services are provided promptly and are reasonably accessible in terms of location and hours of
operation [42 CFR 438.206(c)(1)(i) and (ii)]. There shall be sufficient personnel for the provision of covered
services, including emergency medical care on a 24-hour-a-day, 7-days-a-week basis [42 CFR 438.206(c)(1)(iii)].

The network shall be sufficient to provide covered services within designated time and distance limits. For
Maricopa and Pima Counties only, this includes a network such that 95% of its members residing within the
boundary area of metropolitan Phoenix and Tucson do not have to travel more than 5 miles to visit a PCP, dentist
or pharmacy. Additionally, a Contractor in Maricopa and/or Pima counties must have at least one contracted
hospital in each of the service districts specified in Attachment B. In rural counties the contractor must have a
sufficient network of physicians to provide adequate inpatient and outpatient services to the Contractor’s
members.. For inpatient services Hospitalists may satisfy this requirement. See Attachment B for GSA
specific requirements.

The Contractor is expected to design a network that provides a geographically convenient flow of patients
among network providers. The provider network shall be designed to reflect the needs and service
requirements of AHCCCS’s culturally and linguistically diverse member population. The Contractor shall
design their provider networks to maximize the availability of community based primary care and specialty
care access and that reduces utilization of emergency services, one day hospital admissions, hospital based
outpatient surgeries when lower cost surgery centers are available, and hospitalization for preventable medical
problems. The Contractor must provide a comprehensive provider network that ensures its membership has
access at least equal to community norms. Services shall be as accessible to AHCCCS members in terms of
timeliness, amount, duration and scope as those services are available to non-AHCCCS persons within the same
service area [42 CFR 438.210(a)(2)]. The Contractor is expected to consider the full spectrum of care when
developing its network. The Contractor is encouraged to have available non-emergent after-hours physician or
primary care services within its network. The Contractor must also consider communities whose residents
typically receive care in neighboring states/border communities. If the Contractor is unable to provide any
services locally, it must notify AHCCCS and shall provide reasonable alternatives for members to access care.
These alternatives must be approved by AHCCCS. If the Contractor’s network is unable to provide medically
necessary services required under contract, the Contractor must adequately and timely cover these services
through an out of network provider until a network provider is contracted. The Contractor and out of network
provider must coordinate with respect to authorization and payment issues in these circumstances [42 CFR
438.206(b)(4) and (5)].

The Contractor must pay all AHCCCS registered Arizona Early Intervention Program (AzEIP) providers,
regardless of their contract status with the Contractor, when Individual Family Service Plans identify and meet
the requirement for medically necessary EPSDT covered services.

The Contractor is also encouraged to develop non-financial incentive programs to increase participation in its
provider network.

AHCCCS is committed to workforce development and support of the medical residency and dental student
training programs in the state of Arizona. AHCCCS expects the Contractor to support these efforts. AHCCCS
encourages plans to contract with or otherwise support the many Graduate Medical Education (GME)
Residency Training Programs currently operating in the state and to investigate opportunities for resident
participation in Contractor medical management and committee activities. In the event of a contract
termination between the Contractor and a Graduate Medical Education Residency Training Program or training
site, the Contractor may not remove members from that program in such a manner as to harm the stability of
the program. AHCCCS reserves the right to determine what constitutes risk to the program. If a Residency
Training Program is in need of patients in order to maintain accreditation, AHCCCS may require a Contractor
within the program’s GSA to make members available to the program. Further, the Contractor must attempt to
contract with graduating residents and providers that are opening new practices in, or relocating to, Arizona,
especially in rural or underserved areas.

The Contractor shall not discriminate with respect to participation in the AHCCCS program, reimbursement or
indemnification against any provider based solely on the provider’s type of licensure or certification [42 CFR
438.12(a)(1)]. In addition, the Contractor must not discriminate against particular providers that service high-risk
populations or specialize in conditions that require costly treatment [42 CFR 438.214(c)]. This provision,
however, does not prohibit the Contractor from limiting provider participation to the extent necessary to meet the
needs of the Contractor’s members. This provision also does not interfere with measures established by the
Contractor to control costs consistent with its responsibilities under this contract [42 CFR 438.12(b)(1)]. If a
Contractor declines to include individual or groups of providers in its network, it must give the affected providers
timely written notice of the reason for its decision [42 CFR 438.12(a)(1)]. The Contractor may not include
providers excluded from participation in Federal health care programs, under either section 1128 or section
1128A of the Social Security Act [42 CFR 438.214(d)].

See Attachment B, Minimum Network Requirements, for details on network requirements by Geographic Service
Area.

Provider Network Development and Management Plan: The Contractor shall develop and maintain a provider
network development and management plan, which ensures that the provision of covered services will occur as
stated above. The requirements for the Network Development and Management Plan are found in the ACOM
Provider Network Development and Management Plan Policy [42 CFR 438.207(b)]. This plan shall be updated
annually and submitted to AHCCCS, Division of Health Care Management, 45 days from the start of each
contract year.

28. PROVIDER AFFILIATION TRANSMISSION

The Contractor shall submit information quarterly regarding its provider network. This information shall be
submitted in the format described in the Provider Affiliation Transmission User Manual on October 15, January
15, April 15, and July 15 of each contract year. The manual may be found on the AHCCCS website. If the
provider affiliation transmission is not timely, accurate and complete, the Contractor may be required to submit a
corrective action plan and may be subject to sanction.

29. NETWORK MANAGEMENT

The Contractor shall have policies on how the Contractor will [42 CFR 438.214(a)]:

a. Communicate with the network regarding contractual and/or program changes and requirements;
b. Monitor network compliance with policies and rules of AHCCCS and the Contractor, including compliance
   with all policies and procedures related to the grievance process and ensuring the member’s care is not
   compromised during the grievance process;
c. Evaluate the quality of services delivered by the network;
d. Provide or arrange for medically necessary covered services should the network become temporarily
   insufficient within the contracted service area;
e. Monitor the adequacy, accessibility and availability of its provider network to meet the needs of its members,
   including the provision of care to members with limited proficiency in English;
f. Process expedited and temporary credentials;
g. Recruit, select, credential, re-credential and contract with providers in a manner that incorporate quality
   management, utilization, office audits and provider profiling;
h. Provide training for its providers and maintain records of such training;
i. Track and trend provider inquiries/complaints/requests for information and take systemic action as necessary
   and appropriate;
j. Ensure that provider calls are acknowledged within 3 business days of receipt; resolved and the result
   communicated to the provider within 30 business days of receipt.

Contractor policies shall be subject to approval by AHCCCS, Division of Health Care Management, and shall
be monitored through operational audits.

The Contractor is required to obtain prior approval from AHCCCS, DHCM regarding material changes to
operations. A material change to operations is defined as any change in overall business operations (i.e.,
policy, process, protocol, etc.) that could have an impact on or reasonably be foreseen to have an impact on
more than 5% of the members and/or providers. The Contractor must submit the request for approval of
material change, including draft notification to affected members and providers, 60 days prior to the expected
implementation of the change. The request should contain, at a minimum, information regarding the nature of
the change; the reason for the change; methods of communication to be used; and the anticipated effective
date. If AHCCCS does not respond to the Contractor within 30 days; the request and the notices are deemed
approved. A material change in Contractor operations requires 30 days advance written notice to affected
providers and members. The requirements regarding material changes do not extend to contract negotiations
between the Contractor and a provider.

The Contractor may be required to conduct meetings with providers to address issues (or to provide general
information, technical assistance, etc.) related to federal and state requirements, changes in policy,
reimbursement matters, prior authorization and other matters as identified or requested by the Administration.

The Contractor shall give hospitals and provider groups 90 days notice prior to a contract termination without
cause. Contracts between the Contractor and single practitioners are exempt from this requirement.

All material changes in the Contractor's provider network must be approved in advance by AHCCCS, Division of
Health Care Management [42 CFR 438.207(c)]. A material change to the network is defined as one which
affects, or can reasonably be foreseen to affect, the Contractor's ability to meet the performance and network
standards as described in this contract. It also includes any change that would cause more than 5% of members in
the GSA to change the location where services are received or rendered. The Contractor must submit the request
for approval of material change, including draft notification to affected members, 60 days prior to the expected
implementation of the change. The request must include a description of any short-term gaps identified as a
result of the change and the alternatives that will be used to fill them. If AHCCCS does not respond within 30
days the request and the notice are deemed approved. A material change in Contractor network requires 30
days advance written notice to affected members. For emergency situations, AHCCCS will expedite the
approval process.

The Contractor shall notify AHCCCS, Division of Health Care Management, within one business day of any
unexpected changes that would impair its provider network. This notification shall include (1) information about
how the change will affect the delivery of covered services, and (2) the Contractor's plans for maintaining the
quality of member care, if the provider network change is likely to affect the delivery of covered services.

Homeless Clinics:
A Contractor in Maricopa and Pima County must contract with homeless clinics at the AHCCCS Fee-for-Service
rate for Primary Care services. Contracts must stipulate that:

                1. Only those members that request a homeless clinic as a PCP may be assigned to them; and
                2. Members assigned to a homeless clinic may be referred out-of-network for needed specialty services

The Contractor must make resources available to assist homeless clinics with administrative issues such as
obtaining Prior Authorization, and resolving claims issues.

AHCCCS will convene meetings, as necessary, with the Contractor and the homeless clinics to resolve
administrative issues and perceived barriers to the homeless members receiving care. Representatives from the
Contractor must attend these meetings.

E-Prescribing:
The Contractor must work in collaboration with the Administration to implement E-Prescribing.

30. PRIMARY CARE PROVIDER STANDARDS

The Contractor shall include in its provider network a sufficient number of PCPs to meet the requirements of
this contract. Health care providers designated by the Contractor as PCPs shall be licensed in Arizona as
allopathic or osteopathic physicians who generally specialize in family practice, internal medicine, obstetrics,
gynecology, or pediatrics; certified nurse practitioners or certified nurse midwives; or physician’s assistants
[42 CFR 438.206(b)(2)].

The Contractor shall assess the PCP’s ability to meet AHCCCS appointment availability and other standards
when determining the appropriate number of its members to be assigned to a PCP. The Contractor should also
consider the PCP’s total panel size (i.e., AHCCCS and non-AHCCCS patients) when making this
determination. AHCCCS members shall not comprise the majority of a PCP’s panel of patients. AHCCCS
shall inform the Contractor when a PCP has a panel of more than 1,800 AHCCCS members (assigned by a
single Contractor or multiple Contractors), to assist in the assessment of the size of their panel. This
information will be provided on a quarterly basis. The Contractor will adjust the size of a PCP’s panel, as
needed, for the PCP to meet AHCCCS appointment and clinical performance standards.

The Contractor shall have a system in place to monitor and ensure that each member is assigned to an
individual PCP and that the Contractor’s data regarding PCP assignments is current. The Contractor is
encouraged to assign members with complex medical conditions, who are age 12 and younger, to board
certified pediatricians. PCP’s, with assigned members diagnosed with AIDS or as HIV positive, shall meet
criteria and standards set forth in the AMPM.

The Contractor shall ensure that providers serving EPSDT-aged members utilize AHCCCS-approved standard
developmental screening tools and are trained in the use of the tools. The Contractor is encouraged to assign
EPSDT-aged members to providers that are trained in the use of, and have expressed willingness to use,
AHCCCS-approved developmental screening tools.

To the extent required by this contract, the Contractor shall offer members freedom of choice within its
network in selecting a PCP [42 CFR 438.6(m) and 438.52(d)]. The Contractor may restrict this choice when a
member has shown an inability to form a relationship with a PCP, as evidenced by frequent changes, or when
there is a medically necessary reason. When a new member has been assigned to the Contractor, the
Contractor shall inform the member in writing of his enrollment and of his PCP assignment within 10 days of
the Contractor's receipt of notification of assignment by AHCCCS. The Contractor shall include with the
enrollment notification a list of all the Contractor's available PCPs, the process for changing the PCP
assignment, should the member desire to do so, as well as the information required in the ACOM Member
Information Policy. The Contractor shall confirm any PCP change in writing to the member. Members may
make both their initial PCP selection and any subsequent PCP changes either verbally or in writing.

At a minimum, the Contractor shall hold the PCP responsible for the following activities [42 CFR
438.208(b)(1)]:

a. Supervision, coordination and provision of care to each assigned member;
b. Initiation of referrals for medically necessary specialty care;
c. Maintaining continuity of care for each assigned member;
d. Maintaining the member’s medical record, including documentation of all services provided to the
   member by the PCP, as well as any specialty or referral services. Services potentially requiring medical
   follow up are the only dental services whose documentation must be included in the medical record.

The Contractor shall establish and implement policies and procedures to monitor PCP activities and to ensure
that PCPs are adequately notified of, and receive documentation regarding, specialty and referral services
provided to assigned members by specialty physicians, and other health care professionals. Contractor policies
and procedures shall be subject to approval by AHCCCS, Division of Health Care Management, and shall be
monitored through operational audits.

The Contractor will work with AHCCCS to develop a methodology to reimburse school based clinics.
AHCCCS and the Contractor will identify coordination of care processes and reimbursement mechanisms.
The Contractor will be responsible for payment of these services directly to the clinics.

31. MATERNITY CARE PROVIDER STANDARDS

The Contractor shall ensure that a maternity care provider is designated for each pregnant member for the

duration of her pregnancy and postpartum care and that those maternity services are provided in accordance
with the AMPM. The Contractor may include in its provider network the following maternity care providers:

a. Arizona licensed allopathic and/or osteopathic physicians who are Obstetricians or general
   practitice/family practice providers who provide maternity care services.
b. Physician Assistants
c. Nurse Practitioners
d. Certified Nurse Midwives

Pregnant members may choose, or be assigned, a PCP who provides obstetrical care. Such assignment shall be
consistent with the freedom of choice requirements for selecting health care professionals while ensuring that
the continuity of care is not compromised. Members who choose to receive maternity services from a certified
nurse midwife shall also be assigned to a PCP for medical care, as primary care is not within the scope of
practice for certified nurse midwives.

All physicians and certified nurse midwives who perform deliveries shall have OB hospital privileges or a
documented hospital coverage agreement for those practitioners performing deliveries in alternate settings.
Certified midwives perform deliveries only in the member’s home. Labor and delivery services may also be
provided in the member’s home by physicians, certified nurse practitioners and certified nurse midwives who
include such services within their practice.

32. REFERRAL MANAGEMENT PROCEDURES AND STANDARDS

The Contractor shall have adequate written procedures regarding referrals to specialists, to include, at a
minimum, the following:

a. Use of referral forms clearly identifying the Contractor.
b. PCP referral shall be required for specialty physician services, except that women shall have direct access
   to in-network GYN providers, including physicians, physician assistants and nurse practitioners within the
   scope of their practice, without a referral for preventive and routine services [42 CFR 438.206(b)(2)]. In
   addition, for members with special health care needs determined to need a specialized course of treatment
   or regular care monitoring, the Contractor must have a mechanism in place to allow such members to
   directly access a specialist (for example through a standing referral or an approved number of visits) as
   appropriate for the member’s condition and identified needs. Any waiver of this requirement by the
   Contractor must be approved in advance by AHCCCS.
c. Specialty physicians shall not begin a course of treatment for a medical condition other than that for which
   the member was referred, unless approved by the member’s PCP.
d. A process in place that ensures the member's PCP receives all specialist and consulting reports and a
   process to ensure PCP follow-up of all referrals including EPSDT referrals for behavioral health services.
e. A referral plan for any member who is about to lose eligibility and who requests information on low-cost
   or no-cost health care services.
f. Referral to Medicare Managed Care Plan.
g. Allow for a second opinion from a qualified health care professional within the network, or if one is not
   available in network, arrange for the member to obtain one outside the network, at no cost to the member
    [42 CFR 438.206(b)(3)].

The Contractor shall comply with all applicable physician referral requirements and conditions defined in
Sections 1903(s) and 1877 of the Social Security Act and their implementing regulations which include, but
are not limited to, 42 CFR Part 411, Part 424, Part 435 and Part 455. Sections 1903(s) and 1877 of the Act
prohibits physicians from making referrals for designated health services to health care entities with which the
physician or a member of the physician’s family has a financial relationship. Designated health services
include:

                a. Clinical laboratory services
                b. Physical therapy services
                c. Occupational therapy services
                d. Radiology services
                e. Radiation therapy services and supplies
                f. Durable medical equipment and supplies
                g. Parenteral and enteral nutrients, equipment and supplies
                h. Prosthetics, orthotics and prosthetic devices and supplies
                i. Home health services
                j. Outpatient prescription drugs
                k. Inpatient and outpatient hospital services

33. APPOINTMENT STANDARDS

The Contractor shall monitor appointment availability utilizing the methodology found in the ACOM
Appointment Availability Monitoring and Reporting Policy to ensure that the following standards are met:

Wait time for Appointment:
For Primary Care Appointments, the Contractor shall be able to provide:

a. Emergency PCP appointments - same day of request
b. Urgent care PCP appointments - within 2 days of request
c. Routine care PCP appointments - within 21 days of request

For specialty referrals, the Contractor shall be able to provide:

a. Emergency appointments - within 24 hours of referral
b. Urgent care appointments - within 3 days of referral
c. Routine care appointments - within 45 days of referral

For dental appointments, the Contractor shall be able to provide:

a. Emergency appointments - within 24 hours of request
b. Urgent care appointments - within 3 days of request
c. Routine care appointments - within 45 days of request

For maternity care, the Contractor shall be able to provide initial prenatal care appointments for enrolled
pregnant members as follows:

a. First trimester - within 14 days of request
b. Second trimester - within 7 days of request
c. Third trimester - within 3 days of request
d. High risk pregnancies - within 3 days of identification of high risk by the Contractor or maternity
   care provider, or immediately if an emergency exists

For purposes of the sections above, “urgent” is defined as an acute, but not necessarily life-threatening
condition which, if not attended to, could endanger the patient’s health.

Wait time in Office:
The Contractor shall actively monitor and ensure that a member's waiting time for a scheduled appointment at
the PCP’s or specialist’s office is no more than 45 minutes, except when the provider is unavailable due to an
emergency.

Wait time for Transportation:
If a member needs non-emergent medically necessary transportation, the Contractor shall require its
transportation provider to schedule the transportation so that the member arrives on time for the appointment,
but no sooner than one hour before the appointment; does not have to wait more than one hour after calling for
transportation after the conclusion of the appointment to be picked up; nor have to wait for more than one hour
after conclusion of the treatment for transportation home; nor be picked up prior to the completion of
treatment. The Contractor must develop and implement a quarterly performance auditing protocol to evaluate
compliance with the standards above for all subcontracted transportation vendors/brokers and require
corrective action if standards are not met.

The Contractor must use the results of appointment availability monitoring to assure adequate appointment
availability in order to reduce unnecessary emergency department utilization. The Contractor is also encouraged
to contract with or employ the services of non-emergency facilities to address member non-emergency care issues
occurring after regular office hours or on weekends.

The Contractor shall establish processes to monitor and reduce the appointment “no-show” rate by provider
and service type. As best practices are identified, AHCCCS may require implementation by the Contractor.

The Contractor shall have written policies and procedures about educating its provider network regarding
appointment time requirements. The Contractor must assign a specific staff member or unit within its
organization to monitor compliance with appointment standards. The Contractor must develop a corrective
action plan when appointment standards are not met; if appropriate, the corrective action plan should be
developed in conjunction with the provider [42 CFR 438.206(c)(1)(iv), (v) and (vi)]. Appointment standards
shall be included in the Provider Manual. The Contractor is encouraged to include the standards in the provider
subcontract.

34. FEDERALLY QUALIFIED HEALTH CENTERS AND RURAL HEALTH CLINICS

The Contractor is encouraged to use FQHCs/RHCs in Arizona to provide covered services. AHCCCS requires
the Contractor to negotiate rates of payment with FQHCs/RHCs for non-pharmacy services that are comparable
to the rates paid to providers that provide similar services. AHCCCS reserves the right to review a Contractor’s
negotiated rates with an FQHC/RHC for reasonableness and to require adjustments when negotiated rates are
found to be substantially less than those being paid to other, non-FQHC/RHC providers for comparable services.

The Contractor is required to submit member information for Title XIX members for each FQHC/RHC on a
quarterly basis to the AHCCCS Division of Health Care Management. AHCCCS will perform periodic audits of
the member information submitted. The Contractor should refer to the AHCCCS Reporting Guide for Acute
Care Contractors with the Arizona Health Care Cost Containment System for further guidance. The
FQHCs/RHCs registered with AHCCCS are listed on the AHCCCS website (http://www.azahcccs.gov).

35. PROVIDER MANUAL

The Contractor shall develop, distribute and maintain a provider manual as described in the ACOM Provider
Information Policy.

36. PROVIDER REGISTRATION

The Contractor shall ensure that all of its subcontractors register with AHCCCS as an approved service provider.
A Provider Participation Agreement must be signed by each provider who is not already an AHCCCS registered
provider. The original shall be forwarded to AHCCCS. The provider registration process must be completed in
order for the Contractor to report services a provider renders to enrolled members and for the Contractor to be
paid reinsurance. The National Provider Identifier (NPI) is required on all claim submissions and subsequent
encounters (from providers who are eligible for a NPI). The Contractor shall work with providers to obtain their
NPI.

Except as otherwise required by law or as otherwise specified in a contract between a Contractor and a provider,
the AHCCCS Administration fee-for-service provisions referenced in the AHCCCS Provider Participation
Agreement located on the AHCCCS website (e.g. billing requirements, coding standards, payment rates) are in
force between the provider and Contractor.

37. SUBCONTRACTS

The Contractor shall be legally responsible for contract performance whether or not subcontracts are used [42

CFR 438.230(a) and 434.6(c)]. No subcontract shall operate to terminate the legal responsibility of the
Contractor to assure that all activities carried out by the subcontractor conform to the provisions of this contract.
Subject to such conditions, any function required to be provided by the Contractor pursuant to this contract may
be subcontracted to a qualified person or organization. All such subcontracts must be in writing [42 CFR
438.6(L)]. See the ACOM Contractor Claims Processing by Health Plan Subcontracted Providers Policy.

All subcontracts entered into by the Contractor are subject to prior review and written approval by AHCCCS,
Division of Health Care Management, and shall incorporate by reference the terms and conditions of this
contract. The following types of Administrative Services subcontracts shall be submitted to AHCCCS, Division
of Health Care Management for prior approval at least 30 days prior to the beginning date of the subcontract.
Administrative Services Subcontracts:

                1. Delegated agreements that subcontract:
                                a) Any function related to the management of the contract with AHCCCS. Examples include
                                   member services, provider relations, quality management, medical management (e.g., prior
                                   authorization, concurrent review, medical claims review)
                                b) Claims processing, including pharmacy claims.
                                c) Credentialing including those for only primary source verification
                2. All Management Service Agreements
                3. All Service Level Agreements with any Division or Subsidiary of a corporate parent owner

AHCCCS may, at its discretion, communicate directly with the governing body or Parent Corporation of the
Contractor regarding the performance of a subcontractor or Contractor respectively.

The Contractor shall maintain a fully executed original of all subcontracts, which shall be accessible to AHCCCS
within two business days of request by AHCCCS. All requested subcontracts must have full disclosure of all
terms and conditions and must fully disclose all financial or other requested information. Information may be
designated as confidential but may not be withheld from AHCCCS as proprietary. Information designated as
confidential may not be disclosed by AHCCCS without the prior written consent of the Contractor except as
required by law. All subcontracts shall comply with the applicable provisions of Federal and State laws,
regulations and policies.

Before entering into a subcontract which delegates Contractor duties or responsibilities to a subcontractor, the
Contractor must evaluate the prospective subcontractor’s ability to perform the activities to be delegated. If the
Contractor delegates duties or responsibilities such as utilization management or claims processing to a
subcontractor, then the Contractor shall establish a written agreement that specifies the activities and reporting
responsibilities delegated to the subcontractor. The written agreement shall also provide for revoking delegation
or imposing other sanctions if the subcontractor’s performance is inadequate. In order to determine adequate
performance, the Contractor shall monitor the subcontractor’s performance on an ongoing basis and subject it to
formal review according to a periodic schedule. The schedule for review shall be submitted to AHCCCS,
Division of Health Care Management for prior approval. As a result of the performance review, any deficiencies
must be communicated to the subcontractor in order to establish a corrective action plan. The results of the
performance review and the correction plan shall be communicated to AHCCCS upon completion [42 CFR
438.230(b)].

A merger, reorganization or change in ownership of an Administrative Services subcontractor of the Contractor
shall require a contract amendment and prior approval of AHCCCS.

Contractor must submit the Annual Subcontractor Assignment and Evaluation Report (within 90 days from
the start of the contract year) detailing any Contractor duties or responsibilities that have been subcontracted as
described under administrative subcontracts previously in this section. If the Contractor does not assign any
duties under the subcontract types listed in the paragraph above, a statement to this effect must be submitted in
lieu of the Annual Subcontractor Assignment and Evaluation Report. The Annual Subcontractor Assignment
and Evaluation Report will include the following:

            • Subcontractor’s name
                • Delegated duties and responsibilities
                • Most recent review date of the duties, responsibilities and financial position of the subcontractor
                • A comprehensive evaluation of the performance (operational and financial) of the subcontractor
                • Identified areas of deficiency
                • Corrective action plans as necessary
                • Next scheduled review date

The Contractor shall promptly inform AHCCCS, Division of Health Care Management, in writing if a
subcontractor is in significant non-compliance that would affect their abilities to perform the duties and
responsibilities of the subcontract.

The Contractor shall not include covenant-not-to-compete requirements in its provider agreements. Specifically,
the Contractor shall not contract with a provider and require that the provider not provide services for any other
AHCCCS Contractor. In addition, except for cost sharing requirements, the Contractor shall not enter into
subcontracts that contain compensation terms that discourage providers from serving any specific eligibility
category.

The Contractor must enter into a written agreement with any provider (including out-of-state providers) the
Contractor reasonably anticipates will be providing services at the request of the Contractor more than 25 times
during the contract year [42 CFR 438.206(b)(1)]. Exceptions to this requirement include the following:

1. If a provider who provides services more than 25 times during the contract year refuses to enter into a written
   agreement with the Contractor, the Contractor shall submit documentation of such refusal to AHCCCS,
   Division of Health Care Management within seven days of its final attempt to gain such agreement.
2. If a provider performs emergency services such as an emergency room physician or an ambulance company,
   a written agreement is not required.
3. Individual providers as detailed in the AMPM.
4. Hospitals, as discussed in Section D, Paragraph 40, Hospital Subcontracting and Reimbursement.
5. If a provider primarily performs services in an inpatient setting.
6. If upon the Medical Director’s review, it is determined that the Contractor or members would not benefit by
   adding the provider to the contracted network.

Any other exceptions to this requirement must be approved by AHCCCS, Division of Health Care Management.
If AHCCCS does not respond within 30 days; the requested exception is deemed approved. The Contractor may
request an expedited review and approval.

All subcontracts must contain verbatim all the provisions of Attachment A, Minimum Subcontract Provisions. In
addition, each provider subcontract must contain the following [42 CFR 438.206(b)(1)]:

1. Full disclosure of the method and amount of compensation or other consideration to be received by the
   subcontractor.
2. Identification of the name and address of the subcontractor.
3. Identification of the population, to include patient capacity, to be covered by the subcontractor.
4. The amount, duration and scope of medical services to be provided, and for which compensation will be
   paid.
5. The term of the subcontract including beginning and ending dates, methods of extension, termination and
   re-negotiation.
6. The specific duties of the subcontractor relating to coordination of benefits and determination of third-party
   liability.
7. A provision that the subcontractor agrees to identify Medicare and other third-party liability coverage and to
   seek such Medicare or third party liability payment before submitting claims to the Contractor.
8. A description of the subcontractor's patient, medical, dental and cost record keeping system.
9. Specification that the subcontractor shall cooperate with quality management/quality improvement programs,
   and comply with the utilization management and review procedures specified in 42 CFR Part 456, as
   specified in the AMPM.
10. A provision stating that a merger, reorganization or change in ownership of an Administrative Services
   subcontractor of the Contractor shall require a contract amendment and prior approval of AHCCCS.
11. A provision that indicates that AHCCCS is responsible for enrollment, re-enrollment and dis-enrollment of
   the covered population.
12. A provision that the subcontractor shall be fully responsible for all tax obligations, Worker's Compensation
   Insurance, and all other applicable insurance coverage obligations which arise under this subcontract, for
   itself and its employees, and that AHCCCS shall have no responsibility or liability for any such taxes or
   insurance coverage.
13. A provision that the subcontractor must obtain any necessary authorization from the Contractor or AHCCCS
   for services provided to eligible and/or enrolled members.
14. A provision that the subcontractor must comply with encounter reporting and claims submission
   requirements as described in the subcontract.
15. Provision(s) that allow the Contractor to suspend, deny, refuse to renew or terminate any subcontractor in
   accordance with the terms of this contract and applicable law and regulation.
16. A provision that the subcontractor may provide the member with factual information, but is prohibited from
   recommending or steering a member in the member’s selection of a Contractor.
17. A provision that compensation to individuals or entities that conduct utilization management and concurrent
   review activities is not structured so as to provide incentives for the individual or entity to deny, limit or
   discontinue medically necessary services to any enrollee (42 CFR 438.210(e)).

38. CLAIMS PAYMENT/HEALTH INFORMATION SYSTEM

The Contractor shall develop and maintain a health information system that collects, analyzes, integrates, and

reports data. The system shall provide information on areas including, but not limited to, service utilization,
claim disputes and appeals [42 CFR 438.242(a)].

The Contractor will ensure that changing or making major upgrades to the information systems affecting
claims processing, or any other major business component, will be accompanied by a plan which includes a
timeline, milestones, and adequate testing before implementation. At least six months before the anticipated
implementation date, the Contractor shall provide the system change plan to AHCCCS for review and
comment.

The Contractor must have a health information system that integrates member demographic data, provider
information, service provision, claims submission and reimbursement. This system must be capable of
collecting, storing and producing information for the purposes of financial, medical and operational
management.

In support of this requirement, the Contractor will be required to have an independent audit of the Claims
Payment/Health Information System completed within two (2) calendar years of the initiation of the Contract; or
by September 30, 2010 (CYE10). The Contractor must submit a signed agreement on or before December 31st
2008, with a schedule for completion, entered into with an independent auditing firm of their selection to be
approved by the AHCCCS Division of Health Care Management. The Division of Health Care Management will
monitor the scope of this audit, to include no less than a verification of contract information management
(contract loading and auditing), claims processing and encounter submission processes. In addition to this
requirement, the Contractor may be required in future contract years to initiate additional independent Claim
System/Health Information System audit at the direction of the AHCCCS Administration. In the event of a
system change or upgrade, the Contractor will be required to initiate an independent Claim System/Health
Information System audit.

In addtition to the above required audit, the Contractor shall develop and implement an internal claims audit
function that will include the following:
                • Verification that provider contracts are loaded correctly
                • Accuracy of payments against provider contract terms

The Contractor shall develop and maintain a HIPAA compliant claims processing and payment system capable of
processing, cost avoiding and paying claims in accordance with A.R.S. §§ 36-2903 and 2904 and AHCCCS
Rules R9-22 Article 7. The system must be adaptable to updates in order to support future AHCCCS claims
related Policy requirements as needed.

The contractor must include nationally recognized methodologies to correctly pay claims including but not
limited to:
                • Correct Coding Initiative (CCI) for Professional and Outpatient services;
                • Multiple Surgical Reductions;
                • Global Day Bundling;
                • Multi Channel Lab Test Bundling

The Contractor claims payment system must be able to assess and/or apply the following data related edits:
                • Benefit Package Variations;
                • Timeliness Standards;
                • Data Accuracy;
                • Adherence to AHCCCS Policy;
                • Provider Qualifications;
                • Member Eligibility and Enrollment;
                • Over-Utilization Standards

This system must produce a remittance advice related to the Contractor’s payments and/or denials to providers
and must include at a minimum:
                • an adequate description of all denials and adjustments;
                • the reasons for such denials and adjustments;
                • the amount billed;
                • the amount paid;
                • application of COB;
                • provider rights for claim disputes.

The related remittance advice must be sent with the payment, unless the payment is made by electronic funds
transfer (EFT). The remittance advice sent related to an EFT must be mailed, or sent to the provider, no later than
the date of the EFT. If the remittance is made through EFT, a notice of the provider’s right for claim dispute must
be sent to the provider concurrently.

The Contractor’s claims payment system, as well as its prior authorization and concurrent review process, must
minimize the likelihood of having to recoup already-paid claims. Any individual recoupment in excess of
$50,000 per provider within a contract year must be approved in advance by AHCCCS, Division of Health Care
Management, Acute Care Operations Unit. If AHCCCS does not respond within 30 days the recoupment request
is deemed approved. AHCCCS must be notified of any cumulative recoupment greater than $50,000 per
provider Tax Identification Number per contract year. A Contractor shall not recoup monies from a provider
later than 12 months after the date of original payment on a clean claim, without prior approval from AHCCCS,
as further described in the ACOM Recoupment Request Policy.

The Contractor is required to reimburse providers for previously recouped monies if the provider was
subsequently denied payment by the primary insurer based on timely filing limits or lack of prior authorization
and the member failed to disclose additional insurance coverage other than AHCCCS.

The Contractor must void encounters for claims that are recouped in full. For recoupments that result in a
reduced claim value or adjustments that result in an increased claim value, replacement encounters must be
submitted. AHCCCS will validate the submission of applicable voids and replacement encounters upon
completion of any approved recoupment that meets the qualifications of this section. All replaced or voided
encounters must reach adjudicated status within 120 days of the approval of the recoupment. The Contractor
should refer to the ACOM Recoupment Request Policy and AHCCCS Encounter Reporting User Manual for
further guidance.

Unless a subcontract specifies otherwise, a Contractor with 50,000 or more members shall ensure that 95% of all
clean claims are adjudicated within 30 days of receipt of the clean claim and 99% are adjudicated within 60 days
of receipt of the clean claim. Unless a subcontract specifies otherwise, a Contractor with fewer than 50,000
members shall ensure that 90% of all clean claims are adjudicated within 30 days of receipt of the clean claim and
99% are adjudicated within 60 days of receipt of the clean claim. Additionally, unless a shorter time period is
specified in contract, the Contractor shall not pay a claim initially submitted more than 6 months after date of
service or pay a clean claim submitted more than 12 months after date of service. Claim payment requirements
pertain to both contracted and non-contracted providers. The receipt date of the claim is the date stamp on the
claim or the date electronically received. The receipt date is the day the claim is received at the Contractor’s
specified claim mailing address. The paid date of the claim is the date on the check or other form of payment [42
CFR 447.45(d)]. Claims submission deadlines shall be calculated from the claim end date or the effective date of
eligibility posting, whichever is later as stated in A.R.S. 36-2904.H.

Effective for all non-hospital clean claims, in the absence of a contract specifying other late payment terms, a
Contractor is required to pay interest on late payments. Late claims payments are those that are paid after 45 days
of receipt of the clean claim (as defined in this contract). In grievance situations, interest shall be paid back to the
date interest would have started to accrue beyond the applicable 45 day requirement. Interest shall be at the rate
of ten per cent per annum, unless a different rate is stated in a written contract. In the absence of interest payment
terms in a subcontract, interest shall accrue starting on the first day after a clean claim is contracted to be paid.
For hospital clean claims, a slow payment penalty shall be paid in accordance with A.R.S. 2903.01. When
interest is paid, the Contractor must report the interest as directed in the AHCCCS Encounter Reporting User
Manual.

AHCCCS will require the Contractor to participate in an AHCCCS workgroup to develop uniform guidelines for
standardizing hospital outpatient and outpatient provider claim requirements, including billing rules and
documentation requirements. The workgroup may be facilitated by an AHCCCS selected consultant. The
Contractor will be held responsible for the cost of this project based on its share of AHCCCS enrollment.

The Contractor is required to accept and generate HIPAA compliant electronic claims transactions from/to any
provider interested and capable of electronic submission or electronic remittance receipt; and must be able to
make claims payments via electronic funds transfer. In addition, the Contractor shall implement and meet the
following milestone in order to make claims processing and payment more efficient and timely:

            • Receive and pay 60% of all claims (based on volume of actual claims excluding claims processed by
                Pharmacy Benefit Managers (PBMs)) electronically by July 1, 2009

In accordance with the Deficit Reduction Act of 2005, Section 6085, Contractor is required to reimburse non-
ontracted emergency services providers at no more than the AHCCCS Fee-For-Service rate. This applies to
in state as well as out of state providers.

In accordance with Arizona Revised Statute 36-2903 and 36-2904, in the absence of a written negotiated rate,
Contractor is required to reimburse non-contracted non-emergent in state providers at the AHCCCS fee
schedule and methodology, or pursuant to 36-2905.01, at ninety-five percent of the AHCCCS Fee-For-Service
rates for urban hospital days. All payments are subject to other limitations that apply, such as provider
registration, prior authorization, medical necessity, and covered service.

The Contractor shall submit a monthly Claims Dashboard as specified in the AHCCCS Claims Dashboard
Reporting Guide. The Monthly report must be received by the AHCCCS Division of Healthcare Management,
no later than 15 days from the end of each month.

Within the first 6 months of the contract term, the Contractor must review claim requirements, including billing
rules and documentation requirements, and submit a report to AHCCCS that will include the rationale for the
requirements. AHCCCS shall determine and provide a format for the report.

39. SPECIALTY CONTRACTS

AHCCCS may at any time negotiate or contract on behalf of the Contractor and AHCCCS for specialized
hospital and medical services. AHCCCS will consider existing Contractor resources in the development and
execution of specialty contracts. AHCCCS may require the Contractor to modify its delivery network to
accommodate the provisions of specialty contracts. AHCCCS may consider waiving this requirement in
particular situations if such action is determined to be in the best interest of the State; however, in no case shall
reimbursement exceeding that payable under the relevant AHCCCS specialty contract be considered in capitation
rate development or risk sharing arrangements, including reinsurance.

During the term of specialty contracts, AHCCCS may act as an intermediary between the Contractor and
specialty Contractors to enhance the cost effectiveness of service delivery. Adjudication of claims related to
payments provided under specialty contracts shall remain the responsibility of the Contractor. AHCCCS may
provide technical assistance prior to the implementation of any specialty contracts.

Currently, AHCCCS only has specialty contracts for transplant services and anti-hemophilic agents and related
pharmaceutical services. AHCCCS shall provide at least 60 days advance written notice to the Contractor prior
to the implementation of any specialty contract. See Section D, Paragraph 57, Reinsurance, for further details.

40. HOSPITAL SUBCONTRACTING AND REIMBURSEMENT

Maricopa and Pima counties only: The Inpatient Hospital Reimbursement Program is defined in the Arizona
Revised Statutes (A.R.S.) 36-2905.01, and requires hospital subcontracts to be negotiated between the Contractor
and hospitals in Maricopa and Pima counties to establish reimbursement levels, terms and conditions.
Subcontracts shall be negotiated by the Contractor and hospitals to cover operational concerns, such as timeliness
of claims submission and payment, payment of discounts or penalties and legal resolution which may, as an
option, include establishing arbitration procedures. These negotiated subcontracts shall remain under close
scrutiny by AHCCCS to ensure availability of quality services within specific service districts, equity of related
party interests and reasonableness of rates. The general provisions of this program encompass acute care hospital
services and outpatient hospital services that result in an admission. The Contractor, upon request, shall make
available to AHCCCS, all hospital subcontracts and amendments. For non-emergency patient-days, the
Contractor shall ensure that at least 65% of its members use contracted hospitals. AHCCCS reserves the right to
subsequently adjust the 65% standard. Further, if in AHCCCS’s judgment the number of emergency days at a
particular non-contracted hospital becomes significant, AHCCCS may require a subcontract at that hospital. In
accordance with R9-22-718, unless otherwise negotiated by both parties, the reimbursement for inpatient
services, including outliers, provided at a non-contracted hospital shall be based on the rates as defined in A.R.S.
§ 36-2903.01, multiplied by 95%.

All counties EXCEPT Maricopa and Pima: The Contractor shall reimburse hospitals for member care in
accordance with AHCCCS Rule R9-22-705. The Contractor is encouraged to obtain subcontracts with hospitals
in all GSAs. The Contractor, upon request, shall make available to AHCCCS, all hospital subcontracts and
amendments.

Out-of-State Hospitals: The Contractor shall reimburse out-of-state hospitals in accordance with AHCCCS
Rule R9-22-705. A Contractor serving border communities (excluding Mexico) is strongly encouraged to
establish contractual agreements with those out-of-state hospitals that are identified by GSA in Attachment B.

Outpatient hospital services: In the absence of a contract, the default payment rate for outpatient hospital
services billed on a UB-92 will be based on the AHCCCS outpatient hospital fee schedule, rather than a
hospital-specific cost-to-charge ratio (pursuant to ARS 36-2904).

Hospital Recoupments: The Contractor may conduct prepayment and post-payment medical reviews of all
hospital claims including outlier claims. Erroneously paid claims are subject to recoupment. If the Contractor
fails to identify lack of medical necessity through concurrent review and/or prepayment medical review, lack of
medical necessity identified during post-payment medical review shall not constitute a basis for recoupment by
the Contractor. This prohibition does not apply to recoupments that are a result of an AHCCCS reinsurance
audit. See also Section D, Paragraph 38, Claims Payment/Health Information System. For a more complete
description of the guidelines for hospital reimbursement, please consult the AHCCCS website for applicable
statutes and rules.

41. RESPONSIBILITY FOR NURSING FACILITY REIMBURSEMENT

The Contractor shall provide medically necessary nursing facility services as outlined in Section D, Paragraph 10,
Scope of Services. The Contractor shall also provide medically necessary nursing facility services for any
enrolled member who has a pending ALTCS application who is currently residing in a nursing facility and is
eligible for services provided under this contract. If the member becomes ALTCS eligible and is enrolled with an
ALTCS Contractor before the end of the maximum 90 days per contract year of nursing facility coverage, the
Contractor is only responsible for nursing facility reimbursement during the time the member is enrolled with the
Contractor as shown in the PMMIS. Nursing facility services covered by another liable party (including
Medicare) while the member is enrolled with the Contractor, shall be applied to the 90 day per contract year
limitation.

The Contractor shall not deny nursing facility services when the member’s eligibility, including prior period
coverage, had not been posted at the time of admission. In such situations the Contrator shall impose reasonable
authorization requirements. There is no ALTCS enrollment, including prior period coverage, that occurs
concurrently with AHCCCS acute enrollment.

The Contractor shall notify the Assitant Director of the Division of Member Services, when a member has been
residing in a nursing facility for 75 days as specified in Section D, Paragraph 10, Scope of Services, under the
heading Nursing Facility. This will allow AHCCCS time to follow-up on the status of the ALTCS application
and to consider potential fee-for-service coverage if the stay goes beyond the 90 day per contract year maximum.

42. PHYSICIAN INCENTIVES/PAY FOR PERFORMANCE

Physician Incentives
Reporting of Physician Incentive Plans has been suspended by CMS until further notice. No reporting is
required until suspension is lifted.

The Contractor must comply with all applicable physician incentive requirements and conditions defined in 42
CFR 417.479. These regulations prohibit physician incentive plans that directly or indirectly make payments
to a doctor or a group as an inducement to limit or refuse medically necessary services to a member. The
Contractor is required to disclose all physician incentive agreements to AHCCCS and to AHCCCS members
who request them.

The Contractor shall not enter into contractual arrangements that place providers at significant financial risk as
defined in 42 CFR 417.479 unless specifically approved in advance by the AHCCCS Division of Health Care
Management. In order to obtain approval, the following must be submitted to the AHCCCS Division of
Health Care Management 45 days prior to the implementation of the contract [42 CFR 438.6(g)]:

1. A complete copy of the contract
2. A plan for the member satisfaction survey
3. Details of the stop-loss protection provided
4. A summary of the compensation arrangement that meets the substantial financial risk definition.

The Contractor shall disclose to AHCCCS the information on physician incentive plans listed in 42 CFR
417.479(h)(1) through 417.479(I) upon contract renewal, prior to initiation of a new contract, or upon request
from AHCCCS or CMS.

The Contractor shall also provide for compliance with physician incentive plan requirements as set forth in 42
CFR 422.208, 422.210 and 438.6(h). These regulations apply to contract arrangements with subcontracted
entities that provide utilization management services.

Value Driven Healthcare/Pay for Performance
AHCCCS may explore opportunities to develop and implement system-wide Value Driven Healthcare
programs and pay for performance initiatives. The Contractor shall participate in the development and
implementation of such programs as requested by AHCCCS. Should the Contractor’s individual pay for
performance program conflict with AHCCCS programs, the Contractor may be required to close out the
individual program. AHCCCS may require the Contractor to provide PCP assignment information. The
Contractor shall provide this information in a format specified by AHCCCS upon request.

Transparency
AHCCCS programs will be in compliance with Federal and State transparency initiatives. AHCCCS may
publically report or make available any data, reports, analysis or outcomes related to Contractor activities,
operations and/or performance. Public reporting may include, but is not limited to, the following components:

                a) Use of evidence based guidlelines
                b) Identification and publication of top performing Contractors
                c) Identification and publication of top performing providers
                d) Program pay for performance payouts
                e) Mandated publication of guidelines
                f) Mandated publication of outcomes
                g) Identification of Centers of Excellence for specific conditions, procedures or member populations
                h) Establishment of Return on Investment goals

Any Contractor-selected and/or -developed pay for performance initiative that meets the requirements of 42
CFR 417.479 must be approved by AHCCCS Division of Health Care Management prior to implementation.

Public Reporting of Contractor Cost Management, Satisfaction and Quality Performance
AHCCCS is in the process of developing a cost management, satisfaction, and quality score card as part of the
AHCCCS value driven decision support initiative. The score card information will made available to
beneficiaries, legislators and the public. These reports will be posted on the AHCCCS website and made
available at enrollment and reenrollment or at any time that beneficiaries are choosing a Contractor.
Contractors are also encouraged to provide quality and cost information on network hospitals and providers to
help enrollees choose among high performing value driven providers and hospitals.

43. MANAGEMENT SERVICES AGREEMENT AND COST ALLOCATION PLAN

If a Contractor has subcontracted for management services, the management service agreement must be approved
in advance by AHCCCS, Division of Health Care Management. If there is a cost allocation plan as part of the
management services agreement, it is subject to review by AHCCCS upon request. AHCCCS reserves the right
to perform a thorough review of actual management fees charged and/or corporate allocations made.

If there is a change in ownership of the entity with which the Contractor has contracted for management services,
AHCCCS must review and provide prior approval of the assignment of the subcontract to the new owner.
AHCCCS may offer open enrollment to the members assigned to the Contractor should a change in ownership
occur. AHCCCS will not permit two Contractors to utilize the same management service company in the same
GSA.

The performance of management service subcontractors must be evaluated and included in the Annual
Subcontractor Assignment and Evaluation Report required by Section D, Paragraph 37, Subcontracts and
Attachment F: Periodic Report Requirements.

44. RESERVED

45. RESERVED

46. PERFORMANCE BOND OR BOND SUBSTITUTE

The Contractor shall be required to provide a performance bond of standard commercial scope issued by a surety
company authorized to do business in this State, an irrevocable letter of credit, or a cash deposit ("Performance
Bond") to AHCCCS for as long as the Contractor has AHCCCS-related liabilities of $50,000 or more
outstanding, or 15 months following the termination date of this contract, whichever is later, to guarantee: (1)
payment of the Contractor's obligations to providers, non-contracting providers, and non-providers; and (2)
performance by the Contractor of its obligations under this contract [42 CFR 438.116(a)(1) and (b)(1)]. The
Performance Bond shall be in a form acceptable to AHCCCS as described in the ACOM Performance Bond
Policy available on the AHCCCS website.

In the event of a default by the Contractor, AHCCCS shall, in addition to any other remedies it may have under
this contract, obtain payment under the Performance Bond or substitute security for the purposes of the following:

1. Paying any damages sustained by providers, non-contracting providers and non-providers by reason of a
   breach of the Contractor's obligations under this contract,
2. Reimbursing AHCCCS for any payments made by AHCCCS on behalf of the Contractor, and
3. Reimbursing AHCCCS for any extraordinary administrative expenses incurred by reason of a breach of the
   Contractor's obligations under this contract, including, but not limited to, expenses incurred after termination
   of this contract for reasons other than the convenience of the State by AHCCCS.

In the event AHCCCS agrees to accept substitute security in lieu of the Performance Bond, irrevocable letter of
credit or cash deposit, the Contractor agrees to execute any and all documents and perform any and all acts
necessary to secure and enforce AHCCCS's security interest in such substitute security including, but not limited
to, security agreements and necessary UCC filings pursuant to the Arizona Uniform Commercial Code. The
Contractor must request acceptance from AHCCCS when a substitute security in lieu of the performance bond,
irrevocable letter of credit or cash deposit is established. In the event such substitute security is agreed to and
accepted by AHCCCS, the Contractor acknowledges that it has granted AHCCCS a security interest in such
substitute security to secure performance of its obligations under this contract. The Contractor is solely
responsible for establishing the credit-worthiness of all forms of substitute security. AHCCCS may, after written
notice to the Contractor, withdraw its permission for substitute security, in which case the Contractor shall
provide AHCCCS with a form of security described above.

The Contractor may not change the amount, duration or scope of the performance bond without prior written
approval from AHCCCS, Division of Health Care Management. The Contractor shall not leverage the bond for
another loan or create other creditors using the bond as security.

47. AMOUNT OF PERFORMANCE BOND

The initial amount of the Performance Bond shall be equal to 80% of the total capitation payment expected to
be paid to the Contractor in the first month of the contract year, or as determined by AHCCCS. The total
capitation amount (including delivery supplement) excludes premium tax. This requirement must be satisfied
by the Contractor no later than 30 days after notification by AHCCCS of the amount required. Thereafter,
AHCCCS shall review the adequacy of the Performance Bond on a monthly basis to determine if the
Performance Bond must be increased. The Contractor shall have 30 days following notification by AHCCCS
to increase the amount of the Performance Bond. The Performance Bond amount that must be maintained
after the contract term shall be sufficient to cover all outstanding liabilities and will be determined by
AHCCCS. The Contractor may not change the amount of the performance bond without prior written
approval from AHCCCS, Division of Health Care Management. Refer to the ACOM Performance Bond and
Equity Per Member Requirements Policy for more details.

48. ACCUMULATED FUND DEFICIT

The Contractor and its owners must review for accumulated fund deficits on a quarterly basis. In the event the
Contractor has a fund deficit, the Contractor and its owners shall fund the deficit through capital contributions in
a form acceptable to AHCCCS within 30 days after the quarterly, draft or final annual financial statements in
which the deficit is reported are due to AHCCCS, or in a timeframe otherwise requested by AHCCCS. AHCCCS
may, at its option, impose enrollment caps in any or all GSA’s as a result of an accumulated deficit, even if
unaudited.

49. ADVANCES, DISTRIBUTIONS, LOANS AND INVESTMENTS

The Contractor shall not, without the prior approval of AHCCCS, make any advances, distributions, loans or loan
guarantees to related parties or affiliates including another fund or line of business within its organization. The
Contractor shall not, without prior approval of AHCCCS, make advances to providers in excess of $50,000. All
requests for prior approval are to be submitted to the AHCCCS Division of Health Care Management. Refer to
the ACOM Provider and Affiliate Advance Request Policy for further information.

50. FINANCIAL VIABILITY STANDARDS

The Contractor must comply with the AHCCCS-established financial viability standards. On a quarterly basis,
AHCCCS will review the following ratios with the purpose of monitoring the financial health of the Contractor:
Current Ratio; Equity per Member; Medical Expense Ratio; and the Administrative Cost Percentage.
Sanctions may be imposed if the Contractor does not meet these financial viability standards. AHCCCS will take
into account the Contractor’s unique programs for managing care and improving the heath status of members
when analyzing medical expense and administrative ratio results. However, if a critical combination of the
Financial Viability Standards are not met, or if the Contractor’s experience differs significantly from other
Contractors, additional monitoring, such as monthly reporting, may be required.

FINANCIAL VIABILITY STANDARDS

Current Ratio
Current assets divided by current liabilities. "Current assets" includes
any long-term investments that can be converted to cash within 24
hours without significant penalty (i.e., greater than 20%). A request to
include long-term investments that can be converted to cash within 24
hours in the current ratio calculation must be sent to AHCCCS, DHCM,
within 30 days of the contract start date and within 30 days of contract
renewal.

Standard: At least 1.00

If current assets include a receivable from a parent company, the parent
company must have liquid assets that support the amount of the intercompany
loan.

Equity per Member
Unrestricted equity, less on-balance sheet performance bond, divided by
the number of non-SOBRA Family Planning Extension Services
members enrolled at the end of the period.

Standard: At least $150 for Contractors with enrollment < 100,000
$100 for Contractors with enrollment of 100,000+

Additional information regarding the Equity per Member requirement
may be found in the Performance Bond and Equity per Member
Requirements policy in the ACOM.

Medical Expense Ratio
Total medical expenses divided by the sum of total capitation + Delivery
Supplement +TPL+ Reinsurance less premium tax

Standard: At least 84%

Administrative Cost Percentage
Total administrative expenses divided by the sum of total capitation +
Delivery Supplement + TPL + Reinsurance less premium tax

Standard: No greater than 10%

The Contractor shall comply with all financial reporting requirements contained in Attachment F, Periodic Report
Requirements and the Reporting Guide for Acute Health Care Contractors with the Arizona Health Care Cost
Containment System, a copy of which may be found on the AHCCCS website. The required reports are subject
to change during the contract term and are summarized in Attachment F, Periodic Report Requirements.

51. SEPARATE INCORPORATION

Within 60 days of contract award, a non-governmental Contractor shall have established a separate corporation
for the purposes of this contract, whose sole activity is the performance of the requirements of this contract.

52. MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP

A proposed merger, reorganization or change in ownership of the Contractor shall require prior approval of
AHCCCS and may require a contract amendment. AHCCCS may terminate this contract pursuant to Section D,
Paragraph 1, Term of Contract and Option to Renew, if the Contractor does not obtain prior approval or
AHCCCS determines that the change in ownership is not in the best interest of the State. AHCCCS may offer
open enrollment to the members assigned to the Contractor should a change in ownership occur. AHCCCS will
not permit one organization to own or manage more than one contract in the same GSA.

The Contractor must submit a detailed merger, reorganization and/or transition plan to AHCCCS, Division of
Health Care Management, for review at least 60 days prior to the effective date of the proposed change. The
purpose of the plan review is to ensure uninterrupted services to members, evaluate the new entity's ability to
support the provider network, ensure that services to members are not diminished and that major components of
the organization and AHCCCS programs are not adversely affected by such merger, reorganization or change in
ownership.

53. COMPENSATION

The method of compensation under this contract will be Prior Period Coverage (PPC) capitation, prospective
capitation, delivery supplement, reinsurance and third party liability, as described and defined within this contract
and appropriate laws, regulations or policies.

Actuaries establish the capitation rates using practices established by the Actuarial Standards Board. AHCCCS
provides the following data to its actuaries for the purposes of rebasing the capitation rates.

                a. Utilization and unit cost data derived from adjudicated encounters
                b. Both audited and unaudited financial statements reported by the Contractor
                c. Market basket inflation trends
                d. AHCCCS fee-for-service schedule pricing adjustments
                e. Programmatic or Medicaid covered service changes that affect reimbursement
                f. Other changes to medical practices or administrative requirements that affect reimbursement

AHCCCS adjusts its rates to best match payment to risk. This further ensures the actuarial basis for the capitation
rates. The following are examples of risk factors that may be included:

                a. Reinsurance (as described in Section D, Paragraph 57)
                b. Age/Gender
                c. Medicare enrollment for SSI members
                d. Delivery supplemental payment
                e. Geographic Service Area adjustments
                f. Risk sharing arrangements for specific populations
                g. Member specific statistics, e.g. member acuity, member choice, member diagnosis, etc.

The above information is reviewed by AHCCCS’ actuaries in renewal years to determine if adjustments are
necessary. A Contractor may cover services that are not covered under the State Plan; however those services are
not included in the data provided to actuaries for setting capitation rates [42 CFR 438.6(e)].

AHCCCS anticipates utilizing an episodic/diagnostic risk adjustment methodology that will be applied to
Contractor specific capitation rates for rates effective no sooner than April 1, 2009, and annually thereafter
effective October 1. AHCCCS will use a national model, based on a Contractor's membership at a specified
date, and will share the methodology with the Contractor prior to implementation. For the episodic/diagnostic
risk adjustment in CYE 09, AHCCCS will apply no more than 50% of the capitation rate adjustment to the
remaining months of the contract year. Effective October 1, 2009, the full impact of the model will be
applied.The methodology may apply to any or all risk groups and GSAs.

Prospective Capitation: The Contractor will be paid capitation for all prospective member months, including
partial member months. This capitation includes the cost of providing medically necessary covered services to
members during the prospective period coverage.

Prior Period Coverage (PPC ) Capitation: Except for SOBRA Family Planning, SSDI-TMC, KidsCare, HIFA
Parents and State Only Transplants, the Contractor will be paid capitation for all PPC member months, including
partial member months. This capitation includes the cost of providing medically necessary covered services,
including behavioral health services, to members during prior period coverage. The PPC capitation rates will be
set by AHCCCS and will be paid to the Contractor along with the prospective capitation described above. The
Contractor will not receive PPC capitation for newborns of members who were enrolled at the time of delivery.

Reconciliation of PPC Costs to Reimbursement: AHCCCS will reconcile the Contractor’s PPC medical cost
expenses to PPC capitation paid to the Contractor during the year. This reconciliation will limit the Contractor’s
profits and losses to 2%. Any losses in excess of 2% will be reimbursed to the Contractor, and likewise, profits in
excess of 2% will be recouped. Adjudicated encounter data will be used to determine medical expenses. Refer to
the ACOM PPC Reconciliation Policy for further details.

Reconciliation of SSDI-TMC Costs to Reimbursement: AHCCCS will reconcile the Contractor’s SSDI-TMC
medical expenses to SSDI-TMC capitation paid to the Contractor during the year. This reconciliation will limit
the Contractor’s profits and losses to 2%. Any losses in excess of 2% will be reimbursed to the Contractor, and
likewise, profits in excess of 2% will be recouped. Adjudicated encounter data will be used to determine medical
expenses. Refer to the ACOM SSDI-Temporary Medical Coverage Reconciliation Policy for further details.

Delivery Supplement: When the Contractor has an enrolled woman who delivers during a prospective
enrollment period, the Contractor will be entitled to a supplemental payment. Supplemental payments will not
apply to women who deliver in a prior period coverage time period, SSDI-TMC members or State Only
Transplant members. AHCCCS reserves the right at any time during the term of this contract to adjust the
amount of this payment for women who deliver at home.

State Only Transplants Option 1 and Option 2: The Contractor will only be paid capitation for an
administrative component for those member months the member is enrolled with the Contractor. For Option 1
members the Contractor will be paid the administrative component up to a 12-month continuous period of
extended eligibility. For Option 2 members the administrative component will be paid for the period of time the
transplant is scheduled or performed. All medically necessary covered services will be reimbursed 100% with no
deductible through Reinsurance payments based on adjudicated encounters. Delivery supplement payments will
not apply to women who deliver during the 12 month continuous period of extended eligibility specified as
Option 1.

54. PAYMENTS TO CONTRACTORS

Subject to the availability of funds, AHCCCS shall make payments to the Contractor in accordance with the
terms of this contract provided that the Contractor’s performance is in compliance with the terms and conditions
of this contract. Payment must comply with requirements of A.R.S. Title 36. AHCCCS reserves the option to
make payments to the Contractor by wire or National Automated Clearing House Association (NACHA) transfer
and will provide the Contractor at least 30 days notice prior to the effective date of any such change.

Where payments are made by electronic funds transfer, AHCCCS shall not be liable for any error or delay in
transfer or indirect or consequential damages arising from the use of the electronic funds transfer process. Any
charges or expenses imposed by the bank for transfers or related actions shall be borne by the Contractor. Except
for adjustments made to correct errors in payment, and as otherwise specified in this section, any savings
remaining to the Contractor as a result of favorable claims experience and efficiencies in service delivery at the
end of the contract term may be kept by the Contractor.

All funds received by the Contractor pursuant to this contract shall be separately accounted for in accordance
with generally accepted accounting principles.

Except for funds received from the collection of permitted copayments and third-party liabilities, the only source
of payment to the Contractor for the services provided hereunder is the Arizona Health Care Cost Containment
System Fund. An error discovered by the State, with or without an audit, in the amount of fees paid to the
Contractor will be subject to adjustment or repayment by AHCCCS making a corresponding decrease in a current
Contractor’s payment or by making an additional payment to the Contractor. When the Contractor identifies an
overpayment, AHCCCS must be notified and reimbursed within 30 days of identification.

No payment due the Contractor by AHCCCS may be assigned or pledged by the Contractor. This section shall
not prohibit AHCCCS at its sole option from making payment to a fiscal agent hired by the Contractor.

55. CAPITATION ADJUSTMENTS

Except for changes made specifically in accordance with this contract, the rates set forth in Section B shall not
be subject to re-negotiation or modification during the contract period. AHCCCS may, at its option, review
the effect of a program change and determine if a capitation adjustment is needed. In these instances the
adjustment will be prospective with assumptions discussed with the Contractor prior to modifying capitation
rates. The Contractor may request a review of a program change if it believes the program change was not
equitable; AHCCCS will not unreasonably withhold such a review.

If the Contractor is in any manner in default in the performance of any obligation under this contract, AHCCCS
may, at its option and in addition to other available remedies, adjust the amount of payment until there is
satisfactory resolution of the default. The Contractor shall reimburse AHCCCS and/or AHCCCS may deduct
from future monthly capitation for any portion of a month during which the Contractor was not at risk due to, for
example:

a. death of a member
b. inmate of a public institution
c. duplicate capitation to the same Contractor
d. adjustment based on change in member’s contract type
e. voluntary withdrawal

Upon becoming aware that a member may be an inmate of a public institution, the Contractor must
contact AHCCCS for an eligibility determination.

If a member is enrolled twice with the same Contractor, recoupment will be made as soon as the double
capitation is identified. AHCCCS reserves the right to modify its policy on capitation recoupments at any time
during the term of this contract.

56. RESERVED

57. REINSURANCE

Reinsurance is a stop-loss program provided by AHCCCS to the Contractor for the partial reimbursement of
covered services, as described below, for a member with an acute medical condition beyond an annual
deductible level. AHCCCS self-insures the reinsurance program through a deduction to capitation rates. For
all reinsurance payments AHCCCS bases reimbursement on adjudicated and approved encounters. Refer to the
AHCCCS Reinsurance Processing Manual for further details on the Reinsurance Program.

Inpatient Reinsurance

Inpatient reinsurance covers partial reimbursement of covered inpatient facility medical services. See the table
below for applicable deductible levels and coinsurance percentages. The coinsurance percent is the rate at
which AHCCCS will reimburse the Contractor for covered inpatient costs incurred above the deductible. The
deductible is the responsibility of the Contractor. Per diem rates paid for nursing facility services provided
within 30 days of an acute hospital stay, including room and board, provided in lieu of hospitalization for up to
90 days in any contract year shall be eligible for reinsurance coverage. Same-day admit-and-discharge services
do not qualify for reinsurance.

The following table represents deductible and coinsurance levels effective October 1, 2008, through September
30, 2009:

                                                                                Annual Deductible
Statewide Plan Enrollment                               Prospective Reinsurance                   Coinsurance
0-34,999                                                                  $20,000                                                   75%
35,000-49,999                                                         $35,000                                                   75%
50,000 and over                                                    $50,000                                                   75%

Annual deductible levels apply to all members except for SSDI-TMC, State Only Transplant and SOBRA
Family Planning members. Beginning October 1, 2009, and annually thereafter, each of the deductible levels
above will increase by $5,000.

Prospective Reinsurance: This coverage applies to prospective enrollment periods. The deductible level is
based on the Contractor’s statewide AHCCCS acute care enrollment (not including SOBRA Family Planning
Extension services) as of October 1st each contract year, as shown in the table above. AHCCCS will adjust the
Contractor’s deductible level at the beginning of a contract year if the Contractor’s enrollment changes to the
next enrollment level. A Contractor at or above the 35,000 enrollment deductible level may elect a lower
deductible prior to the beginning of a new contract year. These deductible levels are subject to change by
AHCCCS during the term of this contract. Any change in deductible levels will have a corresponding impact
on capitation rates.

PPC inpatient expenses are not covered for any members under the reinsurance program unless they qualify
under catastrophic or transplant reinsurance.

Catastrophic Reinsurance

The Catastrophic Reinsurance program encompasses members receiving certain biotech drugs (listed below),
and those members diagnosed with hemophilia, Von Willebrand’s Disease or Gaucher’s Disease. For
additional detail and restrictions refer to the AHCCCS Reinsurance Processing Manual and the AMPM. There
are no deductibles for catastrophic reinsurance cases. For member’s receiving Biotech drugs outside of the
specific conditions mentioned in this paragraph, AHCCCS will reimburse at 85% of the cost of the drug only.
For those members diagnosed with hemophilia, Von Willebrand’s Disease and Gaucher’s Disease, all
medically necessary covered services provided during the contract year shall be eligible for reimbursement at
85% of the AHCCCS allowed amount or the Contractor’s paid amount, whichever is lower, depending on the
subcap code. Reinsurance coverage for anti-hemophilic blood factors will be limited to 85% of the AHCCCS
contracted amount or the Contractor’s paid amount, whichever is lower. All catastrophic claims are subject to
medical review by AHCCCS.

AHCCCS holds a single-source specialty contract for anti-hemophilic agents and related services for
hemophilia. Non-hemophilia related services are not covered under this specialty contract. Non-hemophiliarelated
care is defined as any care that is provided not related to the hemophilia services.

The Contractor may access anti-hemophilic agents and related pharmaceutical services for hemophilia or Von
Willebrand’s under the terms and conditions of the specialty contract for members enrolled in their plans. In
that instance, the Contractor is the authorizing payor. As such, the Contractor will provide prior authorization,
care coordination, and reimbursement for all components covered under the contract for their members. A
Contractor utilizing the contract will comply with the terms and conditions of the contract. A Contractor may
use the AHCCCS contract or contract with a provider of their choice.

The Contractor must notify AHCCCS, Division of Health Care Management, Medical Management Unit, of
cases identified for catastrophic reinsurance coverage, excluding coverage of Biotech drugs outside of those
condition mentioned in this paragraph, within 30 days of initial diagnosis and/orenrollment with the
Contractor, and annually 30 days prior to the beginning of each contract year. Catastrophic reinsurance will be
paid for a maximum 30-day retroactive period from the date of notification to AHCCCS. The determination of
whether a case or type of case is catastrophic shall be made by the Director or designee based on the following
criteria; 1) severity of medical condition, including prognosis; and 2) the average cost or average length of
hospitalization and medical care, or both, in Arizona, for the type of case under consideration.

HEMOPHILIA: Catastrophic reinsurance coverage is available for all members diagnosed with Hemophilia
(ICD9 codes 286.0, 286.1, 286.2).

VON WILLEBRAND’S DISEASE: Catastrophic reinsurance coverage is available for all members diagnosed
with von Willebrand’s Disease who are non-DDAVP responders and dependent on Plasma Factor VIII.

GAUCHER’S DISEASE: Catastrophic reinsurance is available for members diagnosed with Gaucher’s Disease
classified as Type I and are dependent on enzyme replacement therapy.

BIOTECH DRUGS: Catastrophic reinsurance is available to cover the cost of certain biotech drugs when
medically necessary. These drugs, collectively referred to as Biotech Drugs, are the responsibility of the
Contractor unless the members is CRS enrolled, the medications are related to the management of a CRS-covered
condition, and CRS is providing coverage. Catastrophic reinsurance will cover the drug cost only.
The drugs covered are Cerazyme, Aldurazyme, Fabryzyme, Myozyme, and Elaprase. The Biotech Drugs
covered under reinsurance will be reviewed by AHCCCS at the start of each contract year. AHCCCS reserves
the right to require the use of a generic equivalent where applicable. AHCCCS will reimburse at the lesser of
the Biotech Drug or its generic equivalent for reinsurance purposes.

Transplants

This program covers members who are eligible to receive covered major organ and tissue transplantation
including bone marrow, heart, heart/lung, lung, liver, kidney, and other organ transplantation. Bone grafts and
cornea transplantation services are not eligible for transplant reinsurance coverage but are eligible under the
regular inpatient reinsurance program. Refer to the AMPM for covered services for organ and tissue
transplants. Reinsurance coverage for transplants received at an AHCCCS contracted facility is paid at the
lesser of 85% of the AHCCCS contract amount for the transplantation services rendered or 85% of the
Contractor’s paid amount. Reinsurance coverage for transplants received at a non-AHCCCS contracted facility
is paid the lesser of 85% of the lowest AHCCCS contracted rate, for the same organ or tissue, or the Contractor
paid amount. The AHCCCS contracted transplantation rates may be found on the AHCCCS website. When a
member is referred to a transplant facility for an AHCCCS-covered organ transplant, the Contractor shall
notify AHCCCS, Division of Health Care Management, Medical Management Unit.

Option 1 and Option 2 Transplant Services: Reinsurance coverage for State Only Option 1 and Option 2
members (as described in Section D, Paragraph 2, Eligibility Categories) for transplants received at an
AHCCCS contracted facility is paid at the lesser of 100% of the AHCCCS contract amount for the
transplantation services rendered, or the Contractor paid amount, less the transplant share of cost. For
transplants received at a facility not contracted with AHCCCS, payment is made at the lesser of 100% of the
lowest AHCCCS contracted amount for the transplantation services rendered, or the Contractor paid amount,
less the transplant share of cost. The AHCCCS contracted transplantation rates may be found on the AHCCCS
website. When a member is referred to a transplant facility for an AHCCCS-covered organ transplant, the
Contractor shall notify AHCCCS, Division of Health Care Management, Medical Management Unit as
specified in the AMPM Chapter 300, Policy 310 Attachments A and B, Extended Eligibility Process/Procedure
for Covered Solid Organ and Tissue Transplants.

Option 1 Non-transplant Reinsurance

All medically necessary covered services provided to Option 1 members, unrelated to the transplant, shall be
eligible for reimbursement, with no deductible, at 100% of the Contractor’s paid amount based on adjudicated
encounters.

Other

For all reinsurance case types other than transplants, the Contractor will be reimbursed 100% for all medically
necessary covered expenses provided in a contract year, after the Contractor paid amount in the reinsurance
case reaches $650,000. It is the responsibility of the Contractor to notify AHCCCS, Division of Health Care
Management, Reinsurance Supervisor, once a reinsurance case reaches $650,000. The Contractor is required to
split encounters as necessary once the reinsurance case reaches $650,000. Failure to notify AHCCCS or failure
to split and adjudicate encounters appropriately within 15 months from the end date or service will disqualify
the related encounters for 100% reimbursement consideration.

Encounter Submission and Payments for Reinsurance

a) Encounter Submission: All reinsurance associated encounters must reach a clean claim status within
fifteen months from the end date of service, or date of eligibility posting, whichever is later. Encounters for
reinsurance claims that have passed the fifteen month deadline and are being adjusted due to a claim dispute or
hearing decision must be submitted and pass all encounter and reinsurance edits within 90 calendar days of the
date of the claim dispute decision or hearing decision, or Director’s decision, whichever is applicable. Failure
to submit the encounter within this timeframe will result in the loss of any related reinsurance dollars.

The Contractor must void encounters for any claims that are recouped in full. For recoupments that result in a
reduced claim value or any adjustments that result in an increased claim value, replacement encounters must be
submitted. For replacement encounters resulting in an increased claim value, the replacement encounter must
reach adjudicated status within 15 months of end date of service to receive additional reinsurance benefits.
The Contractor should refer to Section D, Paragraph 65, Encounter Data Reporting, for encounter reporting
requirements.

b) Payment of Inpatient and Catastrophic Reinsurance Cases: AHCCCS will reimburse a Contractor for
costs incurred in excess of the applicable deductible level, subject to coinsurance percentages and
Medicare/TPL payment, less any applicable quick pay discounts, slow payment penalties and interest.
Amounts in excess of the deductible level shall be paid based upon costs paid by the Contractor, minus the
coinsurance and Medicare/TPL payment, unless the costs are paid under a subcapitated arrangement. In
subcapitated arrangements, the Administration shall base reimbursement of reinsurance encounters on the
lower of the AHCCCS allowed amount or the reported health plan paid amount, minus the coinsurance and
Medicare/TPL payment and applicable quick pay discounts, slow payment penalties and interest.

When a member with an annual enrollment choice changes Contractors within a contract year, for reinsurance
purposes, all eligible inpatient costs, nursing facility costs and inpatient psychiatric costs incurred for that
member do not follow the member to the receiving Contractor. Encounters from the Contractor the member is
leaving (for dates of service within the current contract year) will not be applied toward the receiving
Contractor’s deductible level. For further details regarding this policy and other reinsurance policies refer to
the AHCCCS Reinsurance Processing Manual.

c) Payment of Transplant Reinsurance Cases: Reinsurance benefits are based upon the lower of the
AHCCCS contract amount or the Contractor’s paid amount, subject to coinsurance percentages. The
Contractor is required to submit all supporting encounters for transplant services. Reinsurance payments will
be linked to transplant encounter submissions. In order to receive reinsurance payment for transplant stages,
billed amounts and health plan paid amounts for adjudicated encounters must agree with related claims and/or
invoices. Timeliness for each stage payment will be calculated based on the latest adjudication date for the
complete set of encounters related to the stage. Please refer to the AHCCCS Reinsurance Processing Manual
for the appropriate billing of transplant services.

Reinsurance Audits

Pre-Audit: Any medical audits on reinsurance cases will be conducted on a statistically significant random
sample selected based on utilization trends. The Division of Health Care Management will select reinsurance
cases based on encounter data received during the contract year to assure timeliness of the audit process. The
Contractor will be notified of the documentation required for the medical audit. For closed contracts, a 100%
audit may be conducted.

Audit: AHCCCS will give the Contractor at least 45 days advance notice of any audit. The Contractor shall
have all requested medical records and financial documentation available to the nurse auditors. Any
documents not requested in advance by AHCCCS shall be made available upon request of the Audit Team
during the course of the audit. The Contractor representative shall be available to the Audit Team at all times
during AHCCCS audit activities. If an audit should be conducted on-site, the Contractor shall provide the
Audit Team with workspace, access to a telephone, electrical outlets and privacy for conferences.
Audits may be completed without an on-site visit. For these audits, the Contractor will be asked to send the
required documentation to AHCCCS. The documentation will then be reviewed by AHCCCS.

Audit Considerations: Reinsurance consideration will be given to inpatient facility contracts and hearing
decisions rendered by the Office of Legal Assistance. Pre-hearing and/or hearing penalties discoverable during
the review process will not be reimbursed under reinsurance.

Per diem rates may be paid for nursing facility and rehabilitation services provided the services are rendered
within 30 days of an acute hospital stay, including room and board, provided in lieu of hospitalization for up to
90 days in any contract year. The services rendered in these sub-acute settings must be of an acute nature and,
in the case of rehabilitative or restorative services, steady progress must be documented in the medical record.

Audit Determinations: The Contractor will be furnished a copy of the Reinsurance Post-Audit Results letter
approximately 45 days after the audit and given an opportunity to comment and provide additional medical or
financial documentation on any audit findings. AHCCCS may limit reinsurance reimbursement to a lower or
alternative level of care if the Director or designee determines that the less costly alternative could and should
have been used by the Contractor. A recoupment of reinsurance reimbursements made to the Contractor may
occur based on the results of the medical audit.

A Contractor whose reinsurance case is reduced or denied shall be notified in writing by AHCCCS and will be
informed of rationale for reduction or denial determination and the applicable grievance and appeal process
available.

58. COORDINATION OF BENEFITS

Pursuant to federal and state law, AHCCCS is the payer of last resort except under limited situations. This means
AHCCCS shall be used as a source of payment for covered services only after all other sources of payment have
been exhausted. The Contractor shall coordinate benefits in accordance with 42 CFR 433.135 et seq., ARS 36-
2903, and A.A.C. R9-22-1001 et seq. so that costs for services otherwise payable by the Contractor are cost
avoided or recovered from a liable party. The term “State” shall be interpreted to mean “Contractor” for purposes
of complying with the federal regulations referenced above. The Contractor may require subcontractors to be
responsible for coordination of benefits for services provided pursuant to this contract.

The two methods used in the coordination of benefits are cost avoidance and post payment recovery. The
Contractor shall use these methods as described in A.A.C. R9-22-1001 et seq. and federal and state law. See also
Section D, Paragraph 60, Medicare Services and Cost Sharing.

Cost Avoidance: The Contractor shall take reasonable measures to determine all legally liable parties. This
refers to any individual, entity or program that is or may be liable to pay all or part of the expenditures for
covered services. The Contractor shall cost-avoid a claim if it has established the probable existence of a liable
party at the time the claim is filed. Establishing liability takes place when the Contractor receives confirmation
that another party is, by statute, contract, or agreement, legally responsible for the payment of a claim for a
healthcare item or service delivered to a member. If the probable existence of a party’s liability cannot be
established the Contractor must adjudicate the claim. The Contractor must then utilize post payment recovery
which is described in further detail below. If the Administration determines that the Contractor is not actively
engaged in cost avoidance activities the Contractor shall be subject to sanctions in an amount not less than
three times the amount that could have been cost avoided.

The Contractor shall not deny a claim for untimeliness if the untimely claim submission results from a
provider’s efforts to determine the extent of liability.
If a third party insurer other than Medicare requires the member to pay any copayment, coinsurance or
deductible, the Contractor is responsible for making these payments, even if the services are provided outside
of the Contractor network. The Contractor is not responsible for paying coinsurance and deductibles that are
in excess of what the Contractor would have paid for the entire service per a written contract with the provider
performing the service, or the AHCCCS FFS payment equivalent when no contract exists. If the Contractor
refers the member for services to a third-party insurer, other than Medicare, and the insurer requires payment
in advance of all copaycopayments, coinsurance and deductibles, the Contractor must make such payments in
advance.

Members with CRS condition: A member with private insurance or Medicare coverage is not required to utilize
CRSA. This includes members with Medicare whether they are enrolled in Medicare FFS or a Medicare
Managed Care Plan. If the member uses the private insurance network for a CRS-covered condition, the
Contractor is responsible for all applicable deductibles and copayments. However, if the member has
Medicare coverage, the AHCCCS Policy 201- Medicare Cost Sharing for Members in Traditional Fee for
Service Medicare and Policy 202 - Medicare Cost Sharing for Members in Medicare Managed Care Plans
shall apply. When the private insurance or Medicare is exhausted, or certain annual or lifetime limits are
reached with respect to CRS-covered conditions, the Contractor shall refer the member to CRSA for
determination for CRS services. If the member with private insurance or Medicare chooses to enroll with CRS,
CRS becomes the secondary payer responsible for all applicable deductibles and copayments. The Contractor
is not responsible to provide services in instances when the CRS-eligible member, who has no primary
insurance or Medicare, refuses to receive CRS-covered services through the CRS Program. If the Contractor
becomes aware that a member with a CRS-covered condition refuses to participate in the CRS application
process or refuses to receive services through the CRS Program, the member may be billed by the provider in
accordance with AHCCCS regulations regarding billing for unauthorized services.

Post-payment Recoveries: Post-payment recovery is necessary in cases where the Contractor has not
established the probable existence of a liable party at the time services were rendered or paid for, or was
unable to cost-avoid.The following sections set forth requirements for Contractor recovery actions including
recoupment activities, other recoveries and total plan case requirements.

Recoupments: The Contractor must follow the protocols established in the ACOM Recoupment Request Policy.
The Contractor must void encounters for claims that are recouped in full. For recoupments that result in an
adjusted claim value, the Contractor must submit replacement encounters.

Other Recoveries: The Contractor shall identify the existence of potentially liable parties through the use of
trauma code edits, utilizing diagnostic codes 799.9 and 800 to 999.9 (excluding code 994.6), and other
procedures. The Contractor shall not pursue recovery in the following circumstances, unless the case has been
referred to the Contractor by AHCCCS or AHCCCS’s authorized representative:

Uninsured/underinsured motorist insurance                  Restitution Recovery
First-and third-party liability insurance                            Worker’s Compensation
Tortfeasors, including casualty                                         Estate Recovery
Special Treatment Trust Recovery

Upon identification of any of the above situations, the Contractor shall promptly report cases to AHCCCS’s
authorized representative for determination of a “total plan” case. The Contractor is responsible for all
recovery actions for a “total plan” case. A total plan case is a case where payments for services rendered to the
member are exclusively the responsibility of the Contractor; no reinsurance or fee-for-service payments are
involved. By contrast, a “joint” case is one where fee-for-service payments and/or reinsurance payments are
involved. In joint cases, the Contractor shall notify AHCCCS’s authorized representative within 10 business
days of the identification of a liable party. Failure to report these cases may result in one of the remedies
specified in Section D, Paragraph 72, Sanctions. The Contractor shall cooperate with AHCCCS’s authorized
representative in all collection efforts.

Total Plan Case Requirements: In “total plan” cases, the Contractor is responsible for performing all research,
investigation, the mandatory filing of initial liens on cases that exceed $250, lien amendments, lien releases,
and payment of other related costs in accordance with A.R.S. 36-2915 and A.R.S. 36-2916. The Contractor
shall use the AHCCCS-approved casualty recovery correspondence when filing liens and when corresponding
to others in regard to casualty recovery. The Contractor may retain up to 100% of its recovery collections if all
of the following conditions exist:

                a. Total collections received do not exceed the total amount of the Contractor’s financial
                   liability for the member;
                b. There are no payments made by AHCCCS related to fee-for-service, reinsurance or
                   administrative costs (i.e., lien filing , etc.); and
                c. Such recovery is not prohibited by state or Federal law.

Prior to negotiating a settlement on a total plan case, the Contractor shall notify AHCCCS to ensure that there
is no reinsurance or fee-for-service payment that has been made by AHCCCS. Failure to report these cases
prior to negotiating a settlement amount may result in one of the remedies specified in Section D, Paragraph
72, Sanctions.

Total Plan Cases: the Contractor shall report settlement information to AHCCCS, utilizing the AHCCCS-approved
casualty recovery Notification of Settlement form, within 10 business days from the settlement date.
Failure to report these cases may result in one of the remedies specified in Section D, Paragraph 72, Sanctions.

Joint Cases: AHCCCS’s authorized representative is responsible for performing all research, investigation and
payment of lien-related costs, subsequent to the referral of any and all relevant case information to AHCCCS’s
authorized representative by the Contractor. In joint cases, AHCCCS’s authorized representative is also
responsible for negotiating and acting in the best interest of all parties to obtain a reasonable settlement in joint
cases and may compromise a settlement in order to maximize overall reimbursement, net of legal and other
costs. The Contractor will be responsible for their prorated share of the contingency fee. The Contractor’s
share of the contingency fee will be deducted from the settlement proceeds prior to AHCCCS remitting the
settlement to the Contractor.

Other Reporting Requirements: If a Contractor discovers the probable existence of a liable party that is not
known to AHCCCS, the Contractor must report the information to the AHCCCS contracted vendor not later
than 10 days from the date of discovery. In addition, the Contractor shall notify AHCCCS of any known
changes in coverage within deadlines and in a format prescribed by AHCCCS in the Technical Interface
Guidelines. Failure to report these cases may result in one of the remedies specified in Section D, Paragraph
72, Sanctions.

At AHCCCS’s request, the Contractor shall provide an electronic extract of the Casualty cases, including open
and closed cases. Data elements include, but are not limited to: the member’s first and last name; AHCCCS
ID; date of incident; claimed amount; paid/recovered amount; and case status. The AHCCCS TPL Section
shall provide the format and reporting schedule for this information to the Contractor. AHCCCS will provide
the Contractor with a file of all other coverage information, for the purpose of updating the Contractor’s files,
as decribed in the Technical Interface Guidelines.

Title XXI (KidsCare), HIFA Parents, BCCTP, SOBRA Family Planning and SSDI-TMC: Eligibility for
KidsCare, HIFA Parents, BCCTP, SOBRA Family Planning and SSDI-TMC benefits require that the
applicant/member not be enrolled with any other creditable health insurance plan. If the Contractor becomes
aware of any such coverage, the Contractor shall notify AHCCCS immediately. AHCCCS will determine if the
other insurance meets the creditable coverage definition in A.R.S. 36-2982(G).

Contract Termination: Upon termination of this contract, the Contractor will complete the existing third party
liability cases or make any necessary arrangements to transfer the cases to AHCCCS’s authorized TPL
representative.

59. COPAYMENTS

Most of the AHCCCS members remain exempt from copayments while others are subject to an optional
copayment. Those populations exempt or subject to optional copayments may not be denied services for the
inability to pay the copayment [42 CFR 438.108]. Any copayments collected shall belong to the Contractor or
its subcontractors. Attachment K, Copayments, provides detail of the populations and their related copayment
structure.

60. MEDICARE SERVICES AND COST SHARING

AHCCCS has members enrolled who are eligible for both Medicaid and Medicare. These members are
referred to as “dual eligibles”. Generally, the Contractor is responsible for payment of Medicare coinsurance
and/or deductibles for covered services provided to dual eligible members. However, there are different cost
sharing responsibilities that apply to dual eligible members based on a variety of factors. Unless prior
approval is obtained from AHCCCS, the Contractor must limit their cost sharing responsibility according to
the ACOM Medicare Cost Sharing Policy. The Contractor shall have no cost sharing obligation if the
Medicare payment exceeds what the Contractor would have paid for the same service of a non-Medicare
member. Please refer to Section D, Paragraph 10, Scope of Services, for information regarding prescription
medication for Medicare Part D.

When a person with Medicare who is also eligible for Medicaid (dual eligible) is in a medical institution that is
funded by Medicaid for a full calendar month, the dual eligible person is not required to pay copayments for
their Medicare covered prescription medications for the remainder of the calendar year. To ensure appropriate
information is communicated for these members to the Centers for Medicare and Medicaid Services (CMS),
the Contractor must, using the approved form, notify the AHCCCS Member Database Management
Administration (MDMA), via fax at (602) 253-4807 as soon as it determines that a dual eligible person is
expected to be in a medical institution that is funded by Medicaid for a full calendar month, regardless of the
status of the dual eligible person’s Medicare lifetime or annual benefits. This includes:
                a. Members who have Medicare part “B” only;
                b. Members who have used their Medicare part “A” life time inpatient benefit;
                c. Members who are in a continuous placement in a single medical institution or any
                   combination of continuous placements in a medical institution.

For purposes of the medical institution notification, medical institutions are defined as acute hospitals,
psychiatric hospital – Non IMD, psychiatric hospital – IMD, residential treatment center – Non IMD,
residential treatment center – IMD, skilled nursing facilities, and Intermediate Care Facilities for the Mentally
Retarded.

61. MARKETING

The Contractor shall submit all proposed marketing and outreach materials and events that will involve the
general public to the AHCCCS Marketing Committee for prior approval in accordance with the ACOM
Marketing Outreach and Incentives Policy [42 CFR 438.104]. The Contractor must have signed contracts with
PCPs, specialists, dentists, and pharmacies in order for them to be included in marketing materials. Marketing
materials that have received prior approval must be resubmitted to the Division of Health Care Management
every two years for re-approval.

62. CORPORATE COMPLIANCE

In accordance with A.R.S. Section 36-2918.01, and AHCCCS Contractor Operation Manual (ACOM), Chapter
100, the Contractor and its subcontractors and providers are required to immediately notify the AHCCCS
Office of Program Integrity (OPI) regarding any suspected fraud and report the information within 10 business
days of discovery by completing the confidential AHCCCS Referral for Preliminary Investigation form for any
and all suspected fraud or abuse [42 CFR 455.1(a)(1)] This shall include acts of suspected fraud or abuse that
were resolved internally but involved AHCCCS members or funds.

As stated in A.R.S. Section 13-2310, incorporated herein by reference, any person who knowingly obtains any
benefit by means of false or fraudulent pretenses, representations, promises, or material omissions is guilty of a
Class 2 felony.

The Contractor agrees to permit and cooperate with any onsite review. A review by the AHCCCS Office of
Program Integrity may be conducted without notice and for the purpose of ensuring program compliance. The
Contractor also agrees to respond to electronic, telephonic or written requests for information within the
timeframe specified by AHCCCS Administration. The Contractor agrees to provide documents, including
original documents, to representatives of the Office of Program Integrity upon request. The OPI shall allow a
reasonable time for the Contractor to copy the requested documents, not to exceed 20 business days from the
date of the OPI request.

The Contractor must have a mandatory compliance program, supported by other administrative procedures,
that is designed to guard against fraud and abuse [42 CFR 438.608(a) and (b)] The Contractor shall have
written criteria for selecting a Compliance Officer and job description that clearly outlines the responsibilities
and authority of the position. The Compliance Officer shall have the authority to assess records and
independently refer suspected member fraud, provider fraud and member abuse cases to AHCCCS, Office of
Program Integrity or other duly authorized enforcement agencies [42 CFR 455.17].

The compliance program shall be designed to both prevent and detect suspected fraud or abuse. The
compliance program must include:

1. The written designation of a compliance officer and a compliance committee that are accountable to
   the Contractor’s top management.
2. The Compliance Officer must be an onsite management official who reports directly to top
   management.
3. Effective training and education.
4. Effective lines of communication between the compliance officer and the organization’s employees.
5. Enforcement of standards through well-publicized disciplinary guidelines.
6. Provision for internal monitoring and auditing.
7. Provision for prompt response to problems detected.
8. Written policies, procedures, and standards of conduct that articulate the organization’s commitment
   to comply with all applicable Federal and state standards.
9. A Compliance Committee which shall be made up of, at a minimum, the Compliance Officer, a
   budgetary official and other executive officials with decision making authority. The Compliance
   Committee will assist the Compliance Officer in monitoring, reviewing and assessing the
   effectiveness of the compliance program and timeliness of reporting.
10. Pursuant to the Deficit Reduction Act of 2005 (DRA), the Contractor, as a condition for receiving
   payments shall establish written policies for employees detailing:
                a. The federal False Claims Act provisions;
                b. The administrative remedies for false claims and statements;
                c. Any state laws relating to civil or criminal penalties for false claims and statements;
                d. The whistleblower protections under such laws.
11. The Contractor must establish a process for training existing staff and new hires on the compliance
   program and on the items in section 10. All training must be conducted in such a manner that can be
   verified by AHCCCS.
12. The Contractor must require, through documented policies and subsequent contract amendments, that
   providers train their staff on the following aspects of the Federal False Claims Act provisions:
                a. The administrative remedies for false claims and statements;
                b. Any state laws relating to civil or criminal penalties for false claims and statements;
                c. The whistleblower protections under such laws.

The Contractor is required to research potential overpayments identified by the AHCCCS Office of Program
Integrity [42 CFR 455.1(a)]. After conducting a cost benefit analysis to determine if such action is warranted,
the Contractor should attempt to recover any overpayments identified. The AHCCCS Office of Program
Integrity shall be advised of the final disposition of the research and advised of actions, if any, taken by the
Contractor.

63. RECORDS RETENTION

The Contractor shall maintain records relating to covered services and expenditures including reports to

AHCCCS and documentation used in the preparation of reports to AHCCCS. The Contractor shall comply with
all specifications for record keeping established by AHCCCS. All records shall be maintained to the extent and
in such detail as required by AHCCCS Rules and policies. Records shall include but not be limited to financial
statements, records relating to the quality of care, medical records, prescription files and other records specified
by AHCCCS.

The Contractor agrees to make available, at all reasonable times during the term of this contract, any of its records
for inspection, audit or reproduction by any authorized representative of AHCCCS, State or Federal government.
The Contractor shall be responsible for any costs associated with the reproduction of requested information.
The Contractor shall preserve and make available all records for a period of five years from the date of final
payment under this contract. HIPAA related documents must be retained for a period of six years per 45 CFR
164.530(j)(2).

If this contract is completely or partially terminated, the records relating to the work terminated shall be preserved
and made available for a period of five years from the date of any such termination. Records which relate to
grievances, disputes, litigation or the settlement of claims arising out of the performance of this contract, or costs
and expenses of this contract to which exception has been taken by AHCCCS, shall be retained by the Contractor
for a period of five years after the date of final disposition or resolution thereof.

64. DATA EXCHANGE REQUIREMENTS

The Contractor is authorized to exchange data with AHCCCS relating to the information requirements of this
contract and as required to support the data elements to be provided to AHCCCS in the formats prescribed by
AHCCCS, which include formats prescribed by the Health Insurance Portability and Accountability Act
(HIPAA). Details for the formats may be found in the HIPAA Transaction Companion Documents & Trading
Partner Agreements, the AHCCCS Encounter Reporting User Manual and in the AHCCCS Technical Interface
Guidelines, available on the AHCCCS website.

The information so recorded and submitted to AHCCCS shall be in accordance with all procedures, policies,
rules, or statutes in effect during the term of this contract. If any of these procedures, policies, rules, regulations
or statutes are hereinafter changed, both parties agree to conform to these changes following appropriate
notification by AHCCCS.

The Contractor is responsible for any incorrect data, delayed submission or payment (to the Contractor or its
subcontractors), and/or penalty applied due to any error, omission, deletion, or erroneous insert caused by
Contractor-submitted data. Any data that does not meet the standards required by AHCCCS shall not be accepted
by AHCCCS.

The Contractor is responsible for identifying any inconsistencies immediately upon receipt of data from
AHCCCS. If any unreported inconsistencies are subsequently discovered, the Contractor shall be responsible for
the necessary adjustments to correct its records at its own expense.

The Contractor shall accept from AHCCCS original evidence of eligibility and enrollment in a form appropriate
for electronic data exchange. Upon request by AHCCCS, the Contractor shall provide to AHCCCS updated
date-sensitive PCP assignments in a form appropriate for electronic data exchange.

The Contractor shall be provided with a Contractor-specific security code for use in all data transmissions made
in accordance with contract requirements. Each data transmission by the Contractor shall include the Contractor's
security code. The Contractor agrees that by use of its security code, it certifies that any data transmitted is
accurate and truthful, to the best of the Contractor's Chief Executive Officer, Chief Financial Officer or
designee’s knowledge [42 CFR 438.606]. The Contractor further agrees to indemnify and hold harmless the
State of Arizona and AHCCCS from any and all claims or liabilities, including but not limited to consequential
damages, reimbursements or erroneous billings and reimbursements of attorney fees incurred as a consequence of
any error, omission, deletion or erroneous insert caused by the Contractor in the submitted input data. Neither the
State of Arizona nor AHCCCS shall be responsible for any incorrect or delayed payment to the Contractor’s
AHCCCS services providers (subcontractors) resulting from such error, omission, deletion, or erroneous input
data caused by the Contractor in the submission of AHCCCS claims.

The costs of software changes are included in administrative costs paid to the Contractor. There is no separate
payment for software changes. A PMMIS systems contact will be assigned after contract award. AHCCCS will
work with the contractor as they evaluate Electronic Data Interchange options.

Health Insurance Portability and Accountability Act (HIPAA): The Contractor shall comply with the
Administrative Simplification requirements of Subpart F of the HIPAA of 1996 (Public Law 107-191, 110
Statutes 1936) and all Federal regulations implementing that Subpart that are applicable to the operations of the
Contractor by the dates required by the implementing Federal regulations as well as all subsequent requirements
and regulations as published.

65. ENCOUNTER DATA REPORTING

Encounter Submissions

The accurate and timely reporting of encounter data is crucial to the success of the AHCCCS program. AHCCCS
uses encounter data to pay reinsurance benefits, set fee-for-service and capitation rates, determine reconciliation
amounts, determine disproportionate share payments to hospitals, and to determine compliance with performance
standards. The Contractor shall submit encounter data to AHCCCS for all services for which the Contractor
incurred a financial liability and claims for services eligible for processing by the Contractor where no financial
liability was incurred, including services provided during prior period coverage. This requirement is a condition
of the CMS grant award [42 CFR 438.242(b)(1)].

A Contractor shall prepare, review, verify, certify, and submit, encounters for consideration to AHCCCS.
Upon submission, the Contractor certifies that the services listed were actually rendered [42 CFR 455.1(a)(2)].
The encounters must be submitted in the format prescribed by AHCCCS.

Encounter data must be provided to AHCCCS as outlined in the HIPAA Transaction Companion Documents &
Trading Partner Agreements and the AHCCCS Encounter Reporting User Manual and should be received by
AHCCCS no later than 240 days after the end of the month in which the service was rendered, or the effective
date of the enrollment with the Contractor, whichever date is later. Refer to Paragraph 64, Data Exchange
Requirements, for further information.

The Contractor will be assessed sanctions for noncompliance with encounter submission requirements.

Encounter Reporting

An Encounter Submission Tracking Report (ESTR) must be maintained and made available to AHCCCS upon
request. The Tracking Report’s purpose is to link each claim to an adjudicated or pended encounter returned to
the Contractor. Further information regarding the Encounter Submission Tracking Report may be found in the
AHCCCS Encounter Reporting User Manual.

In addition to the Encounter Submission Tracking Report, the Contractor must maintain and review a report
which reconciles financial fields of a claim (health plan paid, billed amount, health plan allowed, etc.) with the
financial fields of adjudicated encounters. This report shall be available to AHCCCS upon request.

At least twice each month, AHCCCS provides the Contractor with full replacement files containing provider and
medical coding information. These files should be used by the Contractor to ensure accurate Encounter
Reporting. Refer to the AHCCCS Encounter Reporting User Manual for further information.

Pended Encounter Corrections

The Contractor must resolve all pended encounters within 120 days of the original processing date. Sanctions
will be imposed according to the following schedule for each encounter pended for more than 120 days unless
the pend is due to AHCCCS error:

0 – 120 days          121 – 180 days      181 – 240 days      241 – 360 days      361 + days
No sanction          $ 5 per month        $ 10 per month      $ 15 per month      $ 20 per month

“AHCCCS error” is defined as a pended encounter, which (1) AHCCCS acknowledges to be the result of its
own error, and/or (2) requires a change to the system programming, an update to the database reference table,
or further research by AHCCCS. AHCCCS reserves the right to adjust the sanction amount if circumstances
warrant. Upon completion of any changes to the AHCCCS system programming or updates to the database
reference tables, sanctions may be imposed from date of resolution. AHCCCS reserves the right to adjust the
sanction amount if circumstances warrant.

Before imposing sanctions, AHCCCS will notify the Contractor, in writing, of the total number of sanctionable
encounters pended more than 120 days. Pended encounters shall not be voided by the Contractor as a means
of avoiding sanctions for failure to correct encounters within 120 days. The Contractor shall document voided
encounters and shall maintain a record of the voided Claim Reference Number(s) (CRN) with appropriate
reasons indicated. The Contractor shall, upon request, make this documentation available to AHCCCS for
review. Refer to the AHCCCS Encounter Reporting User Manual for further information.

Encounter Corrections

Contractors are required to submit replacement or voided encounters in the event that claims are subsequently

corrected following the initial encounter submission as described below. This includes corrections as a result
of inaccuracies identified by fraud and abuse audits or investigations conducted by AHCCCS or the
Contractor. The Contractor must void encounters for claims that are recouped in full. For recoupments that
result in a reduced claim value or adjustments that result in an increased claim value, replacement encounters
must be submitted. For those recoupments requiring approval from AHCCCS, replacement encounters must be
submitted within 120 days of the recoupment approval from AHCCCS. Refer to the AHCCCS Encounter
Reporting User Manual for instructions regarding the submission of corrected encounters.

Encounter Validation Studies

Per the CMS requirement, AHCCCS will conduct encounter validation studies of the Contractor’s encounter
submissions, and sanction the Contractor for noncompliance with encounter submission requirements. The
purpose of encounter validation studies is to compare recorded utilization information from a medical record or
other source with the Contractor’s submitted encounter data. Any and all covered services may be validated as
part of these studies. Encounter validation studies will be conducted at least yearly.

AHCCCS may revise study methodology, timelines, and sanction amounts based on agency review or as a
result of consultations with CMS. The Contractor will be notified in writing of any significant change in study
methodology.

AHCCCS will notify the Contractor in writing of the sanction amounts and of the selected data needed for
encounter validation studies. The Contractor will have 90 days to submit the requested data to AHCCCS. In
the case of medical records requests, the Contractor’s failure to provide AHCCCS with the records requested
within 90 days may result in a sanction of $1,000 per missing medical record. If AHCCCS does not receive a
sufficient number of medical records from the Contractor to select a statistically valid sample for a study, the
Contractor may be sanctioned up to 5% of its annual capitation payment.

The criteria used in encounter validation studies may include timeliness, correctness, and omission of
encounters. Refer to the AHCCCS Data Validation User Manual for further information.

AHCCCS may also perform special reviews of encounter data, such as comparing encounter reports to the
Contractor’s claims files. Any findings of incomplete or inaccurate encounter data may result in the imposition of
sanctions or requirement of a corrective action plan.

66. ENROLLMENT AND CAPITATION TRANSACTION UPDATES

AHCCCS produces daily enrollment transaction updates identifying new members and changes to existing
members' demographic, eligibility and enrollment data, which the Contractor shall use to update its member
records. The daily enrollment transaction update, that is run immediately prior to the monthly enrollment and
capitation transaction, is referred to as the "last daily" and will contain all rate code changes made for the
prospective month, as well as any new enrollments and disenrollments as of the 1st of the prospective month.
AHCCCS also produces a daily Manual Payment Transaction, which identifies enrollment or disenrollment
activity that was not included on the daily enrollment transaction update due to internal edits. The Contractor
shall use the Manual Payment Transaction in addition to the daily enrollment transaction update to update its
member records.

On a monthly basis AHCCCS provides the Contractor with an electronic file of all Acute members who must
complete a review of their eligibility in order to maintain enrollment with the Contractor. AHCCCS strongly
encourages the Contractor to utilize this file to support member retention efforts.

A weekly capitation transaction will be produced to provide the Contractor with member-level capitation
payment information. This file will show changes to the prospective capitation payments, as sent in the monthly
file, resulting from enrollment changes that occur after the monthly file is produced. This file will also identify
mass adjustments to and/or manual capitation payments that occurred at AHCCCS after the monthly file is
produced.

The monthly enrollment and monthly capitation transaction updates are generally produced two days before the
end of every month. The update will identify the total active population for the Contractor as of the first day of
the next month. These updates contain the information used by AHCCCS to produce the monthly capitation
payment for the next month. The Contractor must reconcile their member files with the AHCCCS monthly
update. After reconciling the monthly update information, the Contractor will record the results of the
reconciliation, which will be made available upon request, and will resume posting daily updates beginning with
the last two days of the month. The last two daily updates are different from the regular daily updates in that they
pay and/or recoup capitation into the next month. If the Contractor detects an error through the monthly update
process, the Contractor shall notify AHCCCS, Information Services Division.

Refer to Section D, Paragraph 64, Data Exchange Requirements, for further information.

67. PERIODIC REPORT REQUIREMENTS

AHCCCS, under the terms and conditions of its CMS grant award, requires periodic reports and other
information from the Contractor. The submission of late, inaccurate, or otherwise incomplete reports shall
constitute failure to report subject to the penalty provisions described in Section D, Paragraph 72, Sanctions and
Attachement F, Periodic Report Requirements.

Standards applied for determining adequacy of required reports are as follows [42 CFR 438.242(b)(2)]:

                a. Timeliness: Reports or other required data shall be received on or before scheduled due dates.
                b. Accuracy: Reports or other required data shall be prepared in strict conformity with appropriate
                   authoritative sources and/or AHCCCS defined standards.
                c. Completeness: All required information shall be fully disclosed in a manner that is both responsive
                   and pertinent to report intent with no material omissions.

The Contractor shall comply with all reporting requirements contained in this contract. AHCCCS requirements
regarding reports, report content and frequency of submission of reports are subject to change at any time during
the term of the contract. The Contractor shall comply with all changes specified by AHCCCS. The Contractor
shall be responsible for continued reporting beyond the term of the contract.

68. REQUESTS FOR INFORMATION

AHCCCS may, at any time during the term of this contract, request financial or other information from the
Contractor. Responses shall fully disclose all financial or other information requested. Information may be
designated as confidential but may not be withheld from AHCCCS as proprietary. Information designated as
confidential may not be disclosed by AHCCCS without the prior written consent of the Contractor except as
required by law. Upon receipt of such written requests for information, the Contractor shall provide complete
information as requested no later than 30 days after the receipt of the request unless otherwise specified in the
request itself.

69. DISSEMINATION OF INFORMATION

Upon request, the Contractor shall assist AHCCCS in the dissemination of information prepared by AHCCCS or
the Federal government to its members. The cost of such dissemination shall be borne by the Contractor. All
advertisements, publications and printed materials that are produced by the Contractor and refer to covered
services shall state that such services are funded under contract with AHCCCS.

70. OPERATIONAL AND FINANCIAL READINESS REVIEWS

AHCCCS may conduct Operational and Financial Readiness Reviews on the Contractor and will, subject to the
availability of resources, provide technical assistance as appropriate. The Readiness Review will be conducted
prior to the start of business. The purpose of a Readiness Review is to assess Contractor’s readiness and ability to
provide covered services to members at the start of the contract. The Contractor will be permitted to commence
operations only if the Readiness Review factors are met to AHCCCS's satisfaction.

71. OPERATIONAL AND FINANCIAL REVIEWS

In accordance with CMS requirements, AHCCCS, or an independent external agent, will conduct annual
Operational and Financial Reviews for the purpose of (but not limited to) identifying best practices and ensuring
operational and financial program compliance [42 CFR 438.204]. The reviews will identify areas where
improvements can be made and make recommendations accordingly, monitor the Contractor's progress towards
implementing mandated programs and provide the Contractor with technical assistance if necessary. The
Contractor shall comply with all other medical audit provisions as required by AHCCCS Rule R9-22-521.

The type and duration of the Operational and Financial Review will be solely at the discretion of AHCCCS.
Except in cases where advance notice is not possible or advance notice may render the review less useful,
AHCCCS will give the Contractor at least three weeks advance notice of the date of the on-site review. In
preparation for the on-site Operational and Financial Reviews, the Contractor shall cooperate fully with
AHCCCS and the AHCCCS Review Team by forwarding in advance such policies, procedures, job descriptions,
contracts, logs and other information that AHCCCS may request. The Contractor shall have all requested
medical records on-site. Any documents, not requested in advance by AHCCCS, shall be made available upon
request of the Review Team during the course of the review. The Contractor personnel, as identified in advance,
shall be available to the Review Team at all times during AHCCCS on-site review activities. While on-site, the
Contractor shall provide the Review Team with appropriate workspace, access to a telephone, electrical outlets,
internet access and privacy for conferences.

The Contractor will be furnished a draft copy of the Operational and Financial Review Report and given an
opportunity to comment on any review findings prior to AHCCCS publishing the final report. Operational and
Financial Review findings may be used in the scoring of subsequent bid proposals by that Contractor.
Recommendations, made by the Review Team to bring the Contractor into compliance with Federal, State,
AHCCCS, and/or contract requirements, must be implemented by the Contractor. AHCCCS may conduct a
follow-up Operational and Financial Review to determine the Contractor's progress in implementing
recommendations and achieving program compliance. Follow-up reviews may be conducted at any time after the
initial Operational and Financial Review.

The Contractor shall not distribute or otherwise make available the Operational and Financial Review Tool,
draft Operational and Financial Review Report nor final report to other AHCCCS Contractors.
AHCCCS may conduct an Operational and Financial Review in the event the Contractor undergoes a merger,
reorganization, has a change in ownership or makes changes in three or more key staff positions within a 12-
month period.

AHCCCS may request, at the expense of the Contractor, to conduct on-site reviews of functions performed at
out-of-state locations. AHCCCS will coordinate travel arrangements and accommodations with the Contractor.
In addition to the annual Operational and Financial Review AHCCCS may conduct unannounced site visits to
monitor contractual requirements and performance as needed.

72. SANCTIONS

AHCCCS may impose monetary sanctions, suspend, deny, refuse to renew, or terminate this contract or any
related subcontracts in accordance with AHCCCS Rules R9-22-606, ACOM Sanctions Policy and the terms of
this contract and applicable Federal or State law and regulations [42 CFR 422.208, 42 CFR 438.700, 702, 704
and 45 CFR 92.36(i)(1)]. Written notice will be provided to the Contractor specifying the sanction to be
imposed, the grounds for such sanction and either the length of suspension or the amount of capitation to be
withheld. The Contractor may dispute the decision to impose a sanction in accordance with the process outlined
in A.A.C. 9-34-401 et seq. Intermediate sanctions may be imposed, but are not limited to the following actions:

a. Substantial failure to provide medically necessary services that the Contractor is required to provide under
   the terms of this contract to its enrolled members.
b. Imposition of premiums or charges in excess of the amount allowed under the AHCCCS 1115 Waiver.
c. Discrimination among members on the basis of their health status of need for health care services.
d. Misrepresentation or falsification of information furnished to CMS or AHCCCS.
e. Misrepresentation or falsification of information furnished to an enrollee, potential enrollee, or provider.
f. Failure to comply with the requirement for physician incentive plan as delineated in Section D, Paragraph 42,
   Physician Incentives/Pay for Performance.
g. Distribution directly, or indirectly through any agent or independent Contractor, of marketing materials that
   have not been approved by AHCCCS or that contain false or materially misleading information.
h. Failure to meet AHCCCS Financial Viability Standards.
i. Material deficiencies in the Contractor’s provider network.
j. Failure to meet quality of care and quality management requirements.
k. Failure to meet AHCCCS encounter standards.
l. Violation of other applicable State or Federal laws or regulations.
m. Failure to fund accumulated deficit in a timely manner.
n. Failure to increase the Performance Bond in a timely manner.
o. Failure to comply with any provisions contained in this contract and all policies referenced in this contract.
p. Failure to report recovery cases as described in Section D, Paragraph 58, Coordination of Benefits.

AHCCCS may impose the following types of intermediate sanctions:

a. Civil monetary penalties
b. Appointment of temporary management for a Contractor as provided in 42 CFR 438.706 and
   A.R.S. §36-2903 (M).
c. Granting members the right to terminate enrollment without cause and notifying the affected members of
   their right to disenroll [42 CFR 438.702(a)(3)].
d. Suspension of all new enrollments, including auto assignments after the effective date of the sanction.
e. Suspension of payment for recipients enrolled after the effective date of the sanction until CMS or AHCCCS
   is satisfied that the reason for imposition of the sanction no longer exists and is not likely to recur.
f. Additional sanctions allowed under statue or regulation that address areas of noncompliance.

Cure Notice Process: Prior to the imposition of a sanction for non-compliance, AHCCCS may provide a
written cure notice to the Contractor regarding the details of the non-compliance. The cure notice will
specify the period of time during which the Contractor must bring its performance back into compliance
with contract requirements. If, at the end of the specified time period, the Contractor has complied with
the cure notice requirements, AHCCCS will take no further action. If, however, the Contractor has not
complied with the cure notice requirements, AHCCCS may proceed with the imposition of sanctions. Refer
to the ACOM Sanctions Policy for details.

Automatic Sanctions: AHCCCS will assess the sanctions listed in Attachment F, Periodic Reporting
Requirements on deliverables listed under DHCM Acute Care Operations, Clinical Quality Management and
Medical Management that are not received by 5:00 PM on the due date indicated. If the due date falls on a
weekend or a State Holiday, sanctions will be assessed on deliverables not received by 5:00 PM on the next
business day.

73. BUSINESS CONTINUITY AND RECOVERY PLAN

The Contractor shall adhere to all elements of the ACOM Business Continuity and Recovery Plan Policy. The
Contractor shall develop a Business Continuity and Recovery Plan to deal with unexpected events that may affect
its ability to adequately serve members. This plan shall, at a minimum, include planning and staff training for:

            • Electronic/telephonic failure at the Contractor's main place of business
                • Complete loss of use of the main site and satellite offices out of state
                • Loss of primary computer system/records
                • Communication between the Contractor and AHCCCS in the event of a business disruption
                • Periodic Testing

The Business Continuity and Recovery Plan shall be updated annually. The Contractor shall submit a summary
of the plan as specified in the ACOM Business Continuity and Recovery Plan Policy 15 days after the start of the
contract year. All key staff shall be trained and familiar with the Plan.

74. TECHNOLOGICAL ADVANCEMENT

The Contractor must have a website with links to the following information:

                1. Formulary
                2. Provider manual
                3. Member handbook
                4. Provider listing
                5. When available, Member and Provider Survey Results
                6. Performance Measure Results
                7. Prior Authorization criteria
                8. Evidence Based Medicine Guidelines

In addition to the above, the Contractor must include member related information, as described in the
Website section of the ACOM Member Information Policy and ACOM Provider Network Information
Policy, on its website.

The Contractor must be able to perform the following functions electronically:

                1. Provide Enrollment Verification in a HIPAA compliant 270/271 format
                2. Accept the Benefit Enrollment and Maintenance transaction (834 format)
                3. Accept the Payroll Deduction and Other Group Premium Payment for Insurance Products
                   transaction (820 format)
                4. Allow Claims inquiry and response in a HIPAA compliant 276/277 format
                5. Accept HIPAA compliant electronic claims transactions in the 837 format (See Section D,
                   Paragraph 38, Claims Payment/Health Information System)
                6. Generate HIPAA compliant electronic remittance in the 835 format (See Section D, Paragraph 38,
                   Claims Payment/Health Information System)
                7. Make Claims payments via electronic funds transfer (See Section D, Paragraph 38, Claims
                   Payment/Health Information System)
                8. Acceptance of Prior Authorization requests, in a HIPAA compliant 278 format, no later than
                   10/01/09. AHCCCS will work with Contractors to develop functionality requirements.

Use of Website: The Contractor is required to post their clinical performance indicators compared to
AHCCCS standard and statewide averages on their website. In addition, AHCCCS will post Contractor
performance indicators on its website.

Arizona Health-e Connection
In February of 2007, AHCCCS was awarded a CMS Transformation Grant of $11.7M to build a health
information exchange (HIE) and a web based suite of applications for accessing electronic health records
(EHR). The HIE will serve to provide real time patient health information and clinical care automation for
AHCCCS contracted health care providers, in accordance with the Governor’s executive order #2005-25 on
Arizona Health-e Connection Roadmap.

AHCCCS will develop a unified approach for AHCCCS Contractors to meet the goal of the executive order
and to connect AHCCCS, AHCCCS Contractors, ancillary subcontractors and registered providers into a
common web based electronic health information data exchange that will meet the standards established by
State and Federal governments. AHCCCS health plans and program Contractors will cooperate in assisting
AHCCCS with developing the Health-e project plan and shall implement required data exchange interfaces as
required to meet the goals of the Governor's executive order.

CMS will provide grants to state Medicaid agencies to support development of IT infrastructure and
applications to achieve the goal of health information data exchange. AHCCCS Contractors will be required
to:

                1) Encourage lab, pharmacy and ancillary subcontractors to develop common electronic
                    interfaces for the exchange of data using standards based transactions.

                2) AHCCCS may issue Minimum Subcontract language that will require subcontractors to
                    participate in the e-Health Initiative. The Contractor must amend all provider subcontracts to
                    include the amended Minimum Subcontract provisions within six (6) months of issuance.

                3) The Contractor will cooperate in passing on any AHCCCS professional fee or facility
                    reimbursement rate adjustments to primary care providers, nursing facility contractor,
                    hospitals and any other providers determined by AHCCCS to be eligible for reimbursement
                    for participation in the health information data exchange.

AHCCCS will continually work to enhance the functionality of the health information exchange, electronic
health records, electronic prescribing and web based applications. The AHCCCS Contractor is expected to
deploy upgrades and enhancements as necessary to contracted providers.

75. PENDING LEGISLATIVE / OTHER ISSUES

The following constitute pending items that may be resolved after the issuance of this contract. Any program
changes due to the resolution of the issues will be reflected in future amendments to the contract. Capitation rates
may also be adjusted to reflect the financial impact of program changes. The items in this paragraph are subject to
change and should not be considered all-inclusive.

Federal and State Legislation: AHCCCS and its Contractors are subject to legislative mandates that may result
in changes to the program. AHCCCS will either amend the contract or incorporate changes in policies
incorporated in the contract by reference.

Member Incentives: AHCCCS may explore opportunities to develop member incentive programs to increase the
use of preventive health services and compliance with guidelines for recommended care and services for specific
health conditions. The Contractor shall participate in the development and implementation of such programs as
directed by AHCCCS.

Medical Home: AHCCCS shall initiate a process to develop, implement and expand the medical home concept.
Through the RFP process, a Contractor may be selected to work with AHCCCS and take the leadership role in
creating medical homes in conjunction with the Acute Care program. The selected Contractor will be paid an
administrative fee for the development of the medical home model. The administrative fee will only be paid until
the project is completed, as determined by AHCCCS. The Contractor will be expected to participate in all phases
of this project. The Contractor shall deploy best practices in medical home concepts as identified and selected for
implementation.

KidsShare: KidsShare is a health insurance buy-in program for children, that is currently being proposed.
KidsShare would allow families below 350% of the FPL to purchase health insurance coverage from the State
based on the KidsCare model. Eligible children would also be required to meet other challenges, such as:
being priced out of the private insurance market; having pre-existing conditions that make obtaining private
insurance extremely difficult; or not having access to employer based insurance because either it is not offered
at their parents' work or their parents' employer does not extend coverage to dependents. Unlike KidsCare, the
program would not be subsidized by the State. Benefit packages and premium levels would be designed to
make the program affordable yet self sustaining. KidsShare would be administered through KidsCare health
plans; these plans would have to go through a bidding process in order to participate.

SSDI-TMC: Due to limited funding and the high cost of the population, the covered services array is being
evaluated and may be changed.

HIFA: The state statute authorizing AHCCCS to provide services to HIFA eligible individuals expires on June
30, 2008, and will require new legislation to continue.

Enrollment Guarantees: AHCCCS intends to modify the rule requiring a 6 month enrollment guarantee as
described in R9-22 Article 17.

Eligibility Privatization: AHCCCS is currently conducting an RFP process to evaluate the potential of
awarding a contract to a private vendor for the determination of eligibility for KidsCare and HIFA Parents. A
similar RFP process will be conducted for the Title XIX eligibility determination process as well.

Coordination of Benefits: Based on the Deficit Reduction Act of 2006, there may be changes to Coordination of
Benefits requirements.

76. SUPPORT OF ARIZONA BASED TRANSLATIONAL AND CLINICAL RESEARCH

AHCCCS is collaborating with the University of Arizona Medical School, Arizona State University, TGen,
and other Arizona based research programs to encourage greater participation of the community in Arizona
based translation and clinical research. The Contractor is encouraged to support AHCCCS-approved volunteer
opportunities for member participation in community based clinical studies and translation research. As part of
this collaboration AHCCCS providers will have the opportunity to be community research associates. The
Arizona Translational Research and Education Consortium will provide statewide governance and oversight of
the community engagement in Arizona translational and clinical research. The Consortium is expecting to
receive a grant from the National Institutes of Health to support the infrastructure for this community
involvement in beneficially translation research trials and studies.

77. RESERVED

78. RESERVED

[END OF SECTION D]

SECTION E: CONTRACT CLAUSES

1) APPLICABLE LAW
Arizona Law - The law of Arizona applies to this contract including, where applicable, the Uniform
Commercial Code, as adopted in the State of Arizona.

Implied Contract Terms - Each provision of law and any terms required by law to be in this contract are a part
of this contract as if fully stated in it.

2) AUTHORITY
This contract is issued under the authority of the Contracting Officer who signed this contract. Changes to the
contract, including the addition of work or materials, the revision of payment terms, or the substitution of work
or materials, directed by an unauthorized state employee or made unilaterally by the Contractor are violations
of the contract and of applicable law. Such changes, including unauthorized written contract amendments, shall
be void and without effect, and the Contractor shall not be entitled to any claim under this contract based on
those changes.

3) ORDER OF PRECEDENCE
The parties to this contract shall be bound by all terms and conditions contained herein. For interpreting such
terms and conditions the following sources shall have precedence in descending order: The Constitution and
laws of the United States and applicable Federal regulations; the terms of the CMS 1115 waiver for the State
of Arizona; the Constitution and laws of Arizona, and applicable State rules; the terms of this contract,
including any attachments and executed amendments and modifications; and AHCCCS policies and
procedures.

4) CONTRACT INTERPRETATION AND AMENDMENT
No Parol Evidence - This contract is intended by the parties as a final and complete expression of their
agreement. No course of prior dealings between the parties and no usage of the trade shall supplement or
explain any term used in this contract.

No Waiver - Either party's failure to insist on strict performance of any term or condition of the contract shall
not be deemed a waiver of that term or condition even if the party accepting or acquiescing in the nonconforming
performance knows of the nature of the performance and fails to object to it.

Written Contract Amendments - The contract shall be modified only through a written contract amendment
within the scope of the contract signed by the procurement officer on behalf of the State.

5) SEVERABILITY
The provisions of this contract are severable to the extent that any provision or application held to be invalid
shall not affect any other provision or application of the contract, which may remain in effect without the
invalid provision, or application.

6) RELATIONSHIP OF PARTIES
The Contractor under this contract is an independent contractor. Neither party to this contract shall be deemed
to be the employee or agent of the other party to the contract.

7) ASSIGNMENT AND DELEGATION
The Contractor shall not assign any right nor delegate any duty under this contract without prior written
approval of the Contracting Officer, who will not unreasonably withhold such approval.

8) INDEMNIFICATION
Contractor/Vendor Indemnification (Not Public Agency)
The parties to this contract agree that the State of Arizona, its departments, agencies, boards and commissions
shall be indemnified and held harmless by the Contractor for the vicarious liability of the State as a result of
entering into this contract. The Contractor agrees to indemnify, defend, and hold harmless the State from and
against any and all claims, losses, liability, costs, and expenses, including attorney’s fees and costs, arising out
of litigation against the AHCCCS Administration including, but not limited to, class action lawsuits
challenging actions by the Contractor. The requirement for indemnification applies irrespective of whether or
not the Contractor is a party to the lawsuit. Each Contractor shall indemnify the State, on a pro rata basis based
on population, attorney’s fees and costs awarded against the State as well as the attorney’s fees and costs
incurred by the State in defending the lawsuit. The Contractor shall also indemnify the AHCCCS
Administration, on a pro rata basis based on population, the administrative expenses incurred by the AHCCCS
Administration to address Contractor deficiencies arising out of the litigation. The parties further agree that the
State of Arizona, its departments, agencies, boards and commissions shall be responsible for its own
negligence. Each party to this contract is responsible for its own negligence.

Contractor/Vendor Indemnification (Public Agency)
Each party (“as indemnitor”) agrees to indemnify, defend, and hold harmless the other party (“as indemnitee”)
from and against any and all claims, losses, liability, costs, or expenses (including reasonable attorney’s fees)
(hereinafter collectively referred to as ‘claims’) arising out of bodily injury of any person (including death) or
property damage but only to the extent that such claims which result in vicarious/derivative liability to the
indemnitee, are caused by the act, omission, negligence, misconduct, or other fault of the indemnitor, its
officers, officials, agents, employees, or volunteers.

9) INDEMNIFICATION -- PATENT AND COPYRIGHT
To the extent permitted by applicable law, the Contractor shall defend, indemnify and hold harmless the State
against any liability including costs and expenses for infringement of any patent, trademark or copyright
arising out of contract performance or use by the State of materials furnished or work performed under this
contract. The State shall reasonably notify the Contractor of any claim for which it may be liable under this
paragraph.

10) COMPLIANCE WITH APPLICABLE LAWS, RULES AND REGULATIONS
The Contractor shall comply with all applicable Federal and State laws and regulations including Title VI of
the Civil Rights Act of 1964; Title IX of the Education Amendments of 1972 (regarding education programs
and activities); the Age Discrimination Act of 1975; the Rehabilitation Act of 1973 (regarding education
programs and activities), and the Americans with Disabilities Act; EEO provisions; Copeland Anti-Kickback
Act; Davis-Bacon Act; Contract Work Hours and Safety Standards; Rights to Inventions Made Under a
Contract or Agreement; Clean Air Act and Federal Water Pollution Control Act; Byrd Anti-Lobbying
Amendment. The Contractor shall maintain all applicable licenses and permits.

11) ADVERTISING AND PROMOTION OF CONTRACT
The Contractor shall not advertise or publish information for commercial benefit concerning this contract
without the prior written approval of the Contracting Officer.

12) PROPERTY OF THE STATE
Except as otherwise provided in this contract, any materials, including reports, computer programs and other
deliverables, created under this contract are the sole property of AHCCCS. The Contractor is not entitled to
maintain any rights on those materials and may not transfer any rights to anyone else. The Contractor shall not
use or release these materials without the prior written consent of AHCCCS.

If a Contractor declares information to be confidential, AHCCCS will maintain the information as confidential
and will not disclose it unless it is required by law or court order.

13) THIRD PARTY ANTITRUST VIOLATIONS
The Contractor assigns to the State any claim for overcharges resulting from antitrust violations to the extent
that those violations concern materials or services supplied by third parties to the Contractor toward fulfillment
of this contract.

14) RIGHT TO ASSURANCE
If AHCCCS, in good faith, has reason to believe that the Contractor does not intend to perform or continue
performing this contract, the procurement officer may demand in writing that the Contractor give a written
assurance of intent to perform. The demand shall be sent to the Contractor by certified mail, return receipt
required. Failure by the Contractor to provide written assurance within the number of days specified in the
demand may, at the State's option, be the basis for terminating the contract.

15) TERMINATION FOR CONFLICT OF INTEREST
AHCCCS may cancel this contract without penalty or further obligation if any person significantly involved in
initiating, negotiating, securing, drafting or creating the contract on behalf of AHCCCS is, or becomes at any
time while the contract or any extension of the contract is in effect, an employee of, or a consultant to, any
other party to this contract with respect to the subject matter of the contract. The cancellation shall be effective
when the Contractor receives written notice of the cancellation unless the notice specifies a later time.

If the Contractor is a political subdivision of the State, it may also cancel this contract as provided by A.R. S.
38-511.

16) GRATUITIES
AHCCCS may, by written notice to the Contractor, immediately terminate this contract if it determines that
employment or a gratuity was offered or made by the Contractor or a representative of the Contractor to any
officer or employee of the State for the purpose of influencing the outcome of the procurement or securing the
contract, an amendment to the contract, or favorable treatment concerning the contract, including the making
of any determination or decision about contract performance. AHCCCS, in addition to any other rights or
remedies, shall be entitled to recover exemplary damages in the amount of three times the value of the gratuity
offered by the Contractor.

17) SUSPENSION OR DEBARMENT
The Contractor shall not employ, consult, subcontract or enter into any agreement for Title XIX services with
any person or entity who is debarred, suspended or otherwise excluded from Federal procurement activity or
from participating in non-procurement activities under regulations issued under Executive Order No. 12549 or
under guidelines implementing Executive Order 12549 [42 CFR 438.610(a) and (b)]. This prohibition extends
to any entity which employs, consults, subcontracts with or otherwise reimburses for services any person
substantially involved in the management of another entity which is debarred, suspended or otherwise
excluded from Federal procurement activity.

The Contractor shall not retain as a director, officer, partner or owner of 5% or more of the Contractor entity,
any person, or affiliate of such a person, who is debarred, suspended or otherwise excluded from Federal
procurement activity.

AHCCCS may, by written notice to the Contractor, immediately terminate this contract if it determines that the
Contractor has been debarred, suspended or otherwise lawfully prohibited from participating in any public
procurement activity.

18) TERMINATION FOR CONVENIENCE
AHCCCS reserves the right to terminate the contract in whole or in part at any time for the convenience of the
State without penalty or recourse. The Contracting Officer shall give written notice by certified mail, return
receipt requested, to the Contractor of the termination at least 90 days before the effective date of the

termination. In the event of termination under this paragraph, all documents, data and reports prepared by the
Contractor under the contract shall become the property of and be delivered to AHCCCS. The Contractor shall
be entitled to receive just and equitable compensation for work in progress, work completed and materials
accepted before the effective date of the termination.

19) TEMPORARY MANAGEMENT/OPERATION OF A CONTRACTOR AND TERMINATION
Temporary Management and Operation of a Contractor: Pursuant to the Balanced Budget Act of 1997, 42
CFR 438.700 et seq. and State Law ARS §36-2903, AHCCCSA is authorized to impose temporary
management for a Contractor under certain conditions. Under federal law, temporary management may be
imposed if AHCCCS determines that there is continued egregious behavior by the Contractor, including but
not limited to the following: substantial failure to provide medically necessary services the Contractor is
required to provide; imposition on enrollees premiums or charges that exceed those permitted by AHCCCSA,
discrimination among enrollees on the basis of health status or need for health care services; misrepresentation
or falsification of information to AHCCCSA or CMS; misrepresentation or falsification of information
furnished to an enrollee or provider; distribution of marketing materials that have not been approved by
AHCCCS or that are false or misleading; or behavior contrary to any requirements of Sections 1903(m) or
1932 of the Social Security Act. Temporary management may also be imposed if AHCCCSA determines that
there is substantial risk to enrollees’ health or that temporary management is necessary to ensure the health of
enrollees while the Contractor is correcting the deficiencies noted above or until there is an orderly transition
or reorganization of the Contractor. Under federal law, temporary management is mandatory if AHCCCSA
determines that the Contractor has repeatedly failed to meet substantive requirements in Sections 1903(m) or
1932 of the Social Security Act. In these situations, AHCCCSA shall not delay imposition of temporary
management to provide a hearing before imposing this sanction.

State law ARS §36-2903 authorizes AHCCCSA to operate a Contractor as specified in this contract. In
addition to the bases specified in 42 CFR 438.700 et seq., AHCCCSA may directly operate the Contractor if,
in the judgment of AHCCCSA, the Contractor's performance is in material breach of the contract or the
Contractor is insolvent. Under these circumstances, AHCCCSA may directly operate the Contractor to assure
delivery of care to members enrolled with the Contractor until cure by the Contractor of its breach, by
demonstrated financial solvency or until the successful transition of those members to other Contractors. Prior
to operation of the Contractor by AHCCCSA pursuant to state statute, the Contractor shall have the
opportunity for a hearing. If AHCCCSA determines that emergency action is required, operation of the
Contractor may take place prior to hearing. Operation by AHCCCSA shall occur only as long as it is necessary
to assure delivery of uninterrupted care to members, to accomplish orderly transition of those members to other
Contractors, or until the Contractor reorganizes or otherwise corrects contract performance failure.

If AHCCCS undertakes direct operation of the Contractor, AHCCCS, through designees appointed by the
Director, shall be vested with full and exclusive power of management and control of the Contractor as
necessary to ensure the uninterrupted care to persons and accomplish the orderly transition of persons to a new
or existing Contractor, or until the Contractor corrects the Contract Performance failure to the satisfaction of
AHCCCS. AHCCCS shall have the power to employ any necessary assistants, to execute any instrument in the
name of the Contractor, to commence, defend and conduct in its name any action or proceeding in which the
Contractor may be a party.

All reasonable expenses of AHCCCS related to the direct operation of the Contractor, including attorney fees,
cost of preliminary or other audits of the Contractor and expenses related to the management of any office or
other assets of the Contractor, shall be paid by the Contractor or withheld from payment due from AHCCCS to
the Contractor.

Termination: AHCCCSA reserves the right to terminate this contract in whole or in part due to the failure of
the Contractor to comply with any term or condition of the contract and as authorized by the Balanced Budget
Act of 1997 and 42 CFR 438.708. If the Contractor is providing services under more than one contract with
AHCCCSA, AHCCCSA may deem unsatisfactory performance under one contract to be cause to require the
Contractor to provide assurance of performance under any and all other contracts. In such situations,
AHCCCSA reserves the right to seek remedies under both actual and anticipatory breaches of contract if
adequate assurance of performance is not received. The Contracting Officer shall mail written notice of the
termination and the reason(s) for it to the Contractor by certified mail, return receipt requested. Pursuant to the
Balanced Budget Act of 1997 and 42 CFR 438.708, AHCCCSA shall provide the contractor with a pre-
determination hearing before termination of the contract.

Upon termination, all documents, data, and reports prepared by the Contractor under the contract shall become
the property of and be delivered to AHCCCSA on demand.

AHCCCSA may, upon termination of this contract, procure on terms and in the manner that it deems
appropriate, materials or services to replace those under this contract. The Contractor shall be liable for any
excess costs incurred by AHCCCSA in re-procuring the materials or services.

20) TERMINATION - AVAILABILITY OF FUNDS
Funds are not presently available for performance under this contract beyond the current fiscal year. No legal
liability on the part of AHCCCS for any payment may arise under this contract until funds are made available
for performance of this contract.

Notwithstanding any other provision in the Agreement, this Agreement may be terminated by AHCCCS, if, for
any reason, there are not sufficient appropriated and available monies for the purpose of maintaining this
Agreement. In the event of such termination, the Contractor shall have no further obligation to AHCCCS,
except as otherwise provided in this contract.

21) RIGHT OF OFFSET
AHCCCS shall be entitled to offset against any amounts due the Contractor any expenses or costs incurred by
AHCCCS concerning the Contractor's non-conforming performance or failure to perform the contract.

22) NON-EXCLUSIVE REMEDIES
The rights and the remedies of AHCCCS under this contract are not exclusive.

23) NON-DISCRIMINATION
The Contractor shall comply with State Executive Order No. 99-4, which mandates that all persons, regardless
of race, color, religion, gender, national origin or political affiliation, shall have equal access to employment
opportunities, and all other applicable Federal and state laws, rules and regulations, including the Americans
with Disabilities Act and Title VI. The Contractor shall take positive action to ensure that applicants for
employment, employees, and persons to whom it provides service are not discriminated against due to race,
creed, color, religion, gender, national origin or disability.

24) EFFECTIVE DATE
The effective date of this contract shall be the date referenced on page 1 of this contract.

25) INSURANCE
A certificate of insurance naming the State of Arizona and AHCCCS as the "additional insured" must be
submitted to AHCCCS within 10 days of notification of contract award and prior to commencement of any
services under this contract. This insurance shall be provided by carriers rated as "A+" or higher by the A.M.
Best Rating Service. The following types and levels of insurance coverage are required for this contract:

a. Commercial General Liability: Provides coverage of at least $1,000,000 for each occurrence for bodily
   injury and property damage to others as a result of accidents on the premises of or as the result of
   operations of the Contractor.
b. Commercial Automobile Liability: Provides coverage of at least $1,000,000 for each occurrence for bodily
   injury and property damage to others resulting from accidents caused by vehicles operated by the
   Contractor.
c. Workers Compensation: Provides coverage to employees of the Contractor for injuries sustained in the
   course of their employment. Coverage must meet the obligations imposed by Federal and State statutes
   and must also include Employer's Liability minimum coverage of $100,000. Evidence of qualified self-insured
   status will also be considered.
d. Professional Liability (if applicable): Provides coverage for alleged professional misconduct or lack of
   ordinary skills in the performance of a professional act of service.

The above coverages may be evidenced by either one of the following:

a. The State of Arizona Certificate of Insurance: This is a form with the special conditions required by the
   contract already pre-printed on the form. The Contractor's agent or broker must fill in the pertinent policy
   information and ensure the required special conditions are included in the Contractor's policy.
b. The Accord form: This standard insurance industry certificate of insurance does not contain the preprinted
   special conditions required by this contract. These conditions must be entered on the certificate by
   the agent or broker and read as follows:

The State of Arizona and Arizona Health Care Cost Containment System are hereby added as
additional insureds. Coverage afforded under this Certificate shall be primary and any insurance
carried by the State or any of its agencies, boards, departments or commissions shall be in excess of
that provided by the insured Contractor. No policy shall expire, be canceled or materially changed
without 30 days written notice to the State. This Certificate is not valid unless countersigned by an
authorized representative of the insurance company.
c. If the Contractor is insured pursuant to A.R.S. § 11-981, the Insurance provisions required by the Contract
   are satisfied.

26) DISPUTES
Contract claims and disputes shall be adjudicated in accordance with State Law, AHCCCS Rules and this
contract.

Except as provided by 9 A.A.C. Chapter 28, Article 6, the exclusive manner for the Contractor to assert any
dispute against AHCCCS shall be in accordance with the process outlined in 9 A.A.C. Chapter 34, Article 4
and ARS §36-2903.01. All disputes except as provided under 9 A.A.C. Chapter 22, Article 6 shall be filed in
writing and be received by AHCCCS no later than 60 days from the date of the disputed notice. All disputes
shall state the factual and legal basis for the dispute. Pending the final resolution of any disputes involving this
contract, the Contractor shall proceed with performance of this contract in accordance with AHCCCS's
instructions, unless AHCCCS specifically, in writing, requests termination or a temporary suspension of
performance.

27) RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS
AHCCCS may, at reasonable times, inspect the part of the plant or place of business of the Contractor or
subcontractor that is related to the performance of this contract, in accordance with A.R.S. §41-2547.

28) INCORPORATION BY REFERENCE
This solicitation and all attachments and amendments, the Contractor's proposal, best and final offer accepted
by AHCCCS, and any approved subcontracts are hereby incorporated by reference into the contract.

29) COVENANT AGAINST CONTINGENT FEES
The Contractor warrants that no person or agency has been employed or retained to solicit or secure this
contract upon an agreement or understanding for a commission, percentage, brokerage or contingent fee. For
violation of this warranty, AHCCCS shall have the right to annul this contract without liability.

30) CHANGES
AHCCCS may at any time, by written notice to the Contractor, make changes within the general scope of this
contract. If any such change causes an increase or decrease in the cost of, or the time required for,
performance of any part of the work under this contract, the Contractor may assert its right to an adjustment in
compensation paid under this contract. The Contractor must assert its right to such adjustment within 30 days
from the date of receipt of the change notice. Any dispute or disagreement caused by such notice shall
constitute a dispute within the meaning of Section E, Paragraph 26, Disputes, and be administered accordingly.

When AHCCCS issues an amendment to modify the contract, the provisions of such amendment will be
deemed to have been accepted 60 days after the date of mailing by AHCCCS, even if the amendment has not
been signed by the Contractor, unless within that time the Contractor notifies AHCCCS in writing that it
refuses to sign the amendment. If the Contractor provides such notification, AHCCCS will initiate termination
proceedings.

31) TYPE OF CONTRACT
Firm Fixed-Price stated as capitated per member per month, except as otherwise provided

32) AMERICANS WITH DISABILITIES ACT
People with disabilities may request special accommodations such as interpreters, alternative formats or
assistance with physical accessibility. Requests for special accommodations must be made with at least three
days prior notice by contacting the Solicitation Contact person.

33) WARRANTY OF SERVICES
The Contractor warrants that all services provided under this contract will conform to the requirements stated
herein. AHCCCS's acceptance of services provided by the Contractor shall not relieve the Contractor from its
obligations under this warranty. In addition to its other remedies, AHCCCS may, at the Contractor's expense,
require prompt correction of any services failing to meet the Contractor's warranty herein. Services corrected
by the Contractor shall be subject to all of the provisions of this contract in the manner and to the same extent
as the services originally furnished.

34) NO GUARANTEED QUANTITIES
AHCCCS does not guarantee the Contractor any minimum or maximum quantity of services or goods to be
provided under this contract.

35) CONFLICT OF INTEREST
The Contractor shall not undertake any work that represents a potential conflict of interest, or which is not in
the best interest of AHCCCS or the State without prior written approval by AHCCCS. The Contractor shall
fully and completely disclose any situation that may present a conflict of interest. If the Contractor is now
performing or elects to perform during the term of this contract any services for any AHCCCS contractor,
provider or Contractor or an entity owning or controlling same, the Contractor shall disclose this relationship
prior to accepting any assignment involving such party.

36) CONFIDENTIALITY AND DISCLOSURE OF CONFIDENTIAL INFORMATION
The Contrator shall safeguard confidential information in accordance with Federal and State laws and
regulations, including but not limited to, 42 CFR 431.300 et seq., 45 CFR parts 160 and 164, and AHCCCS
Regulation A.A.C. R9-22-512.

The Contractor shall establish and maintain procedures and controls that are acceptable to AHCCCS for the
purpose of assuring that no information contained in its records or obtained from AHCCCS or others carrying
out its functions under the contract shall be used or disclosed by its agents, officers or employees, except as
required to efficiently perform duties under the contract. Except as required or permitted by law, the contractor
also agrees that any information pertaining to individual persons shall not be divulged other than to employees
or officers of the contractor as needed for the performance of duties under the contract, unless otherwise
agreed to, in writing, by AHCCCS.

The Contractor shall not, without prior written approval from AHCCCS, either during or after the performance
of the services required by this contract, use, other than for such performance, or disclose to any person other
than AHCCCS personnel with a need to know, any information, data, material, or exhibits created, developed,
produced, or otherwise obtained during the course of the work required by this contract. This nondisclosure
requirement shall also pertain to any information contained in reports, documents, or other records furnished to
the Contractor by AHCCCS.

37) COOPERATION WITH OTHER CONTRACTORS
AHCCCS may award other contracts for additional work related to this contract and Contractor shall fully
cooperate with such other contractors and AHCCCS employees or designated agents, and carefully fit its own
work to such other contractors' work. The Contractor shall not commit or permit any act which will interfere
with the performance of work by any other contractor or by AHCCCS employees.

38) ASSIGNMENT OF CONTRACT AND BANKRUPTCY
This contract is voidable and subject to immediate cancellation by AHCCCS upon the Contractor becoming
insolvent or filing proceedings in bankruptcy or reorganization under the United States Code, or assigning
rights or obligations under this contract without the prior written consent of AHCCCS.

39) OWNERSHIP OF INFORMATION AND DATA
Any data or information system, including all software, documentation and manuals, developed by the
Contractor pursuant to this contract, shall be deemed to be owned by AHCCCS. The Federal government
reserves a royalty-free, nonexclusive, and irrevocable license to reproduce, publish, or otherwise use and to
authorize others to use for Federal government purposes, such data or information system, software,
documentation and manuals. Proprietary software which is provided at established catalog or market prices
and sold or leased to the general public shall not be subject to the ownership or licensing provisions of this
section.

Data, information and reports collected or prepared by the Contractor in the course of performing its duties and
obligations under this contract shall be deemed to be owned by AHCCCS. The ownership provision is in
consideration of the Contractor's use of public funds in collecting or preparing such data, information and
reports. These items shall not be used by the Contractor for any independent project of the Contractor or
publicized by the Contractor without the prior written permission of AHCCCS. Subject to applicable state and
Federal laws and regulations, AHCCCS shall have full and complete rights to reproduce, duplicate, disclose
and otherwise use all such information. At the termination of the contract, the Contractor shall make available
all such data to AHCCCS within 30 days following termination of the contract or such longer period as
approved by AHCCCS, Office of the Director. For purposes of this subsection, the term "data" shall not
include member medical records.

Except as otherwise provided in this section, if any copyrightable or patentable material is developed by the
Contractor in the course of performance of this contract, the Federal government, AHCCCS and the State of
Arizona shall have a royalty-free, nonexclusive, and irrevocable right to reproduce, publish, or otherwise use,
and to authorize others to use, the work for state or Federal government purposes. The Contractor shall
additionally be subject to the applicable provisions of 45 CFR Part 74 and 45 CFR Parts 6 and 8.

40) AUDITS AND INSPECTIONS
The Contractor shall comply with all provisions specified in applicable AHCCCS Rule R9-22-521 and
AHCCCS policies and procedures relating to the audit of the Contractor's records and the inspection of the
Contractor's facilities. The Contractor shall fully cooperate with AHCCCS staff and allow them reasonable
access to the Contractor's staff, subcontractors, members, and records [42 CFR 438.6(g)].

At any time during the term of this contract, the Contractor's or any subcontractor's books and records shall be
subject to audit by AHCCCS and, where applicable, the Federal government, to the extent that the books and
records relate to the performance of the contract or subcontracts [42 CFR 438.242(b)(3)].

AHCCCS, or its duly authorized agents, and the Federal government may evaluate through on-site inspection
or other means, the quality, appropriateness and timeliness of services performed under this contract.

41) LOBBYING
No funds paid to the Contractor by AHCCCS, or interest earned thereon, shall be used for the purpose of
influencing or attempting to influence an officer or employee of any Federal or State agency, a member of the
United States Congress or State Legislature, an officer or employee of a member of the United States Congress
or State Legislature in connection with awarding of any Federal or State contract, the making of any Federal or
State grant, the making of any Federal or State loan, the entering into of any cooperative agreement, and the
extension, continuation, renewal, amendment or modification of any Federal or State contract, grant, loan, or
cooperative agreement. The Contractor shall disclose if any funds, other than those paid to the Contractor by
AHCCCS, have been used or will be used to influence the persons and entities indicated above and will assist
AHCCCS in making such disclosures to CMS.

42) CHOICE OF FORUM
The parties agree that jurisdiction over any action arising out of or relating to this contract shall be brought or
filed in a court of competent jurisdiction located in the State of Arizona.

43) DATA CERTIFICATION
The Contractor shall certify that financial and encounter data submitted to AHCCCS is complete, accurate and
truthful. Certification of financial and encounter data must be submitted concurrently with the data.
Certification may be provided by the Contractor CEO, CFO or an individual who is delegated authority to sign
for, and who report directly to the CEO or CFO [42 CFR 438.604 et seq.].

44) OFF SHORE PERFORMANCE OF WORK PROHIBITED
Due to security and identity protection concerns, direct services under this contract shall be performed within
the borders of the United States. Any services that are described in the specifications or scope of work that
directly serve the State of Arizona or its clients and may involve access to secure or sensitive data or personal
client data or development or modification of software for the State shall be performed within the borders of
the United States. Unless specifically stated otherwise in the specifications, this definition does not apply to
indirect or “overhead” services, redundant back-up services or services that are incidental to the performance
of the contract. This provision applies to work performed by subcontractors at all tiers.

45) FEDERAL IMMIGRATION AND NATIONALITY ACT
The Contractor shall comply with all federal, state and local immigration laws and regulations relating to the
immigration status of their employees during the term of the contract. Further, the Contractor shall flow down
this requirement to all subcontractors utilized during the term of the contract. The State shall retain the right to
perform random audits of Contractor and subcontractor records or to inspect papers of any employee thereof to
ensure compliance. Should the State determine that the Contractor and/or any subcontractors be found
noncompliant, the State may pursue all remedies allowed by law, including, but not limited to; suspension of
work, termination of the contract for default and suspension and/or debarment of the Contractor.

46) IRS W-9 FORM
In order to receive payment under any resulting contract, the Contractor shall have a current IRS W-9 Form on
file with the State of Arizona.

47) CONTINUATION OF PERFORMANCE THROUGH TERMINATION
The Contractor shall continue to perform, in accordance with the requirements of the contract, up to the date of
termination and as directed in the termination notice.

[END OF SECTION E]

SECTION F: RESERVED

SECTION G: REPRESENTATIONS and CERTIFICATIONS of OFFEROR

The Offeror must complete all information requested below.

1. CERTIFICATION OF ACCURACY OF INFORMATION PROVIDED

By signing this offer, the Offeror certifies, under penalty of law, that the information provided herein is true,
correct and complete to the best of the Offeror's knowledge and belief. The Offeror also acknowledges that,
should investigation at any time disclose any misrepresentation or falsification, any subsequent contract may be
terminated by AHCCCS without penalty to or further obligation by AHCCCS.

2. CERTIFICATION OF NON-COERCION

By signing this offer, the Offeror certifies, under penalty of law, that it has not made any requests or inducements
to any provider not to contract with another potential program contractor in relation to this solicitation.

3. CERTIFICATION OF COMPLIANCE - ANTI-KICKBACK / LABORATORY TESTING

By signing this offer, the Offeror certifies that it has not engaged and will not engage in any violation of the
Medicare Anti-Kickback or the “Stark I” and “Stark II” laws governing related-entity and compensation
therefrom. If the Offeror provides laboratory testing, it certifies that it has complied with, and has sent to
AHCCCS, simultaneous copies of the information required to be sent to the Centers for Medicare and Medicaid
Services (see 42 USC §1320a-7b, P.L. 101-239 and 42 CFR §411.361).

4. AUTHORIZED SIGNATORY

Authorized Signatory for _________________________________________________________
                                                                                [OFFEROR’S Name]
_____________________________________ ___________________________________
                [INDIVIDUAL'S Name]                                                       [Title]

is the person authorized to sign this contract on behalf of the Offeror.

5. OFFEROR'S MAILING ADDRESS

AHCCCS should address all notices relative to this offer to the attention of:

________________________________________________________________________
Name                                                                      Title

________________________________________________________________________
Address                                                                 Telephone Number

________________________________________________________________________
Fax Number                                                           Email Address

________________________________________________________________________
City                                                                         State                                       ZIP

OFFEROR GENERAL INFORMATION (Page 1 of 2)

1. If other than a governmental agency, when was your organization formed? _______________________

2. License/Certification: Attach a list of all licenses and certifications (e.g. federal HMO status or state
certifications) your organization maintains. Use a separate sheet of paper listing the license requirement and the
renewal dates.

Have any licenses been denied, revoked or suspended within the past 10 years? Yes _____ No _____
If yes, please explain.

__________________________________________________________________________________________
__________________________________________________________________________________________

3. Civil Rights Compliance Data: Has any federal or state agency ever made a finding of noncompliance with
any civil rights requirements with respect to your program? Yes _____ No_____ If yes, please explain.
__________________________________________________________________________________________
__________________________________________________________________________________________

4. Accessibility Assurance: Does your organization provide assurance that no qualified person with a
disability will be denied benefits of, or excluded from, participation in a program or activity because the Offeror's
facilities (including subcontractors) are inaccessible to, or unusable by, persons with disabilities? (Note: Check
local zoning ordinances for accessibility requirements). Yes____ No____ If yes, describe how such assurance
is provided or how your organization is taking affirmative steps to provide assurance.
__________________________________________________________________________________________
__________________________________________________________________________________________

5. Prior Convictions: List all felony convictions within the past 15 years of any key personnel (i.e.,
Administrator, Medical Director, financial officers, major stockholders or those with controlling interest, etc.).
Failure to make full and complete disclosure shall result in the rejection of your proposal.
__________________________________________________________________________________________
__________________________________________________________________________________________

6. Compliance Agreements/Criminal or Civil Judgments: List any compliance agreements the organization
has entered into within the last 10 years with any regulatory body (include name of regulator and summary of
agreement). Additionally, list any criminal or civil judgments against the organization within the last 10 years
(provide a summary of the judgment).
__________________________________________________________________________________________
__________________________________________________________________________________________

7. Federal Government Suspension/Exclusion: Has the Offeror been suspended or excluded from any
federal government programs for any reason? Yes_____ No_____ If yes, please explain.
_________________________________________________________________________________________
_________________________________________________________________________________________

8. Did a firm or organization provide the Offeror with any assistance in making this offer (to include
developing capitation rates or providing any other technical assistance)? Yes_____ No_____ If yes, what
is the name of this firm or organization?
__________________________________________________________________________________________
Name
__________________________________________________________________________________________
Address                                                                                                 City                                                         State

FINANCIAL DISCLOSURE STATEMENT (Page 1 of 2)

The Offeror must provide the following information as required by 42 CFR 455.103. This Financial Disclosure
Statement shall be prepared as of 12/31/07 or as specified below. However, continuing Offerors who have filed
the required Financial Disclosure Statement within the last 12 months need not complete this section if no
significant changes have occurred since the last filing.

1. Ownership: List the name and address of each person with an ownership or controlling interest, as defined
by 42 CFR 455.101, in the entity submitting this offer:

                                                                                                                                                Percent of
Name                                                                      Address                                                 Ownership or Control
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

2. Subcontractor Ownership: List the name and address of each person with an ownership or control interest
in any subcontractor in which the Offeror has direct or indirect ownership of 5% or more:
                                                                                                                                                Percent of
Name                                                                      Address                                                 Ownership or Control
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

Names of above persons who are related to one another as spouse, parent, child or sibling:
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

3. Ownership in Other Entities: List the name of any other entity in which a person with an ownership or
controlling interest in the Offeror entity also has an ownership or controlling interest:
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

FINANCIAL DISCLOSURE STATEMENT (Page 2 of 2)

4. Long-Term Business Transactions: List any significant business transactions, as defined in 42 CFR
455.101, between the Offeror and any wholly-owned provider or supplier during the five-year period ending on
the Contractor’s most recent fiscal year end:

Describe Ownership                            Type of Business                                                 Dollar Amount
of Wholly Owned Provider                Transaction with Provider                                  of Transaction
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

5. Criminal Offenses: List the name of any person who has ownership or control interest in the Offeror, or is
an agent or managing employee of the Offeror and has been convicted of a criminal offense related to that
person’s involvement in any program under Medicare, Medicaid or the Title XIX or Title XXI services program
since the inception of those programs:

Name                                                                      Address                                                 Title
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

6. Creditors: List the name and address of each creditor whose loans or mortgages exceed 5% of total Offeror
equity and are secured by assets of the Offeror’s company.

                                                                                                                Description           Amount
Name                                                                      Address                 of Debt                   of Security
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

RELATED PARTY TRANSACTIONS (Page 1 of 1)

1. Board of Directors: List the names and addresses of the Board of Directors of the Offeror.

Name/Title                                                             Address
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

2. Related Party Transactions: Describe transactions between the Offeror and any related party in which a
transaction or series of transactions during any one fiscal year exceeds the lesser of $50,000 or 2% of the total
operating expenses of the Offeror. The Offeror must list property, goods, services and facilities in detail noting,
the dollar amounts or other consideration for each transaction and the date thereof. Include a justification as to
(1) the reasonableness of the transaction, (2) its potential adverse impact on the fiscal soundness of the Offeror,
and (3) that the transaction is without conflict of interest:

a) Describe all transactions between Offeror and any related party which includes advances of money,
the lending of money, extensions of credit or any investment in a related party.

Description of                                       Name of Related Party                         Dollar Amount for
Transaction                                           and Relationship                                  Reporting Period
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

Justification:
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

b) List the name and address of any individual who owns or controls more than 10% of stock or that has
a controlling interest (i.e., formulates, determines or vetoes business policy decisions):
                                                                                                                                                                Has Controlling
                                                                                                                Owner or                                Interest?
Name                                                                      Address                 Controller                              Yes / No
_____________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

[END OF SECTION G]

SECTION H: EVALUATION FACTORS AND SELECTION PROCESS

AHCCCS has established a scoring methodology that is designed to evaluate fairly an Offeror’s ability to provide
cost-effective, high-quality contract services in a managed care setting in accordance with the AHCCCS overall
mission and goals. The following evaluation factors will be weighted in the order listed:

                1. Capitation
                2. Program
                3. Organization
                4. Network

Capitation and the Network Development portion of the Network section will be scored by Geographic Service
Area. The remaining submission areas; the Network Management portion of Network, Program and
Organization, are anticipated to be scored statewide, except as otherwise specified in the submission requirements
listed in Section I, Instructions to Offerors. The scores received for each of the four required components will be
weighted separately and combined to derive a final score for the Offeror by GSA. A contract will be awarded to
a qualified Offeror whose proposal is deemed to be advantageous to the State in accordance with Section I,
Paragraph 10, Award of Contract.

In the case of negligible differences between two or more competing proposals for a particular GSA, in the
best interest of the State, AHCCCS may consider one or all of the following factors in awarding the contract:

            • an Offeror who is an incumbent Contractor and has performed in an adequate manner (in the interest
                   of continuity of care);

            • an Offeror who participates satisfactorily in other lines of AHCCCS business;

            • an Offeror’s past performance with AHCCCS;

            • an Offeror is a Medicare Advantage Plan, or has developed formal relationships with a Medicare
                   Advantage Plan that allow the Contractor to provide coordinated care for dual eligible members;

            • an award of contract would enhance the diversity of the AHCCCS Contractor network.;

            • the nature, frequency and significance of any compliance agreements with any regulatory authority;

            • any convictions or civil judgments entered against the organization.

Offerors are encouraged to submit a bid for more than one GSA and/or for more than just urban GSAs.

AHCCCS reserves the right to waive immaterial defects or omissions in this solicitation or submitted proposals.
The Offeror should note that, if successful, it must meet all AHCCCS requirements, irrespective of what is
requested and evaluated through this solicitation. The proposal provided by the Offeror will become part of the
contract with AHCCCS.

__________________________________________________________________________________________
All of the components listed below will be evaluated against relevant statutes, AHCCCS Rules and policies and
the requirements contained in this RFP. The Offeror’s Checklist (Attachment J) contains RFP references for
each of these items:

1. CAPITATION

The Offeror shall submit initial capitation bids by risk group within a GSA. These initial bids will be evaluated
and scored. The lowest bid within each GSA and risk group will receive the maximum allowable points. If a bid
is below the actuarial rate range, the bid will be evaluated as if it were at the bottom of the actuarial rate range.
No additional points will be given for bids below the actuarial rate range. Conversely, the highest bid (within or
above the actuarial rate range) will receive the least number of points.

If AHCCCS requests best and final offers, these offers will be scored using the same methodology as was used to
score the initial bids. The initial bid will be weighted 60% and the final bid 40%.

Offerors should note that AHCCCS may not offer the opportunity to submit best and final offers.

2. PROGRAM

Program refers to the Offeror’s policies and procedures supporting the provision of all covered services. In
particular, the Offeror's proposal will be evaluated on the following:

                a. Quality Management
                b. Medical Management
                c. EPSDT/Maternal and Child Health
                d. Behavioral Health

3. ORGANIZATION

Organization refers to the Offeror's ability to perform the administrative tasks necessary to support the
requirements identified in this solicitation. The following areas will be evaluated:

                a. Organization and Staffing
                b. Information Systems
                c. Claims
                d. Corporate Compliance
                e. Encounters
                f. Member Services
                g. Grievance and Appeals
                h. Finance

4. NETWORK

Network refers to the Offeror’s capacity to develop and manage a provider network sufficient for the provision of
all covered services. A signed Letter of Intent will receive the same weight and consideration as a signed contract.
The following areas will be evaluated:

                a. Network Development
                b. Network Management

[END OF SECTION H]

SECTION I: INSTRUCTIONS TO OFFERORS

1. PROSPECTIVE OFFEROR’S INQUIRIES

Any questions related to this solicitation must be directed to the Solicitation Contact Person listed in Section
A. Offerors shall not contact or ask questions of other AHCCCS staff unless authorized by the Contracting
Solicitation Contact Person. Questions shall be e-mailed, hand delivered or mailed to the Solicitation Contact
Person in the prescribed MS Word format available in the Bidder’s Library. In addition, questions hand
delivered or mailed must also be submitted on a Compact Disk (CD) and saved in the specified format. The
envelope must be marked "RFP Questions- ACUTE CARE". All questions are due to AHCCCS by the dates
found in Paragraph 11 of this section. AHCCCS will respond, in writing, to all questions submitted through
this process. Written responses will be posted in the Bidder’s Library in accordance with the schedule of
milestone dates found in Paragraph 11 of this section.

2. PROSPECTIVE OFFEROR’S CONFERENCE AND TECHNICAL INTERFACE MEETING

An Offeror’s Conference will be held on February 11, 2008, from 8:30 a.m. until 5:00 p.m., at AHCCCS, 701 E.
Jefferson St., Phoenix, Arizona, in the third floor Gold Room. The purpose of this conference will be to: 1) orient
new Offerors to AHCCCS, 2) clarify the contents of this solicitation, and 3) clarify the AHCCCS PMMIS System
and interface requirements. Any doubt as to the contents and requirements of this solicitation or any apparent
omission or discrepancy should be presented at this conference. Questions posed during the Prospective Offeror’s
Conference must also be submitted as specified in Paragraph 1 of this section. Verbal responses provided during
the Conference are not binding.

3. PROPOSAL OPENING

Proposals will be opened publicly immediately following the proposal due date and time. The name of each
Offeror will be read aloud and recorded, but no other information contained in the proposals will be disclosed.
Proposals will not be available for public inspection until after contract award.

4. LATE PROPOSALS

Late proposals will not be considered.

5. WITHDRAWAL OF PROPOSAL

At any time prior to the proposal due date and time, the Offeror (or designated representative) may withdraw its
proposal. Withdrawals must be provided in writing and submitted to the Solicitation Contact Person listed in
Section A.

6. AMENDMENTS TO RFP

Amendments may be issued subsequent to the issue date of this solicitation. Receipt of solicitation amendments
must be acknowledged by signing and returning the signature page of the amendment to the Solicitation Contact
Person listed in Section A.

7. ON-SITE REVIEW

Prior to or as part of a contract award, all Offerors may be subject to on-site review(s) to determine that an
infrastructure is in place that will support the provision of services to the Acute population within the GSAs bid.

8. BEST AND FINAL OFFERS

AHCCCS reserves the right to accept any or all initial offers without further negotiation and may choose not to
request a best and final offer (BFO). Offerors are therefore advised to submit their most competitive offers at
the outset. However, if it is considered in the best interest of the State, AHCCCS may issue a written request
to submit a BFO in a particular GSA. The purpose of a BFO request is to allow Offerors an opportunity to
resubmit bids for rates not previously accepted by AHCCCS. This request will notify the Offeror of the date,
time and place for the resubmission of the capitation rate bid. In addition, AHCCCS will disclose to each
Offeror which of its bid rates are acceptable (within or below actuarial rate range), and which are not
acceptable (above the actuarial rate range). Final bid rates that fall below the bottom of the actuarial rate range
will be increased to the bottom of that rate range after the final BFO. If an Offeror does not submit a notice of
withdrawal or participate in a requested BFO, its immediate previous offer will be considered its best and final
offer.

All BFOs must be submitted via the AHCCCS website. AHCCCS will limit the number of BFO rounds if it is in
the best interest of the State. Offerors will be permitted, within the restrictions and limitations defined below, to
adjust a capitation rate upward for a risk group that was previously accepted to offset the reduction of a capitation
rate in another risk group in the first BFO round only. These restrictions and limitations include, but are not
limited to:

                a. An Offeror will be allowed to adjust upward a previously accepted rate only during the first BFO round;

                b. The weighted amount of BFO increase cannot exceed the weighted amount of BFO reduction.
                   AHCCCS will furnish the Offeror, in the Data Supplement, the enrollment percentages, by risk group,
                   by GSA, to be used in determining the weighted amount. Should the weighted amount of the
                   adjustment exceed the weighted amount of the BFO reduction, AHCCCS shall reject the first BFO
                   and the adjustment (costing the Offeror the loss of the first BFO round in that GSA). Since a risk
                   group can only be adjusted during the first BFO round, the Offeror will lose the opportunity to make
                   an upward capitation adjustment to previously accepted risk group bids in that GSA.

                For example, assume that SSI w/o Medicare was the risk group where a BFO was needed and the
                Offeror reduced this rate by $10 PMPM. Also assume the SSI w/o Medicare risk group accounted for
                9% of the members in the GSA.

                Weighted Average Capitation Reduction - 9% X $10.00 = $.90

                Assume the risk group adjusted upward was TANF and this risk group was increased by $2.00 PMPM.
                Also assume this risk group accounted for 50% of the members in the GSA.

                Weighted Average Capitation Increase - 50% X $2.00 = $1.00

                Therefore, the BFO would be rejected because the weighted amount of the BFO upward adjustment
                exceeded the weighted amount of the BFO reduction.

                c. Offerors will not be allowed to decrease a bid in a BFO round if the initial bid was below the bottom of
                   the rate range. If such a BFO is submitted it will be rejected.

                d. If an adjustment during the initial BFO round causes the Offeror to exceed the upper range of any risk
                   group, AHCCCS will reject the adjustment and return the (adjusted) risk group to the initial capitation
                   rate bid by the Offeror. Since a previously accepted risk group bid can only be adjusted during the first
                   BFO round, the Offeror will lose the opportunity to make an upward capitation adjustment for this risk
                   group.

                e. AHCCCS reserves the sole right to accept or reject any adjustment. By submitting an adjustment to a
                   risk group, the Offeror is requesting approval by AHCCCS; such approval shall not be automatic. If
                   an initial bid is below the bottom of a rate range, it cannot be adjusted downward by the Offeror in a
                   BFO round.

Capitation Rates Offered after the BFOs: As stated above, AHCCCS may limit the number of BFO rounds.
After the final BFO round is complete, provided it is in the best interest of the State, AHCCCS will cease issuing
BFO requests. At this point, should the Offeror have a risk group without an accepted capitation rate, AHCCCS
shall offer a capitation rate to the Offeror. The capitation rate offered should be somewhere in the bottom half of
the rate range (specific placement to be determined by AHCCCS and its actuaries). Note that all rates offered in
this manner shall be identical for all offerors in the same GSA and risk group.

9. AWARD OF CONTRACT

AHCCCS has determined that the provision of covered services to eligible populations in the GSAs as described
below will stabilize risk sharing. The Offeror must therefore bid on at least one entire GSA in order to be
considered for a contract award. Although AHCCCS encourages Offerors to bid on multiple GSAs, AHCCCS
may limit the number of GSAs awarded to any one Offeror, if deemed in the best interest of the State.

Notwithstanding any other provision of this solicitation, AHCCCS expressly reserves the right to:

                a. Waive any immaterial mistake or informality;
                b. Reject any or all proposals, or portions thereof; and/or
                c. Reissue a Request for Proposal

AHCCCS will not make an award in a single GSA to any single organization that owns or manages more than
one contract, or to two Contractors that utilize the same management service company.

If there are significant compliance issues with a current Contractor, or a Contractor’s contract in a particular GSA
has been previously terminated, AHCCCS retains the right to address that compliance or termination issue on an
individual basis, according to what is deemed in the best interest of the State. A new bid proposal may not be
accepted until it has been determined that the reason for the significant compliance or termination issue has been
resolved and there is a reasonable assurance that it will not recur.
If there are significant compliance issues with a new Offeror’s performance in another state or with another
governmental entity, AHCCCS retains the right to address that compliance or termination issue on an individual
basis according to what is deemed in the best interest of the State.

Subsequent to the award of contracts, in the event of significant non-compliance issues with a Contractor in a
particular GSA, AHCCCS may refer back to the results of the evaluation of this solicitation and select another
Contractor for a particular GSA that is considered to be in the best interest of the State.

A response to this Request for Proposals is an offer to contract with AHCCCS based upon the terms, conditions,
scope of work and specifications of the RFP. All of the terms and conditions of the contract are contained in this
solicitation, solicitation amendments and subsequent contract amendments, if any, signed by the Contracting
Officer. Proposals do not become contracts unless and until they are accepted by the Contracting Officer. The
proposal provided by the Offeror will become part of the contract with AHCCCS. A contract is formed when the
AHCCCS Contracting Officer signs the award page and provides written notice of the award(s) to the successful
Offeror(s), and the Offeror accepts any special provisions to the contract and the final rates awarded. AHCCCS
may also, at its sole option, modify any requirements described herein. All Offerors will be promptly notified of
award.

AHCCCS reserves the right to specify and/or modify the number of contracts to be awarded in any GSA.
AHCCCS anticipates awarding contracts as follows:

GSA#:	County or Counties	Number of Awards
2 4 6 8 10 12 14	Yuma, La Paz Apache, Coconino, Mohave, and Navajo Yavapai Gila, Pinal Pima, Santa Cruz* Maricopa Graham, Greenlee, Cochise	Maximum of 2 Maximum of 2 Maximum of 2 Maximum of 2 Maximum of 5 Maximum of 6 Maximum of 2

Note: *AHCCCS anticipates awarding up to five contracts in the Pima County portion of the Pima/Santa Cruz
GSA. Contracts will be awarded in Santa Cruz County to only two of the five Pima contract awardees.

An existing contractor in Maricopa or Pima County who is not awarded a CYE 09 contract may request to have
its enrollment capped and to continue providing services under the terms and conditions of this new Contract.
AHCCCS may, at its sole option, grant or deny such a request. If AHCCCS approves such an enrollment cap, the
Contractor would continue to serve its existing members but would not receive any new members and their
membership will not be included in the Conversion Group described below. The enrollment cap will not be lifted
during the term of this or any subsequent contract period unless one of the following conditions exists:

                a. Another contractor is terminated and increased member capacity is needed, or
                b. Legislative action creates a sudden and substantial increase in the overall AHCCCS population, or
                c. Extraordinary and unforeseen circumstances make such an action necessary and in the best interest of the State.

If an existing contractor is not awarded a new or capped (as mentioned above) contract, AHCCCS will assign the
membership as follows:

Conversion Group
On June 30, 2008, AHCCCS will identify all members that are currently enrolled in a plan that is exiting any
GSA effective September 30, 2008, and will classify those members as the Conversion Group. The
Conversion Group members will be auto-assigned to select Contractors as described in Attachment G Auto-
Assignment Algorithm.

On July 1, 2008, the Conversion Group will be mailed a letter indicating that the Contractor with which they
are currently enrolled will no longer be available, and will be provided with the name of the Contractor that
they will be assigned to as of October 1, 2008. From July, 1, 2008, to August 31, 2008, and again from
October 1, 2008 to November 30, 2008, the Conversion Group will be provided with an opportunity to change
plans by selecting from the Contractors that have been awarded CYE09 contracts in their GSA.

AHCCCS will provide all Contractors with a potential membership files on July 1, 2008 that contains the
Conversion Group Contractor assignments that will be effective October 1, 2008 as well as any regular Annual
Enrollment Choice plan changes. Contractors will receive additional membership files on or about August 15,
September 1, and September 15, 2008. These additional files will identify the members that have elected to
change Contractors.

Beginning on September 2, 2008, Relinquishing Contractors (Contractors who are exiting a GSA) will
provide electronic files containing member transition information, in the format established by AHCCCS, to
the Receiving Contractors (those Contractors to which Conversion Group members are assigned). This
information exchange must be completed by September 5, 2008.

Based on the importance of continuity of care during the transition period, the Receiving Contractor is
expected to honor the Relinquishing Contractor’s previously issued prior authorizations or waive its own prior
authorization requirements for any previously scheduled outpatient services and/or prescribed pharmaceuticals
until November 30, 2008. The Contractor is also expected to waive any requirement for Conversion Group
members to use the Contractor’s provider network until October 31, 2008. The Receiving Contractor should
apply medical necessity criteria when paying for services.The Contractor will receive an official enrollment
file for October enrollment prior to October 1, 2008. Receiving Contractors are expected to secure an
appropriate network for the membership identified in the transition files in order to address any potential
service gaps by November 30, 2008. Receiving Contractors must attempt to contract with Primary Care
Physicians historically utilized by the transitioning members for both continuity of care and to maintain its
membership.

New Members after Contract Awards
Members who become eligible and enrolled between May 1, 2008 and July 31, 2008 will have the opportunity
to choose from all of the Contractors currently contracted with AHCCCS. AHCCCS will continue to auto
assign members to all Contractors currently contracted with AHCCCS until July 31, 2008. Starting August 1,
2008, new members will only be offered choice of Continuing Contractors (currently an AHCCCS Contractor
in the GSA and awarded a CYE 09 Contract). Members who do not make a choice will be auto assigned to a
Continuing Contractor.

If none of the current Contractors in a GSA are awarded a CYE09 contract, members will have the ability to
choose Contractors in their GSA that are currently contracted with AHCCCS in that GSA. Members that do
not make a choice will be auto assigned to one of the Contractors in their GSA that are currently contracted
with AHCCCS in that GSA.

Members who have chosen or have been assigned to an Exiting Contractor (a Contractor not awarded a CYE
09 contract) between May 1, 2008 and June 30, 2008 will be included in the Conversion Group, assigned to a
new Contractor, and their transition must be managed as indicated in the Conversion Group section.
Members who have chosen or have been assigned to an Exiting Contractor after June 30, 2008, through and
including July 31, 2008 will be auto assigned by the process described in Attachment G Auto-Assignment
Algorithm and included in the October official enrollment file.

Although choice of an Exiting Contractor ends July 31, 2008, there are limited instances (family continuity,
newborn enrollment or 90-day re-enrollment) when assignment to an Exiting Contractor will occur through
September 30, 2008. Members assigned under these circumstances will be moved via the process described in
Attachment G Auto-Assignment Algorithm and included in the October official enrollment file.

All of the members who became eligible and enrolled after contracts have been awarded but before October 1,
2008, that are not transitioned into the Conversion Group, will also be provided with the opportunity to select
any of the Contractors available in their GSA from October 1, 2008 to November 30, 2008. The Contractor is
encouraged to execute contracts with the providers utilized by the transitioning members, in an attempt to
maintain its membership.

Annual Enrollment Choice
AHCCCS will suspend Annual Enrollment Choice for all members who would have been notified of their
AEC opportunity for the months of May, June and July 2008. The affected members will be afforded an
opportunity to choose from the Contractors awarded CYE09 contracts in their GSA starting in August, 2008
for an October 1, 2008 effective date.

10. FEDERAL DEADLINE FOR SIGNING CONTRACT

The Center for Medicare and Medicaid Services (CMS) has imposed strict deadlines for finalization of
contracts in order to qualify for federal financial participation. This contract, and all subsequent amendments,
must be completed and signed by both parties, and must be available for submission to CMS prior to the
beginning date for the contract term (October 1, 2008). All public entity Offerors must ensure that the
approval of this contract is placed on appropriate agendas well in advance to ensure compliance with this
deadline. Any withholding of federal funds caused by the Offeror’s failure to comply with this requirement
shall be borne in full by the Offeror.

11. RFP MILESTONE DATES

The following is the schedule of events regarding the solicitation process. These dates are subject to change
based on the best interest of the State:

Activity	Date
RFP Issued	February 1, 2008
Prospective Offerors Conference and Technical Assistance Session	February 11, 2008 - AM
Information Technology (IT) PMMIS Technical Interface Meeting	February 11, 2008 – PM
Technical Assistance and RFP Questions Due by 5:00 P.M. MST	February 15, 2008
RFP Amendment, if necessary, and Formal Response to Questions	February 29, 2008
Second Set of Technical Assistance and RFP Questions Due Due by 5:00 P.M. MST	March 7, 2008
Second RFP Amendment Issued, if necessary, and Formal Response to Second Set of Questions	March 14, 2008
Proposals Due by 3:00 P.M. MST	March 28, 2008
Contracts Awarded	May 1, 2008
Readiness Reviews Begin	July 1, 2008
New Contracts Effective	October 1, 2008

12. AHCCCS BIDDER’S LIBRARY

The Bidder’s Library contains critical reference material including, but not limited to, AHCCCS policies;
utilization; member data; and performance requirements to assist the Offeror in preparing a thorough and realistic
response to this solicitation. References are made throughout this solicitation to material in the Bidder’s Library
and on the AHCCCS website. Offerors are responsible for reviewing the contents of the Bidder’s Library material
as if they were printed in full herein. All such material is incorporated into the contract by reference. The
Bidder’s Library is located on the AHCCCS website at http://www.azahcccs.gov/Contracting/BidderLib.asp

13. OFFEROR’S INABILITY TO MEET REQUIREMENTS

If a potential offeror cannot meet the minimum capitalization requirements, the performance bond requirements,
or the minimum network standards described herein, AHCCCS requests that the potential offeror not submit a
bid.

Minimum Capitalization Requirements:

The Offeror must meet a minimum capitalization requirement for each GSA bid in order for the bid to be
scored. The capitalization requirement must be met within 30 days after contract award.

Minimum capitalization requirements by GSA are as follows:

Geographic Service Area (GSA)      Capitalization Requirement

Mohave/Coconino/Apache/Navajo $4,400,000
La Paz/Yuma                                         $3,000,000
Maricopa                                               $5,000,000
Pima/Santa Cruz                                   $4,500,000
Cochise/Graham/ Greenlee                 $2,150,000
Pinal/Gila                                               $2,400,000
Yavapai                                                  $1,600,000

New Offerors (any Offeror that is not currently an Acute Care Contractor with AHCCCS): To be
considered for a contract award in a given GSA or group of GSAs, a new Offeror must meet the minimum
capitalization requirements listed above. The capitalization requirement is subject to a $10,000,000 ceiling
regardless of the number of GSAs awarded. This requirement is in addition to the Performance Bond
requirements defined in Section D, Paragraphs 46, Performance Bond or Bond Substitute, and 47, Amount of
Performance Bond, and must be met with cash with no encumbrances, such as a loan subject to repayment.
The capitalization requirement may be applied toward meeting the equity per member requirement (see
Section D, Paragraph 50, Financial Viability Standards) and is intended for use in operations of the Contractor.

Continuing Offerors: Continuing Offerors that are bidding a county or GSA in which they currently have a
contract must meet the equity per member standard (see Section D, Paragraph 50, Financial Viability
Standards) for their current membership. Continuing Offerors that do not meet the equity standard must fund,
through capital contribution, the necessary amount to meet the minimum capitalization requirement.
Continuing Offerors that are bidding a new GSA must provide the additional capitalization for the new GSA
they are bidding. The amount of the required capitalization for continuing Offerors may differ from that for
new Offerors due to size of the continuing Offeror’s current enrollment. Continuing Offerors will not be
required to provide additional capitalization for new GSAs if they currently meet the equity per member
standard with their existing membership and their excess equity is sufficient to cover the proposed additional
members, or they have at least $10,000,000 in equity.

14. CONTENTS OF OFFEROR'S PROPOSAL
All proposals (original and seven copies) shall be organized with strict adherence to the Offeror’s Checklist
(Attachment J) as described in this section and submitted using the forms and specifications provided in this RFP.
All pages of the Offeror's proposal must be numbered sequentially with documents placed in sturdy 3-inch, 3-ring
binders. All responses shall be in 11 point font or larger with borders no less than ½”. Unless otherwise
specified, responses to each submission requirement must be limited to three (3) 8½” x 11” one sided, single
spaced, type written pages. Erasures, interlineations or other modifications in the proposal must be initialed in
original ink by the authorized person signing the offer. A policy, brochure, or reference to a policy or manual
does not constitute an adequate response. AHCCCS will not reimburse the Offeror the cost of proposal
preparation.

It is the responsibility of the Offeror to examine the entire RFP, seek clarification of any requirement that may not
be clear, and check all responses for accuracy before submitting its proposal. The proposal becomes a part of the
contract; thus, what is stated in the proposal may be evaluated either during the proposal evaluation process or
during other reviews. Proposals may not be withdrawn after the published due date and time.

All proposals will become the property of AHCCCS. The Offeror may designate certain information to be
proprietary in nature by typing the word "proprietary" on top of every page for which nondisclosure is requested.
Final determinations of nondisclosure, however, rest with the AHCCCS Director. Regardless of such
determinations, all portions of the Offeror's proposal, even pages that are proprietary, will be provided to CMS.

All proposals shall be organized according to the following major categories:

                I. General Matters
                II. Network
                III. Capitation
                IV. Program
                V. Organization
                VI. Other

Each section shall be separated by a divider and contain all information requested in this solicitation. Numbering
of pages should continue in sequence through each separate section. For example, "Provider Network" would
begin with the page number following the last page number in "Program”. Each section shall begin with a table
of contents.

Proposals that are not submitted in conformance with the guidelines described herein will not be considered.
References to various sections of the RFP document in Section I are intended to be of assistance and are not
intended to represent all requirements. Other possible resources may be found in the Bidder’s Library.

All responses incorporating examples of past performance and/or outcome data must comply with the following
requirements:

            • Incumbents must submit based on their AHCCCS Acute line of business
                • New Offerors currently operating as Managed Care Organizations (MCO), must submit all historical
                  information from the same MCO/line of business

The following specifies the submission requirements.

I. General Matters

See the Offeror’s Checklist (Attachment J) for information to be submitted under this section.

II. Network

The Offeror shall have in place an adequate network of providers capable of meeting contract requirements.
Attachment B lists minimum geographic network requirements by GSA. The following specifies the submission
requirements.

Required Submissions: Network

Network Questions

1. The Offeror must provide the:

                a. Network Attestation Statement and attachments, located in the Bidder’s Library, listing the
                   number of providers by provider type in each community listed within for each GSA bid.

                b. The Offeror must also submit 3 CDs containing the Offeror’s complete network by GSA on the
                   CYE ‘09 RFP Minimum Network Standards Excel Spreadsheet located in the Bidder’s
                   Library.

References: Section D, Paragraph 27, Attachment B; Network Attestation Statement; Minimum Network
Standards Excel Spreadsheet; Minimum Network Standards Instructions

2. The Offeror must submit a Network Development and Management plan. The submission may
   exceed the three (3) page maximum.
   References: Section D, Paragraphs 27, Network Development, and 29, Network Management; ACOM
   415, Provider Network Development and Management Plan Policy

3. Any Offeror that is new to a GSA or is a Continuing Offeror with less than 50,000 members in the
   Maricopa GSA, or 30,000 members in Pima County, or less than 50% of the members in a rural GSA,
   must submit a description of how it will launch a network capable of supporting this minimum
   membership by October 1, 2008. (Current Contractors that are not bidding on a new GSA and have a
   membership higher than those listed above in the GSAs in which they are currently operating, will not
   be evaluated on this Submission Requirement)
   References: Section D, Paragraph 6, Auto Assignment Algorithm, 27, Network Development, and 29,
   Network Management; ACOM 415, Provider Network Development and Management Plan Policy,
   and 416, Provider Information Policy

4. Describe the methodologies and interventions used by the Offeror that are considered to be innovative
   and proactive for reducing unnecessary ER utilization. Include the reason(s) why these are felt to be
   innovative and proactive.
   References: Section D, Paragraph 27, Network Development; ACOM 415, Provider Network
   Information Policy; AMPM Chapter 400.

5. Describe the contents of the initial PCP training offered to providers that are new to the network.
   References: Section D, Paragraph 29, Network Management; ACOM 416, Provider Information Policy;
   AMPM Chapter 400

6. Describe how the organization will communicate with its provider network regarding program standards,
   changes in laws and regulations and changes in subcontract requirements.
   References: Section D, Paragraph, 29, Network Management; ACOM 416, Provider Information Policy

7. Describe the process for accepting and managing provider inquiries, complaints, and requests for
   information that are received outside of the Claim Dispute process.
   References: Section D, Paragraph 29, Network Management

8. Describe how the results obtained through various types of provider and network monitoring (i.e.,
   Provider Relations, Quality Management, Case Management, Grievance System, Medical Management
   etc.) are used to manage and improve the network. Identify how provider issues are communicated
   within the organization.
   References: Section D, Paragraph 27, Network Development, and 29, Network Management; ACOM
   415, Provider Network Development and Management Plan Policy

9. Describe how the organization will monitor the potential for and handle the loss (i.e., contract
   termination, closure or natural disaster) in a GSA of a) hospital/hospital system and/or b) a large
   provider group. The response must address how the Offeror will ensure that members receive
   medically necessary services if such a situation occurs.
   References: Section D, Paragraphs 27, Network Development, and 29, Network Management;
   ACOM 104, Business Continuity and Recovery Plan

10. Describe how feedback (turnover, complaints, survey results etc.) from the contracted network is used to
     drive changes and/or improvements to the Offeror’s Operations.
     References: Section D, Paragraphs 19, Surveys, 27, Network Development, and 29, Network
     Management;

11. Describe the process to identify and reduce the member no-show rate for appointments across the
spectrum of care (e.g. oral heath, physician, transportation, Children’s Rehabilitative Services,
etc.). Describe no-show identification methods, interventions, best practices, member and
provider outreach approaches, and how outcomes of the processes implemented to reduce the noshow
rate are or will be evaluated for effectiveness. Submission requirement can be a maximum
of five (5) pages.
References: Section D, Paragraph 33, Appointment Standards; ACOM 417, Appointment
Availability Monitoring and Reporting Policy

III. Capitation

Capitation is a fixed (per-member) monthly payment to a Contractor for the provision of covered services to
members. It is an actuarially sound amount to cover expected utilization and costs for the individual risk groups
in a risk-sharing, managed care environment. The Offeror must demonstrate that the capitation rates proposed
are actuarially sound. In general terms, this means that the Offeror that is awarded a contract should be able to
keep utilization at or near its proposed levels and should be able to contract for unit costs that average at or near
the amounts shown on the CCFR. This requirement also applies to bids submitted in best and final offer rounds.
Prior Period Coverage (PPC), Delivery Supplement, SOBRA Family Planning, SSDI-TMC and State Only
Transplant rates will be set by the AHCCCS actuaries and not bid by the Contractor. See Section D, Paragraph
53, Compensation, for information regarding risk sharing for the PPC time period and the SSDI-TMC members.
All other risk groups will be subject to competitive bidding.

To facilitate the preparation of capitation proposals, a Data Supplement is provided in the Bidder’s Library. This
data source should not be used as the sole source of information in making decisions concerning the capitation
proposal. Each Offeror is solely responsible for research, preparation and documentation of its capitation
proposal.

Required Submission: Capitation

Capitation

12. Submit a capitation proposal using the AHCCCS bid web tool. Instructions for accessing and using
     the web tool will be issued on or about February 15, 2008. The Offeror must have an actuary who is a
     member of the American Academy of Actuaries certify that the bid submission is actuarially sound.
     This certification is also required with subsequent submissions in Best and Final Offer rounds (if
     applicable). The Offeror must also submit hard copy print outs of the web tool. Refer to Attachment E
     for more details.

     The Offeror should assume that all AHCCCS-covered medical services are included in the capitation
     rates. The Offeror must prepare and submit its capitation proposal assuming a $20,000 deductible
     level for regular reinsurance, for all risk groups, in all GSAs. AHCCCS will provide the reinsurance
     offset amounts via the bid web tool and Section N of the data supplement for each risk group, for each
     GSA. Prior to the contract award AHCCCS will provide a table of per-member per-month reinsurance
     adjustments to be made to capitation rates for the Contractor whose actual deductible level exceeds
     $20,000.

IV. Program

Required Submissions: Program

Program Questions

13. Describe how the Offeror identifies quality improvement opportunities. Describe the process to select
     a performance improvement project, and the process to develop multi-departmental interventions to
     improve care or services. Describe the process for evaluating the effectiveness of the interventions. In
     addition to the three-page submission the Offeror must include a two-page sample Performance
     Improvement methodology for a relevant topic.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900

14. Describe how the results of the Offeror’s monitoring and evaluation of overall performance is
     incorporated into the Quality Management/Quality Improvement Program structure.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900

15. Describe how peer review is utilized by Offeror and incorporated into quality management processes.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900

16. Describe how quality of care and service complaints are identified, researched, resolved and the
     resolution will be communicated to the member.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900

17. Describe the qualifications of the staff that will perform the quality management and quality
     improvement functions for the Offeror. Note if these persons are solely responsible for quality
     management functions.
     References: Section D, Paragraph 16, Staff Requirements and Support Services; AMPM, Chapter 900

18. Describe the process for provisional credentialing, initial credentialing, recredentialing and
     organizational credentialing for all provider types specified in the AMPM. Please include a
     description of the Quality Management Unit and the Medical Director’s role in the Offeror’s process.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900

19. Describe the process utilized to train Offeror’s staff, other than Quality Management staff, regarding
     identification and appropriate referral of quality of care concerns.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900

20. Describe the process utilized to coordinate care or provide additional assistance to members identified
     as having difficulties with accessing care. Include processes for assisting challenging members
     identified through the quality of care process and those members that may be referred by AHCCCS.
     References: Section D, Paragraphs 23, Quality Management (QM), and 24, Medical Management;
     AMPM, Chapters 400, 900, and 1000

21. Describe the Offeror’s experience and commitment to improving quality of care and performance in
     specific measures of health care services, and how this commitment is spread throughout the
     organization.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900.

22. Provide results/rates for any HEDIS or HEDIS-like measure from a state in which the Offeror
     participates in the Medicaid line of business and in which the Offeror has experienced sustained,
     statistically significant improvement within the last three years. Include a minimum of three years of
     results, including numerators and denominators for the measure and statistical significance of change
      (e.g. chi-square test).
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapter 900.

23. Describe how the Offeror gathers and analyzes utilization data. In addition to no more than three
     pages of narrative, the Offeror must include three pages of example utilization reports.
     References: Section D, Paragraph 24, Medical Management (MM); AMPM, Chapter 1000

24. Provide an example of when the Offeror’s analysis of data resulted in changes to medical management
     programs.
     References: Section D, Paragraph 24, Medical Management (MM); AMPM, Chapter 1000

25. Describe the Offeror’s existing or planned disease/chronic care management programs that are
     designed to improve care for members with one or more chronic illnesses.
     References: Section D, Paragraph 24, Medical Management (MM); AMPM, Chapter 1000

26. Describe the staff and processes utilized by the Offeror to conduct concurrent and retrospective review
     of hospital stays.
     References: Section D, Paragraph 24, Medical Management (MM); AMPM, Chapter 1000

27. Describe the staff and processes utilized by the Offeror to review requests for prior authorization.
     References: Section D, Paragraph 24, Medical Management (MM); AMPM, Chapter 1000

28. Describe existing or planned relationships with Medicare plans (MA, PDP or PDP) that will allow for
     coordination of care between Medicare and Medicaid services.
     References: Section D, Paragraphs 10, Scope of Services, and 60, Medicare Services and Cost
     Sharing; Section H, Evaluation Factors and Selection Process

29. Describe how the Offeror identifies members needing assistance navigating the health care delivery
     system. Describe what assistance is provided, and how the effectiveness of the assistance is evaluated.
     References: Section D, Paragraphs 11, Special Health Care Needs, 23, Quality Management (QM),
     and 24, Medical Management (MM); AMPM, Chapters 900 and 1000

30. Describe planned health promotion, outreach, and monitoring of adult preventive/early detection
     services including well woman, well man, adult immunizations and chronic disease.
     References: Section D, Paragraph 10, Scope of Services; AMPM, Chapters 400, 900 and 1000

31. Describe planned health promotion, outreach, and monitoring for Early and Periodic Screening,
     Diagnosis and Treatment (EPSDT) and explain how the EPSDT program is integrated within the
     organization. Describe how EPSDT Tracking Forms are utilized to identify specific member needs
     such as AzEIP referral, PEDS tool, behavioral health, oral health, and CRS conditions.
     References: Section D, Paragraph 10, Scope of Services - EPSDT; AMPM, Chapters 400 and 900

32. Describe planned outreach and care coordination processes for populations of children with special
     health care needs and other hard-to-reach populations such as those identified through the use of the
     PEDS tool and eligible or enrolled in the AzEIP, CRS and/or a Regional Behavioral Health Authority
      (RBHA).
     References: Section D, Paragraph 11, Special Health Care Needs; AMPM, Chapters 400 and 900

33. Describe planned health promotion, outreach, and monitoring strategies for maternity care, including
     post partum care. Include a description of how care will be coordinated for physical and behavioral
     care needs. Describe process to increase provider participation in Baby Arizona.
     References: Section D, Paragraphs 10, Scope of Services, and 30, Primary Care Provider Standards;
     AMPM, Chapters 400, 900 and 1000

34. Describe how intervention activities to improve access to adult preventive health/early detection,
     EPSDT and maternity care will be evaluated for effectiveness. Describe what the Offeror will do if
     interventions are not effective.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapters 400 and 900

35. Describe the Offeror’s EPSDT and Maternal (MCH) organizational structure. Describe the staff
     functions within the organizational structure to ensure care needs are met. The Offeror must note if
     staff persons are dedicated solely to EPSDT and/or MCH functions.
     References: Section D, Paragraph 16, Staff Requirements and Support Services; AMPM, Chapters
     400 and 900

36. Describe strategies, both implemented and planned, to improve utilization of EPSDT oral health
     services to ensure increased member participation beginning at age 1 and continuing through age 20.
     References: Section D, Paragraph 10, Scope of Services; AMPM, Chapter 400

37. Describe how members are educated on the availability of family planning services and how to access
     those services. Describe the process to be used to facilitate access to primary care services (a noncovered
     benefit) by SOBRA Family Planning Extension participants, as well as no- or low-cost family
     planning services when these members lose eligibility.
     References: Section D, Paragraphs 10, Scope of Services, and 32, Referral Management Procedures
     and Standards; AMPM, Chapter 400; AHCCCS 1115 Waiver, Special Terms and Conditions #39

38. Describe Offeror’s participation and/or planned participation in the Arizona Quality Improvement
     Organization’s initiatives such as, but not limited to: diabetes management, hospital quality
     improvement, and activities/initiatives of other Arizona community organizations.
     References: Section D, Paragraph 23, Quality Management (QM); AMPM, Chapters 400 and 900

39. Describe how the Offeror identifies members with Behavioral Health needs.
     References: Section D, Paragraph 12, Behavioral Health Services; AMPM, Chapters 400, 500, 900
     and 1000

40. Describe the Offeror’s process for referring members with behavioral health care needs to the RBHA,
     and for assisting members in accessing services in the RBHA system.
     References: Section D, Paragraph 12, Behavioral Health Services; AMPM, Chapters 400, 500, 900
     and 1000

41. Describe the Offeror’s process for coordinating care between the RBHA/treating provider and the
     PCP.
     References: Section D, Paragraph 12, Behavioral Health Services; AMPM, Chapters 400, 500, 900
     and 1000

42. Describe how PCPs are educated on their ability to treat attention deficit/hyperactivity disorder
      (ADHD), depression and anxiety behavioral health conditions, and monitors PCPs to ensure
     appropriate care is provided.
     References: Section D, Paragraph 12, Behavioral Health Services; AMPM, Chapters 400, 500, and
     900

43. Essay – Describe how the Offeror envisions Medical Homes to be developed and integrated as a
service for members with special health care needs and for members with chronic illnesses who
would benefit from the assistance a Medical Home would provide. Please include in the
description what services would be provided and by what type of staff (provider or health plan),
how providers would be involved in and participate in the Medical Home model, and how
reimbursement would be modified to appropriately reimburse for a true Medical Home.
Consideration should also be given to how outcomes of the Medical Home, including utilization
patterns, would be evaluated.

–Please include a description of how Offeror will staff/resource this project if
                selected as the successful Offeror, with additional funding anticipated to be paid
                until the project is completed as determined by AHCCCS (prorated if less than a
                complete year).

–The response submitted for this submission requirement will not be used to
                consider contract award for the RFP. The response will be evaluated to
                determine the potential award of additional administrative funds for one to two
                Offerors awarded contracts in this RFP. The AHCCCS Administration reserves
                the right to request additional information before making final awards in the
                development of a Medical Home model program.
                References: Section D Paragraph 75, Pending Legislative/Other Issues; AMPM Chapters 400,
                900 and 1000

V. Organization

Organization refers to the Offeror's ability to perform the administrative tasks necessary to support the
requirements identified throughout this RFP. The following identifies the submission requirements.

Required Submissions: Organization

Organization Questions

44. Submit resumes of key personnel. Include information on how long the personnel have been in these
     positions. If personnel are not in place, submit job descriptions outlining the minimum qualifications of
     the position(s). Each resume or job description is limited to three pages.
     References: Section D, Paragraph 16, Staff Requirements and Support Services

45. Submit an organizational chart down to the supervisor level that includes the number of employees
     under the supervisor for the following functional areas: Member Services, Provider Services, Medical
     Management, Grievance System, Finance, Claims, Encounters, Information Systems, EPSDT and
     Quality Management.

–The chart must identify the functions that have been subcontracted in a Delegated
                Agreement, Management Service Agreement and or Service Level Agreement.

–Provide the number of full-time equivalent employees who are or will be devoted to
                the program by functional area.
                References: Section D, Paragraphs 16, Staff Requirements and Support Services, and 37,
                Subcontracts

46. Describe the Offeror’s initial and ongoing employee training program. In addition to the three page
     submission the Offeror must include a syllabus of the Offeror’s initial and ongoing trainings.
     References: Section D, Paragraph 16, Staff Requirements and Support Services

47. Describe the Offeror’s experience as a managed care contractor in a publicly funded program and or as a
     managed care organization in a non-publicly funded program. Include a table showing current Medicare
     and Medicaid risk contracts and other risk contracts to include date started and enrollees by risk group.
     In addition, include a table of Medicare and Medicaid contracts discontinued within the past five years
      (January 1, 2003) and the reason(s) for the termination.

48. Please provide the information listed below for a minimum of three governmental entities with
which the Offeror or a related organization (e.g. parent company) holds a managed care risk
agreement. If the Offeror does not have three separate contracts with governmental entities, the
Offeror must specify this fact and submit the information below for all governmental entities with
which it holds a contract.

–Contact information must include: name of governmental entity, type of contract
                and relevant contract number(s), contact person, telephone number and address.

–Submissions must include, and identify, at least one reference (other than
                Arizona) for an entity with which the Offeror has received a performance
                sanction (does not have to be monetary). Not applicable if no sanctions have
                been levied.

49. Describe the Offeror’s process to select and monitor subcontracted entities (Delegated Agreement,
     Management Service Agreement and or Service Level Agreement) providing services in any or all of
     the following functional areas: health plan Administration, Member Services, Provider Services,
     Medical Management, Grievance System, Finance, Claims, Encounters, Information Systems, EPSDT
     and Quality Management. Describe the authority the Offeror’s CEO (as identified on the Organization
     Chart, not the CEO of the subcontractor) has to effectuate change over each subcontracted functional
     area.
     References: Section D, Paragraph 37, Subcontracting

50. Describe any sanctions levied against the Offeror, its parent corporation or any legally related
     corporate entity since January 1, 2005 that have been imposed by AHCCCS, Medicaid programs in
     other states, Medicare or any state insurance regulatory body. Include the description of the sanction,
     the specific reason for the sanction and the timeline to resolve or correct the deficiency. Sanctions are
     defined as any monetary and non-monetary punitive actions taken by regulatory bodies.

51. Describe the Offeror’s information services organization, and the hardware and software that will
     support the AHCCCS line of business, including a diagram of the information system and data
     processing flow with all existing or planned interfaces. If not a current Contractor, the Offeror must
     include a detailed plan for ensuring that all IS requirements will be met prior to the contract start date.
      (Submission requirement not to exceed 10 pages, plus flowcharts)
     References: Section D, Paragraphs 38, Claims Payment/Health Information System, and 64, Data
     Exchange Requirements

52. Describe the Offeror’s information system change order or software modification processes, the date
     of the last major version update, and indicate if there is a planned system conversion within the
     contract period (five years). If yes, indicate which subsystems will be affected and describe the
     planning and system implementation process.

     System conversion is defined as a significant modification to the managed care system used
     by the Offeror. Significant modification would include migration from one software product
     or vendor to another, or a major version upgrade to the product from its current vendor. This
     would also include any significant changes or enhancements in functionality to the system for
     enrollment of members, maintenance of member benefits, premium/capitation payment
     posting, provider contracts, prior authorization of claims, and payment/encounter reporting.
     References: Section D, Paragraphs 38, Claims Payment/Health Information System, and 64, Data
     Exchange Requirements

53. When was the last IT-specific external operational audit or external performance review of the
     Offeror’s system/division? Provide the contact information for the external organization if applicable.
     References: Section D, Paragraphs 38, Claims Payment/Health Information System, and 64, Data
     Exchange Requirements

54. Describe Offeror’s HIPAA version migration plans, ability to support future HIPAA mandates, and
     the system’s ability to support E-health connectivity (i.e., electronic health records)
     References: Section D, Paragraphs 38, Claims Payment/Health Information System, and 64, Data
     Exchange Requirements, and 74, Technology Advancements

55. Indicate how many years the Offeror’s IT organization or software vendor has supported the
     information system, and whether or the not the software version currently operated by the Offeror is
     supported by the software vendor. If Offeror’s software is vendor supported, include vendor name(s),
     address, contact person and version(s) being used.
     References: Section D, Paragraphs 38, Claims Payment/Health Information System, and 64, Data
     Exchange Requirements

56. Provide a detailed flowchart and narrative description of the claims adjudication process, addressing both
     paper and electronic claims submissions. Include processing timeliness standards, coordination of benefit
     activities and how claim inquiries are handled. The submission requirement should not exceed three
     pages of narrative and an additional three pages of flowcharts.
     References: Section D, Paragraphs 38, Claims Payment/Health Information System, and 58,
     Coordination of Benefits

57. Provide a description of the monitoring process for accurate and timely claim adjudication and how
     identified deficiencies are resolved.
     References: Section D, Paragraph 38, Claims Payment/Health Information System

58. Provide a description of the clinical edits and data related edits included in the claims adjudication
     process.
     References: Section D, Paragraph 38, Claims Payment/Health Information System

59. Describe the Offeror’s Corporate Compliance Program.
     References: Section D, Paragraph 62, Corporate Compliance

60. Describe the Compliance Officer’s level of authority and reporting relationships.
     References: Section D, Paragraph 62, Corporate Compliance

61. Submit a description of the Offeror’s encounter submissions process including, but not limited to, how
     accuracy, timeliness and completeness are ensured and the remediation process when AHCCCS
     standards are not met.
     References: Section D, Paragraph 65, Encounter Data Reporting; Encounter Reporting User Manual

62. Describe the Member Grievance process from identification to resolution. Include the communication
     process with other departments, internal benchmarks for timely resolution and average time of
     resolution.
     References: Section D, Paragraph 26, Grievance System; Attachment H(1); ACOM Enrollee
     Grievance Policy

63. Describe how the organization monitors the operational effectiveness of the Member Services
     Department.
     References: Section D, Paragraph 25, Administrative Performance Standards

64. Describe the Offeror’s member orientation and on-going education regarding how to access benefits.
     References: Section D, Paragraphs 8, Mainstreaming of AHCCCS Members, 18, Member Information,
     20, Cultural Competency; ACOM 404, Member Information Policy

65. Describe how feedback (disenrollment, complaints, survey results etc.) from members is used to drive
     changes and/or improvements to the Offeror’s operations.
     References: Section D, Paragraph 26, Grievance System; Attachments H(1), Enrollee Grievance System
     Standards and Policy; ACOM, 406 Enrollee Grievance Policy

66. Provide a flowchart and written description of the Offeror’s grievance system. At a minimum, the
     description should include the member grievance and appeal process, and the provider and
     subcontractor claim dispute process. The submission requirement should not excced five pages of
     narrative with a maximum of three pages of flowcharts.
     References: Section D, Paragraph 26, Grievance System; Attachments H(1), Enrollee Grievance System
     Standards and Policy, and H(2), Provider Claim Dispute Standards and Policy

67. Describe how data resulting from the grievance system is used to improve the operational
     performance of the Offeror.
     References: Section D, Paragraph 26, Grievance System; Attachments H(1), Enrollee Grievance System
     Standards and Policy, and H(2), Provider Claim Dispute Standards and Policy

68. Submit the Offeror’s plan for meeting the Performance Bond or Bond Substitute requirement
     including the type of bond to be posted, source of funding and timeline for meeting the requirement.
     References: Section D, Paragraphs 46, Performance Bond or Bond Substitute, and 47, Amount of
     Performance Bond

69. Submit a plan for meeting the minimum capitalization requirement.
     References: Section I, Paragraph 13, Minimum Capitalization Requirements

70. Provide the Offeror’s two most recent audited financial statements, including enrollment and member
     month amounts. Include the parent company’s two most recent audited statements as well, if
     applicable. There is no page limit on this requirement. Current Acute Care Contractors who have met
     this requirement through deliverable submission do not need to resubmit.

                The Offeror refers to the separate corporation established for the purposes of this contract. If no
                separate corporation exists, the Offeror should submit audited financial statements for the line of
                business most like the services provided under this contract. If no other financial information is
                available, AHCCCS will accept the Offeror’s corporate financial statement, with an explanation
                of why other data is not available.

     References: AHCCCS Reporting Guide for Acute Health Care Contractors

71. Provide the organization’s most recent quarterly financial statements, including year-to-date
     information where applicable and including enrollment and member month amounts. There is no page
     limit on this requirement. Current Acute Care Contractors who have met this requirement through
     deliverable submission do not need to resubmit.
     References: AHCCCS Reporting Guide for Acute Health Care Contractors

72. Submit prospective time period financial forecasts by GSA and statewide totals for the first three years
     of the contract starting with October 1, 2008, including a balance sheet and a statement of revenues,
     expenses and changes in equity in at least the level of detail specified for annual audited financial
     statements as outlined in the AHCCCS Reporting Guide for Acute Health Care Contractors. Balance
     sheet and changes in equity statements should be statewide. Income statements should be by GSA and
     statewide. Include all assumptions used for the forecasts, including enrollment and member months.
     There is no page limit to this requirement. For the purposes of this question, “Statewide” should be
     understood to mean all of the GSAs for which the Offeror is submitting a bid combined.
     References: AHCCCS Reporting Guide for Acute Health Care Contractors

73. Submit financial viability calculations for the three-year financial projections.
     References: Section D, Paragraph 50, Financial Viability Standards; AHCCCS Reporting Guide for
     Acute Health Care Contractors

74. Describe the Offeror’s process for monitoring the appropriateness of the Total Medical Claims
     liability including the frequency of internal and external reviews; the individuals or entity that will
     conduct the review; and the method for necessary adjustments resulting from such reviews.
     References: AHCCCS Reporting Guide for Acute Health Care Contractors

75. Describe the Offeror’s methodology for recording reinsurance revenue and reinsurance receivables
     and the process for monitoring the appropriateness of reinsurance revenue and reinsurance
     receivables. The description should include the frequency of review and adjustment.
     References: Section D, Paragraph 57, Reinsurance; AHCCCS Reporting Guide for Acute Health Care
     Contractors

VI. Other

This submission requirement will not be scored or used to determine contract awards for AHCCCS Acute or
KidsCare business pursuant to this request for proposals.

Required Submissions: Other

Other Question

76. As described in Section D, Paragraph 75, KidsShare is a health insurance program being considered in
     the 2008 Legislative Session. Should the program be enacted, it is currently structured as follows:

                Program Design:
                                • A full risk program for children only (under 19 years of age)
                                • AHCCCS would set a capitation rate range; Offerors awarded contracts under this RFP will
                                   be afforded an opportunity to bid a capitation rate and potentially be offered a KidsShare
                                   contract.
                                • Benefit would be designed based on an affordable premium

                Eligibility Criteria including but not limited to:
                                • Resident of Arizona, citizen of the US, or a legal resident
                                • Family income above 200% not to exceed 350% of the Federal Poverty Level
                                • Parent/guardian employer does not offer insurance, or coverage is not extended to dependents
                                • Employer sponsored coverage or private commercial coverage is unaffordable for the family,
                                   i.e. greater than 10% of the family income or exceeding 150% of the premium(s) for KidsShare.
                                • Child or family member has preexisting conditions that precludes coverage under commercial coverage.

                Eligibility and Enrollment:
                                • AHCCCS would determine eligibility
                                • Family would choose a Contractor

                Please indicate if Offeror is interested in participating in this program. Identify any additional issues
                for consideration in the development or design of the program. Response must be limited to one page.

[END OF SECTION I]

SECTION J: LIST OF ATTACHMENTS

Attachment A: Minimum Subcontract Provisions
Attachment B: Geographic Service Area; Minimum Network Requirements
Attachment C: RESERVED
Attachment D: Sample Letter of Intent: Network Submission Requirements
Attachment E: Instructions for Preparing Capitation Proposal
Attachment F: Periodic Reporting Requirements
Attachment G: Auto-Assignment Algorithm
Attachment H: Grievance System Standards and Policy
Attachment I: RESERVED
Attachment J: Offeror’s Checklist
Attachment K: Cost Sharing Copayments

ATTACHMENT A: MINIMUM SUBCONTRACT PROVISIONS

For the sole purpose of this Attachment, the following definitions apply:

“Subcontract” means any contract between the Contractor and a third party for the performance of any or all
services or requirements specified under the Contractor’s contract with AHCCCS.

“Subcontractor” means any third party with a contract with the Contractor for the provision of any or all
services or requirements specified under the Contractor’s contract with AHCCCS.

Subcontractors who provide services under the AHCCCS ALTCS and or the Acute Care Program must
comply with the following applicable rules and statutes:

            • Rules for the ALTCS are found in Arizona Administrative Code (AAC) Title 9, Chapter 28.
                AHCCCS statutes for long term care are generally found in Arizona Revised Statue (ARS) 36,
                Chapter 29, Article 2.

            • Rules for the Acute Care Program are found in AAC Title 9, Chapter 22. AHCCCS statutes for the
                Acute Care Program are generally found in ARS 36, Chapter 29, Article 1. Rules for the KidsCare
                Program are found in AAC Title 9, Chapter 31 and the statutes for KidsCare Program may be found in
                ARS 36, Chapter 29, Article 4.

All statutes, rules and regulations cited in this attachment are listed for reference purposes only and are not
intended to be all inclusive.

[The following provisions must be included verbatim in every contract.]

1. ASSIGNMENT AND DELEGATION OF RIGHTS AND RESPONSIBILITIES

No payment due the Subcontractor under this subcontract may be assigned without the prior approval of the
Contractor. No assignment or delegation of the duties of this subcontract shall be valid unless prior written
approval is received from the Contractor. (AAC R2-7-305)

2. AWARDS OF OTHER SUBCONTRACTS

AHCCCS and/or the Contractor may undertake or award other contracts for additional or related work to the
work performed by the Subcontractor and the Subcontractor shall fully cooperate with such other contractors,
subcontractors or state employees. The Subcontractor shall not commit or permit any act which will interfere
with the performance of work by any other contractor, subcontractor or state employee. (AAC R2-7-308)

3. CERTIFICATION OF COMPLIANCE – ANTI-KICKBACK AND LABORATORY TESTING

By signing this subcontract, the Subcontractor certifies that it has not engaged in any violation of the Medicare
Anti-Kickback statute (42 USC §§1320a-7b) or the “Stark I” and “Stark II” laws governing related-entity
referrals (PL 101-239 and PL 101-432) and compensation there from. If the Subcontractor provides laboratory
testing, it certifies that it has complied with 42 CFR §411.361 and has sent to AHCCCS simultaneous copies of
the information required by that rule to be sent to the Centers for Medicare and Medicaid Services. (42 USC
§§1320a-7b; PL 101-239 and PL 101-432; 42 CFR §411.361)

4. CERTIFICATION OF TRUTHFULNESS OF REPRESENTATION

By signing this subcontract, the Subcontractor certifies that all representations set forth herein are true to the best
of its knowledge.

5. CLINICAL LABORATORY IMPROVEMENT AMENDMENTS OF 1988

The Clinical Laboratory Improvement Amendment (CLIA) of 1988 requires laboratories and other facilities that
test human specimens to obtain either a CLIA Waiver or CLIA Certificate in order to obtain reimbursement from
the Medicare and Medicaid (AHCCCS) programs. In addition, they must meet all the requirements of 42 CFR
493, Subpart A.

To comply with these requirements, AHCCCS requires all clinical laboratories to provide verification of CLIA
Licensure or Certificate of Waiver during the provider registration process. Failure to do so shall result in either a
termination of an active provider ID number or denial of initial registration. These requirements apply to all
clinical laboratories.

Pass-through billing or other similar activities with the intent of avoiding the above requirements are prohibited.
The Contractor may not reimburse providers who do not comply with the above requirements (CLIA of 1988; 42
CFR 493, Subpart A).

6. COMPLIANCE WITH AHCCCS RULES RELATING TO AUDIT AND INSPECTION

The Subcontractor shall comply with all applicable AHCCCS Rules and Audit Guide relating to the audit of the
Subcontractor's records and the inspection of the Subcontractor's facilities. If the Subcontractor is an inpatient
facility, the Subcontractor shall file uniform reports and Title XVIII and Title XIX cost reports with AHCCCS
(ARS 41-2548; 45 CFR 74.48 (d)).

7. COMPLIANCE WITH LAWS AND OTHER REQUIREMENTS

The Subcontractor shall comply with all federal, State and local laws, rules, regulations, standards and executive
orders governing performance of duties under this subcontract, without limitation to those designated within this
subcontract [42 CFR 434.70 and 42 CFR 438.6(l)].

8. CONFIDENTIALITY REQUIREMENT

Confidential information shall be safeguarded pursuant to 42 CFR Part 431, Subpart F, ARS §36-107, 36-2932,
41-1959 and 46-135, AHCCCS Rules and the Health Insurance Portability and Accountability Act (CFR 164).

9. CONFLICT IN INTERPRETATION OF PROVISIONS

In the event of any conflict in interpretation between provisions of this subcontract and the AHCCCS Minimum
Subcontract Provisions, the latter shall take precedence.

10. CONTRACT CLAIMS AND DISPUTES

Contract claims and disputes shall be adjudicated in accordance with AHCCCS Rules.

11. ENCOUNTER DATA REQUIREMENT

If the Subcontractor does not bill the Contractor (e.g., Subcontractor is capitated), the Subcontractor shall submit
encounter data to the Contractor in a form acceptable to AHCCCS.

12. EVALUATION OF QUALITY, APPROPRIATENESS, OR TIMELINESS OF SERVICES

AHCCCS or the U.S. Department of Health and Human Services may evaluate, through inspection or other
means, the quality, appropriateness or timeliness of services performed under this subcontract.

13. FRAUD AND ABUSE

If the Subcontractor discovers, or is made aware, that an incident of suspected fraud or abuse has occurred, the
Subcontractor shall report the incident to the prime Contractor as well as to AHCCCS, Office of Program
Integrity. All incidents of potential fraud should be reported to AHCCCS, Office of the Director, Office of
Program Integrity.

14. GENERAL INDEMNIFICATION

The parties to this contract agree that AHCCCS shall be indemnified and held harmless by the Contractor and
Subcontractor for the vicarious liability of AHCCCS as a result of entering into this contract. However, the
parties further agree that AHCCCS shall be responsible for its own negligence. Each party to this contract is
responsible for its own negligence.

15. INSURANCE

[This provision applies only if the Subcontractor provides services directly to AHCCCS members]

The Subcontractor shall maintain for the duration of this subcontract a policy or policies of professional liability
insurance, comprehensive general liability insurance and automobile liability insurance in amounts that meet
Contractor’s requirements. The Subcontractor agrees that any insurance protection required by this subcontract,
or otherwise obtained by the Subcontractor, shall not limit the responsibility of Subcontractor to indemnify, keep
and save harmless and defend the State and AHCCCS, their agents, officers and employees as provided herein.
Furthermore, the Subcontractor shall be fully responsible for all tax obligations, Worker's Compensation
Insurance, and all other applicable insurance coverage, for itself and its employees, and AHCCCS shall have no
responsibility or liability for any such taxes or insurance coverage. (45 CFR Part 74) The requirement for
Worker’s Compensation Insurance does not apply when a Subcontractor is exempt under ARS 23-901, and
when such Subcontractor executes the appropriate waiver (Sole Proprietor/Independent Contractor) form.

16. LIMITATIONS ON BILLING AND COLLECTION PRACTICES

Except as provided in federal and state law and regulations, the Subcontractor shall not bill, or attempt to collect
payment from a person who was AHCCCS eligible at the time the covered service(s) were rendered, or from the
financially responsible relative or representative for covered services that were paid or could have been paid by
the System.

17. MAINTENANCE OF REQUIREMENTS TO DO BUSINESS AND PROVIDE SERVICES

The Subcontractor shall be registered with AHCCCS and shall obtain and maintain all licenses, permits and
authority necessary to do business and render service under this subcontract and, where applicable, shall comply
with all laws regarding safety, unemployment insurance, disability insurance and worker's compensation.

18. NON-DISCRIMINATION REQUIREMENTS

The Subcontractor shall comply with State Executive Order No. 99-4, which mandates that all persons,
regardless of race, color, religion, gender, national origin or political affiliation, shall have equal access to
employment opportunities, and all other applicable Federal and state laws, rules and regulations, including the
Americans with Disabilities Act and Title VI. The Subcontractor shall take positive action to ensure that
applicants for employment, employees, and persons to whom it provides service are not discriminated against
due to race, creed, color, religion, sex, national origin or disability. (Federal regulations, State Executive order
# 99-4)

19. PRIOR AUTHORIZATION AND UTILIZATION MANAGEMENT

The Contractor and Subcontractor shall develop, maintain and use a system for Prior Authorization and
Utilization Review that is consistent with AHCCCS Rules and the Contractor’s policies.

20. RECORDS RETENTION

The Subcontractor shall maintain books and records relating to covered services and expenditures including
reports to AHCCCS and working papers used in the preparation of reports to AHCCCS. The Subcontractor shall
comply with all specifications for record keeping established by AHCCCS. All books and records shall be
maintained to the extent and in such detail as required by AHCCCS Rules and policies. Records shall include
but not be limited to financial statements, records relating to the quality of care, medical records, dental records,
prescription files and other records specified by AHCCCS.

The Subcontractor agrees to make available at its office at all reasonable times during the term of this contract
and the period set forth in the following paragraphs, any of its records for inspection, audit or reproduction by any
authorized representative of AHCCCS, State or Federal government.

The Subcontractor shall preserve and make available all records for a period of five years from the date of final
payment under this contract unless a longer period of time is required by law.

If this contract is completely or partially terminated, the records relating to the work terminated shall be preserved
and made available for a period of five years from the date of any such termination. Records which relate to
grievances, disputes, litigation or the settlement of claims arising out of the performance of this contract, or costs
and expenses of this contract to which exception has been taken by AHCCCS, shall be retained by the
Subcontractor for a period of five years after the date of final disposition or resolution thereof unless a longer
period of time is required by law. (45 CFR 74.53; 42 CFR 431.17; ARS 41-2548)

21. SEVERABILITY

If any provision of these standard subcontract terms and conditions is held invalid or unenforceable, the
remaining provisions shall continue valid and enforceable to the full extent permitted by law.

22. SUBJECTION OF SUBCONTRACT

The terms of this subcontract shall be subject to the applicable material terms and conditions of the contract
existing between the Contractor and AHCCCS for the provision of covered services.

23. TERMINATION OF SUBCONTRACT

AHCCCS may, by written notice to the Subcontractor, terminate this subcontract if it is found, after notice and
hearing by the State, that gratuities in the form of entertainment, gifts, or otherwise were offered or given by the
Subcontractor, or any agent or representative of the Subcontractor, to any officer or employee of the State with a
view towards securing a contract or securing favorable treatment with respect to the awarding, amending or the
making of any determinations with respect to the performance of the Subcontractor; provided, that the existence
of the facts upon which the state makes such findings shall be in issue and may be reviewed in any competent
court. If the subcontract is terminated under this section, unless the Contractor is a governmental agency,
instrumentality or subdivision thereof, AHCCCS shall be entitled to a penalty, in addition to any other damages
to which it may be entitled by law, and to exemplary damages in the amount of three times the cost incurred by
the Subcontractor in providing any such gratuities to any such officer or employee. (AAC R2-5-501; ARS 41-
2616 C.; 42 CFR 434.6, a. (6))

24. VOIDABILITY OF SUBCONTRACT

This subcontract is voidable and subject to immediate termination by AHCCCS upon the Subcontractor
becoming insolvent or filing proceedings in bankruptcy or reorganization under the United States Code, or upon
assignment or delegation of the subcontract without AHCCCS’s prior written approval.

25. WARRANTY OF SERVICES

The Subcontractor, by execution of this subcontract, warrants that it has the ability, authority, skill, expertise and
capacity to perform the services specified in this contract.

26. OFF-SHORE PERFORMANCE OF WORK PROHIBITED

Due to security and identity protection concerns, direct services under this contract shall be performed within the
borders of the United States. Any services that are described in the specifications or scope of work that directly
serve the State of Arizona or its clients and may involve access to secure or sensitive data or personal client data
or development or modification of software for the State shall be performed within the borders of the United
States. Unless specifically stated otherwise in specifications, this definition does not apply to indirect or
“overhead” services, redundant back-up services or services that are incidental to the performance of the contract.
This provision applies to work performed by subcontractors at all tiers.

27. FEDERAL IMMIGRATION AND NATIONALITY ACT

The Subcontractor shall comply with all federal, state and local immigration laws and regulations relating to the
immigration status of their employees during the term of the contract. Further, the Subcontractor shall flow down
this requirement to all subcontractors utilized during the term of the contract. The State shall retain the right to
perform random audits of Contractor and subcontractor records or to inspect papers of any employee thereof to
ensure compliance. Should the State determine that the Contractor and/or any subcontractors be found
noncompliant, the State may pursue all remedies allowed by law, including, but not limited to; suspension of
work, termination of the contract for default and suspension and/or debarment of the Contractor.

ATTACHMENT B: MINIMUM NETWORK STANDARDS (By Geographic Service Area)

INSTRUCTIONS:

Contractors shall have in place an adequate network of providers capable of meeting contract requirements. The
information that follows describes the minimum network requirements by Geographic Service Area (GSA).

In some GSAs there are required service sites located outside of the geographical boundary of a GSA. The
reason for this relates to practical access to care. In certain instances, a member must travel a much greater
distance to receive services within their assigned GSA, than if the member were not allowed to receive services in
an adjoining Border Community.

Split zip codes occur in some counties. Split zip codes are those which straddle two different counties.
Enrollment for members residing in these zip codes is based upon the county and GSA to which the entire zip
code has been assigned by AHCCCS. The Contractor shall be responsible for providing services to members
residing in the entire zip code that is assigned to the GSA for which the Contractor has agreed to provide services.
The split zip codes GSA assignments are as follows:

ZIP CODE	SPLIT BETWEEN THESE COUNTIES	COUNTY ASSIGNED TO	ASSIGNED GSA
85220	Pinal and Maricopa	Maricopa	12
85242	Pinal and Maricopa	Maricopa	12
85292	Gila and Pinal	Gila	12
85342	Yavapai and Maricopa	Maricopa	12
85358	Yavapai and Maricopa	Maricopa	12
85390	Yavapai and Maricopa	Maricopa	12
85643	Graham and Cochise	Cochise	14
85645	Pima and Santa Cruz	Santa Cruz	10
85943	Apache and Navajo	Navajo	4
86336	Coconino and Yavapai	Yavapai	6
86351	Coconino and Yavapai	Coconino	4
86434	Mohave and Yavapai	Yavapai	6
86340	Coconino and Yavapai	Yavapai	6

If outpatient specialty services (OB, family planning, and pediatrics) are not included in the primary care provider
contract, at least one subcontract is required for each of these specialties in the service sites specified.

In Tucson (GSA 10) and Metropolitan Phoenix (GSA 12), the Contractor must have a network that is able to
provide PCP, dental and pharmacy services so that members do not need to travel more than 5 miles from their
residence. The Contractor must also obtain at least one hospital contract in each service district listed on the
Hospitals in Phoenix and Tucson Metropolitan area pages within this section, respectively. Metropolitan
Phoenix is further defined on the Minimum Network Standard page specific to GSA # 12.

At a minimum, the Contractor shall have contracts with physicians with admitting and treatment privileges at
each hospital in its network.

For the remaining GSAs and areas not included in the Phoenix or Tucson Metropolitan Areas, the Contractor is
required to obtain contracts with Physician(s) with admission and treatment privileges in the communities
identified under Hospitals on the Minimum Network Standard page specific to each GSA. The Contractor must
have a network that is able to provide PCP, dental and pharmacy services in each of the communities identified
on the Minimum Network Standard Page specific to each GSA.

Provider categories required at various service delivery sites included in the Service Area Minimum Network
Standards are indicated as follows:

H Hospitals
P Primary Care Providers (physicians, certified nurse practitioners and physician assistants)
D Dentists
Ph Pharmacies

HOSPITALS IN PHOENIX METROPOLITAIN AREA (By service district, by zip code)

DISTRICT 1

85006 Banner Good Samaritan Medical Center
85281 St. Luke’s Medical Center
85008 Maricopa Medical Center
85013 St. Joseph’s Hospital & Medical Center
85020 John C. Lincoln Hospital – North Mountain

DISTRICT 2

85015 Phoenix Baptist Hospital & Medical Center
85027 John C. Lincoln Hospital – Deer Valley
85037 Banner Estrella Medical Center
85306 Banner Thunderbird Medical Center
85308 Arrowhead Community Hospital & Medical Center
85338 West Valley Hospital
85351 Walter O. Boswell Memorial Hospital
85375 Del E. Webb Memorial Hospital
85031 Maryvale Hospital Medical Center

DISTRICT 3

85031 Paradise Valley Hospital
85054 Mayo Clinic Hospital
85251 Scottsdale Healthcare – Osborn
85261 Scottsdale Healthcare – Shea
85255 Scottsdale Healthcare – Thompson Peak

DISTRICT 4

85201 Mesa General Hospital Medical Center
85201 Mesa Lutheran Hospital
85202 Banner Desert Medical Center
85206 Valley Lutheran Hospital
85224 Chandler Regional Hospital
85281 Tempe St. Luke’s Hospital
85296 Mercy Gilbert
85234 Banner Gateway
85209 Mountain Vista

HOSPITALS IN TUCSON METROPOLITAN AREA (By service district, by zip code)

DISTRICT 1

85719 University Medical Center
85741 Northwest Hospital
85745 Carondelet St. Mary’s Hospital
85775 Northwest Medical Center Oro Valley

DISTRICT 2

85711 Carondelet St. Joseph’s Hospital
85712 El Dorado Hospital
85717 Tucson Medical Center
85713 University Physicians Hospital at Kino Campus

COUNTIES: LA PAZ AND YUMA – Geographic Service Area 2

HospitalsPhysician(s) w/admit and
treatment privileges required
in the following communities
Blythe, CA
Lake Havasu City
Parker
Yuma

Primary Care Providers
Blythe, CA
Lake Havasu City
Parker
San Luis
Somerton
Wellton
Yuma

Dentists
Blythe, CA
Lake Havasu City
Parker
San Luis
Yuma

Pharmacies
Blythe, CA
Lake Havasu City
Parker
Somerton
San Luis
Yuma

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

COUNTIES: APACHE, COCONINO, MOHAVE, AND NAVAJO – Geographic Service Area 4

HospitalsPhysician(s) w/admit
and treatment privileges required
in the following communities
Bullhead City
Flagstaff
Gallup, NM
Kanab, UT
Kingman
Lake Havasu City
Needles, CA
Page
Payson
Show Low
Springerville
St. George, UT
Winslow

Primary Care Providers
Ash Fork/Seligman
Bullhead City
Colorado City or Hilldale or Kanab, UT
Flagstaff
Fort Mohave
Gallup, NM
Holbrook
Kingman
Lake Havasu City
Page
Payson
Sedona
Show Low or Pinetop or Lakeside
Snowflake or Taylor
Springerville or Eager
St. George, UT or Mesquite, NV
St. Johns
Williams
Winslow

Dentists
SAME AS PRIMARY
CARE PROVIDERS
(except for Fort Mohave,
no dentist required)

Pharmacies
SAME AS PRIMARY
CARE PROVIDERS

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

COUNTY: YAVAPA – Geographic Service Area 6

HospitalsPhysician(s) w/admit
and treatment privileges required
in the following communities
Cottonwood
Flagstaff
Maricopa County
Prescott

Primary Care Providers
Ash Fork or Seligman
Camp Verde
Cottonwood
Maricopa County or Wickenburg
Prescott
Prescott Valley
Sedona

Dentists
SAME AS PRIMARY CARE
PROVIDERS

Pharmacies
SAME AS PRIMARY CARE
PROVIDERS
(except for Ash Fork/Seligman,
no pharmacy required)

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

COUNTIES: PINAL AND GILA – Geographic Service Area 8

HospitalsPhysician(s) w/admit
and treatment privileges required
in the following communities
Casa Grande
Globe
Maricopa County District 4
Payson

Primary Care Providers
Apache Junction
Casa Grande
Coolidge or Florence
Eloy
Globe or Miami or Claypool
Kearney
Mammoth or San Manuel or
Oracle
Mesa or Gilbert or Queen Creek
Payson

Dentists
Apache Junction
Casa Grande
Coolidge or Florence
Eloy
Globe or Miami or Claypool
Kearney
Mammoth or San Manuel or
Oracle
Mesa or Gilbert or Queen Creek
Payson

Pharmacies
Apache Junction
Casa Grande
Coolidge or Florence
Globe or Miami or Claypool
Kearney
Mammoth or San Manuel or
Oracle
Mesa or Gilbert or Queen Creek
Payson

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

COUNTY: PIMA AND SANTA CRUZ – Geographic Service Area 10

Hospital
Tucson
District 1
Contract Required
District 2
Contract Required
Nogales
Physician(s) w/admit and
treatment privileges required

Primary Care Providers
Ajo
Green Valley
Marana
Nogales
Oro Valley
Tucson

Dentists
SAME AS PRIMARY CARE
PROVIDERS

Pharmacies
SAME AS PRIMARY CARE
PROVIDERS

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

COUNTY: MARICOPA – Geographic Service Area 12

Hospital
Metropolitan Phoenix*
   District 1
Contract Required
   District 2
Contract Required
   District 3
Contract Required
   District 4
Contract Required

Primary Care Providers
Buckeye
Cave Creek or Carefree
Gila Bend
Goodyear or Litchfield Park
Metropolitan Phoenix*
Queen Creek
Wickenburg

Dentists
Buckeye or Goodyear or Litchfield Park
Metropolitan Phoenix*
Wickenburg

Pharmacies
Buckeye
Cave Creek or Carefree
Goodyear or Litchfield Park
Metropolitan Phoenix*
Wickenburg

*For Purposes of this RFP, Metropolitan Phoenix encompasses the following: Apache Junction, Avondale, Chandler, El Mirage, Fountain Hills, Gilbert, Glendale, Mesa, Paradise Valley, Peoria, Phoenix, Scottsdale, Sun City/Sun City West, Surprise, Tempe, Tolleson, and Youngtown. Within this area, distance standards must be met as specified in Attachment B.

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

COUNTIES: COCHISE, GRAHAM AND GREENLEE – Geographic Service Area 14

HospitalsPhysician(s) w/admit and treatment privileges required in the following communities
Benson
Bisbee
Douglas
Safford
Sierra Vista
Tucson
Willcox

Primary Care Providers
Benson
Bisbee
Douglas
Morenci or Clifton
Safford
Sierra Vista
Willcox

Dentists
Benson or Willcox
Bisbee
Douglas
Morenci or Clifton
Safford
Sierra Vista

Pharmacies
Benson
Bisbee
Douglas
Morenci or Clifton
Safford or Thatcher
Sierra Vista
Willcox

H=Hospital P=Primary Care Physician D=Dentist Ph=Pharmacy

ATTACHMENT C: RESERVED

ATTACHMENT D: SAMPLE LETTER OF INTENT

The following information is provided as early notification for Offerors’ benefit. However, complete
instructions regarding this Letter of Intent will be provided when the RFP is released. Only instructions
included in the RFP are considered official. Do not send completed Letter of Intent to AHCCCS at this time.

Letter of Intent Instructions

The following is the mandated format for the Arizona Health Care Cost Containment System, Contract Year
Ending 2007 Letter of Intent (LOI). It is to be used to show a provider’s intention to enter into a contract with
an Offeror. No alterations or changes are permitted, except for shaded areas which identify the Offeror. The
Offeror may print the form on its letterhead or insert its name or logo in the box at the top of the forms. The
completed LOI or an executed contract will be acceptable evidence of an Offeror’s proposed network.

If a provider has multiple sites that offer identical services, only one LOI should be signed, with additional
service site information (items 1 to 6) attached to the LOI. If services differ between sites, a separate LOI must
be obtained for each service site.

If a representative signs an LOI on behalf of a provider, evidence of authority for the representative must be
available upon request.

[OFFEROR’S LOGO]

Please do not sign this Letter of Intent unless you seriously intend to enter into negotiations with the Offeror mentioned below and understand that the Arizona Health Care Cost Containment System Administration (AHCCCS) requires all contracts to include Minimum Subcontract Provisions as listed at http://www.azahcccs.gov/Contracting/BidderLib_Acute.asp.

No alterations or changes are permitted, except for shaded areas which identify the Offeror. This letter is subject to verification by AHCCCS.

The provider signing below is willing to enter into contract negotiations with (Offeror’s name), for provision of covered services to AHCCCS members enrolled with (Offeror’s name). This provider intends to sign a contract with (Offeror’s name) if (Offeror’s name) is awarded an AHCCCS contract beginning October 1, 2008 in the provider’s service area and an acceptable agreement can be reached between the provider and (Offeror’s name). Signing this Letter of Intent does not obligate the provider to sign a contract with (Offeror’s name) however, please do not sign this Letter of Intent unless you seriously intend to enter into negotiations with the above mentioned health plan.

The following information is furnished by the provider:

1. NATIONAL PROVIDER IDENTIFICATION NUMBER (NPI) or AHCCCS PROVIDER IDENTIFICATION NUMBER
_____________________________________________________________

2. PROVIDER’S PRINTED NAME ____________________________________________________________

3. ADDRESS (where services will be provided) ___________________________________________________
_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

___ Please check here if additional service site information is attached to the Letter of Intent

7. CHECK ALL THAT APPLY

___ A. Primary Care Physician                          ___ Family Practice
                                                                                ___ General Practice
                                                                                ___ Pediatrics
                                                                                ___ Internal Medicine

                                                Services:                ___ EPSDT
                                                                                ___ OB

___ B. Primary Care Nurse Practitioner            ___ Family Practice
                                                                                ___ Adult
                                                                                ___ Pediatrics
                                                                                ___ Midwife

                                                Services:                ___ EPSDT
                                                                                ___ OB

___ C. Primary Care Physician’s Assistant

                                                Services:                ___ EPSDT
                                                                                ___ OB

___ D. Physician – Specialist – (Specify)_____________________________________________________

___ E. Hospital
___ F. Urgent Care Facility
___ G. Pharmacy
___ H. Laboratory
___ I. Medical Imaging
___ J. Medically Necessary Transportation
___ K. Nursing Facility
___ L. Dentist
___ M. Therapy (Specify Physical Therapy, Occupational Therapy, Speech, Respiratory) _____________
________________________________________________________________________________
___ N. Behavioral Health Provider (Specify) __________________________________________________
___ O. Durable Medical Equipment
___ P. Home Health Agency
___ Q. Other (Please Specify)______________________________________________________________

8. LANGUAGES SPOKEN BY THE PROVIDER (OTHER THAN ENGLISH) _____________________

______________________________________________________________________________________

9. NAME OF HOSPITAL(S) WHERE PHYSICIAN HAS ADMITTING PRIVILEGES ______________

______________________________________________________________________________________

NOTICE TO PROVIDERS: This Letter of Intent will be used by AHCCCS in its bid evaluation and contract award process. You should only sign this Letter of Intent if you intend to enter into contract negotiations with (Offeror’s name) should they receive a contract award. If you are signing on behalf of a physician, please provide evidence of your authority to do so.

Do not return completed Letter of Intent to AHCCCS. Completed Letter of Intent needs to be returned to (Offeror’s name).

10. PROVIDER’S SIGNATURE ____________________________________DATE _______________

11. PRINTED NAME OF SIGNER _________________________________TITLE _______________

[OFFEROR’S LOGO]

ADDITIONAL SERVICE SITES:

1. NATIONAL PROVIDER IDENTIFICATION NUMBER (NPI) or AHCCCS PROVIDER IDENTIFICATION NUMBER

_____________________________________________________________

2. PROVIDER’S PRINTED NAME ____________________________________________________________

3. ADDRESS (where services will be provided) ___________________________________________________

_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

3. ADDRESS (where services will be provided) ___________________________________________________

_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

3. ADDRESS (where services will be provided) ___________________________________________________

_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

3. ADDRESS (where services will be provided) ___________________________________________________

_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

3. ADDRESS (where services will be provided) ___________________________________________________

_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

3. ADDRESS (where services will be provided) ___________________________________________________

_________________________________________________ZIP CODE________________________________

4. COUNTY ________________ 5. TELEPHONE ________________ 6. FAX _________________________

ATTACHMENT E: INSTRUCTIONS FOR PREPARING CAPITATION PROPOSAL

All capitation rate bid proposals (including best and final offers, if applicable) must be submitted to AHCCCS
via the AHCCCS Web Based Capitation Rate Proposal application. A CCFR must be completed for every risk
group in each Geographic Service Area (GSA) in which the Offeror bids.

The Offeror must also use the Web Tool to print and submit Section B, Capitation Rates, of the Request for
Proposal (RFP). In the event that the Web Tool bid submission differs from the bid submission included with
Section B of the RFP, the bid submitted via the Web Tool will prevail. The first page of Section B should be the
certification that the capitation rates are actuarially sound, signed by an actuary who is a member of the American
Academy of Actuaries.

The Web Tool will present the CCFR bid screens by GSA and Risk Group.

The following is a list of the GSAs and the counties associated to each GSA that will be effective 10/1/08.

GSA #     County or Counties
2              Yuma, La Paz
4              Apache, Coconino, Mohave, and Navajo
6              Yavapai
8              Gila, Pinal
10            Pima, Santa Cruz
12            Maricopa
14            Graham, Greenlee, Cochise

The following is a listing of the risk groups for which capitation rates need to be bid. All risk groups apply to
each GSA.

1. TANF <1
2. TANF 1-13
3. TANF 14-44 Female
4. TANF 14-44 Male
5. TANF 45+
6. SSI with Medicare
7. SSI without Medicare
8. MED
9. AHCCCS Care (Non-MED)

Note: 1931s, KidsCare, HIFA Parents, SOBRA Children, SOBRA Mothers, and Breast and Cervical Cancer
Treatment Program populations are included in TANF risk groups. See the Data Supplement for the roll up of
rate codes in the risk groups.

Detailed instructions for the Web tool will be included within the Data Supplement. These instructions will
include general guidelines for the usage of the Web tool as well as the following items:

            • Process to receive a unique ID and password for the Web Tool
                • Application software requirements
                • Customer technical support desk phone number

ATTACHMENT F: PERIODIC REPORT REQUIREMENTS

The following table is a summary of the periodic reporting requirements for the Contractor and is subject to
change at any time during the term of the contract. The table is presented for convenience only and should not
be construed to limit the Contractor’s responsibilities in any manner. Content for all deliverables is subject to
review; AHCCCS may assess sanctions if it is determined that inaccurate or incomplete data is submitted.

The deliverables listed below are due by 5:00 PM on the due date indicated, if the due date falls on a weekend
or a State Holiday the due date is 5:00 PM on the next business day.

REPORT	WHEN DUE	SOURCE/REFERENCE	SEND TO:
DHCM Finance
Monthly Financial Reporting Package	30 days after the end of the month, only when required by AHCCCS	Reporting Guide For Acute Health Care Contractors	Finance Manager
Quarterly Financial Reporting Package	60 days after the end of each quarter	Reporting Guide For Acute Health Care Contractors	Finance Manager
FQHC Member Information	60 days after the end of each quarter	Reporting Guide For Acute Health Care Contractors; Section D, Paragraph 34	Finance Manager
Draft Annual Financial Reporting Package	90 days after the end of each fiscal year	Reporting Guide For Acute Health Care Contractors	Finance Manager
Final Annual Financial Reporting Package	120 days after the end of each fiscal year	Reporting Guide For Acute Health Care Contractors	Finance Manager
Advances/Loans/Equity Distributions	Submit for approval prior to effective date	Section D, Paragraph 49;	Finance Manager
Premium Tax Reporting	March 15th, June 15th, September 15th and December 15th	ACOM Premium Tax Reporting Policy	Finance Manager
REPORT	WHEN DUE	SOURCE/REFERENCE	SEND TO:
DHCM Data Analysis and Research
Corrected Pended Encounter Data	Monthly, according to established schedule	Encounter Reporting User Manual	Encounter Administrator
New Day Encounter	Monthly, according to established schedule	Encounter Reporting User Manual	Encounter Administrator
Medical Records for Data Validation	90 days after the request received from AHCCCS	Data Validation User Manual	Encounter Administrator
REPORT	WHEN DUE	SOURCE/REFERENCE	SEND TO:
Office of Program Integrity
Provider Fraud/Abuse Report	Within 10 days of discovery	Section D, Paragraph 62	Office of Program Integrity Manager
Eligible Person Fraud/Abuse Report	Within 10 days of discovery	Section D, Paragraph 62	Office of Program Integrity Manager

AHCCCS will assess the following sanctions on the deliverables listed below, under DHCM Acute Care
Operations, Clinical Quality Management and Medical Management that are not received by 5:00 PM on the
due date indicated, if the due date falls on a weekend or a State Holiday, sanctions will be assessed on
deliverables not received by 5:00 PM on the next business day.

Late Deliverables
1st time “late” sanction/ 1-10 days:                  $5,000
1st time “late” sanction/ 11-20 days:                $10,000
1st time “late” sanction/ over 21 days:             $15,000

2nd time “late” sanction/ 1-10 days: $10,000
2nd time “late” sanction/ 11-20 days:               $20,000
2nd time “late” sanction/over 21 days:            $30,000

3rd time “late” sanction/ 1-10 days:                  $20,000
3rd time “late” sanction/ 11-20 days:                $40,000
3rd time “late” sanction/over 21 days:             $60,000

The sanctions outlined above are deliverable specific. For example, if the Contractor submits its claims
dashboard 5 days late in January, a $5,000 sanction will be assessed. The next month, if the Contractor
submits its administrative measures 5 days late, it will be assessed a 1st time late sanction of $5,000. However
if the Contractor submits the claims dashboard 5 days late again in March AHCCCS will asses a 2nd time late
sanction of $10,000.

REPORT	WHEN DUE	SOURCE/REFERENCE	SEND TO:
DHCM Acute Care Operations
Annual Subcontractor Assignment  and Evaluation Report	90 days after the beginning of the contract year	Section D, Paragraph 37; Section D, Paragraph 43	Operations and Compliance Officer
Provider Affiliation Transmission	15 days after the end of each quarter	Provider Affiliation Transmission Manual, submitted to PMMIS Provider-to- Contractor FTP	Operations and Compliance Officer
Claims Dashboard	15th day of each month following the reporting period	Section D, Paragraph 38; Claims Dashboard Reporting Guide	Operations and Compliance Officer
Subcontracts	As required by Contract	Section D, Paragraph 37;  ACOM Templates Policy	Operations and Compliance Officer
Third Party Administrator subcontracts	30 days prior to the effective date of the subcontract	Section D, Paragraph 37; ACOM Templates Policy	Operations and Compliance Officer
Provider Advances	As required by Policy	ACOM Provider and Affiliate Advance Request Policy	Operations and Compliance Officer
Claim recoupments >$50,000	Upon identification by Contractor	Section D, Paragraph 38; ACOM Recoupment Request Policy	Operations and Compliance Officer
Administrative Measures	15th day of each month following the reporting period	Section D, Paragraph 25	Operations and Compliance Officer
Grievance System Report	See Grievance System Reporting Guide for frequency	Section D, Paragraph 26; Grievance System Reporting Guide	Operations and Compliance Officer
Provider Network Development and Management Plan	45 days after the first day of a new contract year	Section D, Paragraph 27; ACOM Provider Network Development and Management Plan Policy	Operations and Compliance Officer
Cultural Competency Plan	45 days after the first day of a new contract year	ACOM Cultural Competency Policy	Operations and Compliance Officer
Business Continuity and Recovery Plan	15 days after the beginning of each contract year	ACOM Business Continuity and Recovery Plan Policy	Operations and Compliance Officer
Marketing Attestation Statement	45 days after the beginning of each contract year	ACOM Marketing Outreach and Incentives Policy	Operations and Compliance Officer
Marketing and Outreach Materials	30 days prior to dissemination	ACOM Marketing Outreach and Incentives Policy	Marketing Committee Chairperson
Member Handbook	By August 15th of contract year, or within 4 weeks of receiving annual amendment, whichever is later.	Section D, Paragraph 18; ACOM Member Information Policy	Operations and Compliance Officer
Provider Network – Material Change	Submit change for approval prior to effective date	Section D, Paragraph 29; ACOM Provider Network Information Policy	Operations and Compliance Officer
Provider Network – Unexpected change	Within one business day	Section D, Paragraph 29	Operations and Compliance Officer
System Change Plan	Six months prior to implementation	Section D, Paragraph 38	Operations and Compliance Officer
Key Position Change	Within 7 days after an employee leaves and as soon as new hire has taken place	Section D, Paragraph 16	Operations and Compliance Officer
Listing of Local Presence	Within 45 days of the beginning of the Contract Year	Section D, Paragraph 16	Operations and Compliance Officer

REPORT	WHEN DUE	SOURCE/REFERENCE	SEND TO:
DHCM Clinical Quality Management
EPSDT Quarterly Monitoring Report	Annually on December 15th	Section D, Paragraph 10, Scope of Services, AMPM, Chapter 400	DHCM/CQM
EPSDT Improvement and Adult Quarterly Monitoring Report (Template must be used)	15 days after the end of each quarter	Section D, Paragraph 10, Scope of Services, AMPM, Chapter 400	DHCM/CQM
Quality Assessment/Performance Improvement Plan and Evaluation (Checklist to be submitted with Document)	Annually on December 15th	AMPM, Chapter 900	DHCM/CQM
Credentialing Quarterly Report	30 days after the end of each quarter	Section D, Paragraph 25	DHCM/CQM
Monthly Pregnancy Termination Report	End of the month following the pregnancy termination	AMPM, Chapter 400	DHCM/CQM
Maternity Care Plan	Annually on December 15th	AMPM, Chapter 400	DHCM/CQM
Sterilization Report	Immediately following procedure	AMPM, Chapter 400	DHCM/CQM
Stillbirth Report	Immediately following procedure	AMPM, Chapter 400	DHCM/CQM
Semi-annual report of number of pregnant women who are HIV/AIDS positive	30 days after the end of the 2nd and 4th quarter of each contract year	AMPM, Chapter 400	DHCM/CQM
Performance Improvement Project Baseline Report (Standardized format to be utilized)	Annually on December 15th	AMPM, Chapter 900	DHCM/CQM
Performance Improvement Project Re-measurement Report (Standardized format to be utilized)	Annually on December 15th	AMPM, Chapter 900	DHCM/CQM
Performance Improvement Project Final Report (Standardized format to be utilized)	Within 180 days of the end of the project, as defined in the project proposal approved by AHCCCS DHCM	AMPM, Chapter 900	DHCM/CQM
QM Quarterly Report	30 Days after the end of each quarter	Section D, Paragraph 23	DHCM/CQM
Pediatric Immunization Audit	As requested	Section D, Paragraph 23	DHCM/CQM

REPORT	WHEN DUE	SOURCE/REFERENCE	SEND TO:
DHCM Medical Management
Quarterly Inpatient Hospital Showing	15 days after the end of each quarter	State Medicaid Manual and the AMPM, Chapter 1000	DHCM/MM
Utilization Management Plan and Evaluation	Annually on December 15th	AMPM, Chapter 900	DHCM/MM
UM Quarterly Report	60 Days after the end of each quarter	Section D, Paragraph 24	DHCM/MM
HIV Specialty Provider List	Annually, on December 15th	AMPM, Chapter 300	DHCM/MM
Transplant Report	15 days after the end of each month	AMPM, Chapter 1000	DHCM/MM
Non-Transplant Catastrophic Reinsurance covered Diseases	Annually, within 30 days of the beginning of the contract year, enrollment to the plan, and when newly diagnosed.	Section D, Paragraph 57	DHCM/MM

ATTACHMENT G: AUTO-ASSIGNMENT ALGORITHM

Members who have the right to choose, but do not exercise this right, will be assigned to a Contractor through an
auto-assignment algorithm. The algorithm is a mathematical formula used to distribute members to the various
Contractors in a manner that is consistent with AHCCCS goals.

With the exception of an enhanced auto-assignment algorithm that may be in effect at the start of a new contract
cycle (October 1, 2008) for a three to six month period, the auto-assignment algorithm calculation details are as
follows:

The algorithm employs a data table and a formula to assign cases (a case may be a member or a household of
members) to Contractors using the target percentages developed. The algorithm data table consists of all the
geographic service areas (GSA) in the state, all Contractors serving each GSA, and the target percentages by risk
group within each GSA.

The Contractor farthest away from its target percentage within a GSA and risk group, the largest negative
difference, is assigned the next case for that GSA. The equation used is:

                (t/T) – P = d

t = The total members assigned to the GSA, per risk group category, for the Contractor
T = The total members assigned to the GSA, per risk group category, all Contractors combined
P = The target percentage of members per risk group for the Contractor
d = The difference

The algorithm is calculated after each assignment to give a new difference for each Contractor. When more than
one Contractor has the same difference, and their differences are greater than all other Contractors, the Contractor
with the lowest Health Plan I.D. Number will be assigned the case.

Assignment by the algorithm applies to:

                1.             Members who are newly eligible to the AHCCCS program that did not choose a Contractor within
                                the prescribed time limits.

                2.             Members whose assigned health plan is no longer available after the member moves to a new
                                GSA and did not choose a new Contractor within the prescribed time limits.

All Contractors, within a given geographic service area (GSA) and for each risk group, will have a placement in
the algorithm and will receive members accordingly. A Contractor with a more favorable target percentage in the
algorithm will receive proportionally more members. Conversely, a Contractor with a lower target percentage in
the algorithm will receive proportionally fewer members. The initial algorithm formula favors Contractors with
both lower awarded capitation rates and higher scores on the Program Component of the proposal.

In future contract years, AHCCCS may adjust the auto-assignment algorithm in consideration of Contractors’
clinical performance measure results when calculating target percentages. Ranking in the algorithm may be
weighted based on the number of Performance Measures for which a Contractor is meeting the current AHCCCS
Minimum Performance Standard (MPS) as a percentage of the total number of measures utilized in the
calculation. AHCCCS will determine the Performance Measures used to evaluate Contractor performance and
apply the criterion universally when making the adjustment.

Development of the Target Percentages

Beginning in CYE ’09, the algorithm target percentages will be developed using the methodology described
below, subject to the enhanced algorithm described below, if applicable. However, for subsequent years,
AHCCCS reserves the right to change the algorithm methodology to assure assignments are made in the best
interest of the AHCCCS program and the State.

A Contractor’s placement in the algorithm is based upon the following two factors, which are weighted as
follows:

#	Factor	Weighting
1	The Contractor’s final awarded capitation rate from AHCCCS.	50%
2	The Contractor’s score on the Program component of the proposal.	50%

Points will be assigned to each Contractor by risk group by GSA. Based on the rankings of the final awarded
capitation rates and the final Program component scores, each Contractor will be assigned a number of points for
each of these two components separately using the table below:

TABLE OF POINTS FOR FACTORS #1 (LOWEST CAPITATION RATE) AND #2 (HIGHEST
PROGRAM SCORE)

Number of Awards in GSA	1st Place	2nd Place	3rd Place	4th Place	5th Place	6th Place
2	60	40
3	44	32	24
4	35	28	22	15
5	30	25	20	15	10
6	26	23	19	15	11	6

Two or more Contractors that have equal final awarded capitation rates or Program component scores in a GSA
for the same risk group will be given an equal percentage of the points for all of the positions held by the tied
Contractors combined.

The points awarded for the two components will be combined as follows to give the target percentage for each
Contractor by GSA by risk group:

Final Awarded Capitation Rate (.50) + Program Component Score (.50)= TARGET PERCENTAGE

Enrollment Considerations

AHCCCS will favor new and small Contractors in each GSA with increased auto-assignment. A new Contractor
is defined as a Contractor new to the AHCCCS program or an incumbent Contractor that is new to a GSA. Small
Contractors will be determined based on enrollment as of May 1, 2008. A small Contractor is defined by GSA
and has a membership level as delineated in the following table:

County/GSA	GSA-specific Enrollment Threshold
Maricopa – GSA 12	<50,000
Pima County Only	<30,000
Rural GSAs (including Santa Cruz County)	less than or equal to 45% of enrollment in the entire GSA as of May 1, 2008

Conversion Group Auto-Assignment

Members who are enrolled as of June 30, 2008 in an Exiting Contractor (Conversion Group) will be assigned to
new and small Contractors within their GSA, effective October 1, 2008 via the coversion auto-assignment
algorithm. These members will be allowed to remain with the Contractor to which they were auto-assigned or to
choose a different Contractor by August 31, 2008 from any of the incumbent or new Contractors in the GSA that
are effective October 1, 2008. These members will again have an opportunity to change Contractors from
October 1, 2008 until November 30, 2008 in order to provide them with the choice of any incumbent or new
Contractors.

If the number of members in the Conversion Group in a GSA is enough to bring all new and small Contractors
within the GSA above the thresholds listed in the table above, the conversion auto-assignment algorithm will be
applied until all of the new and small Contractors reach the thresholds. The remaining members of the
Conversion Group will be auto-assigned to all Contractors in the GSA according to the initial algorithm
methodology based on awarded capitation rates and Program Component scores.

If the number of Conversion Group members in a GSA is not enough to bring all new and small Contractors
within the GSA above the thresholds listed in the table above, an enhanced auto-assignment will be utilized to
bring all new and small Contractors as close to equal as possible, without reducing any Contractor size.

In a rural GSA, if both Contractors are new to AHCCCS, the Conversion Group members will be auto-assigned
approximately equally between the two Contractors.

For details on member choice of Contractors for the months of July, August and September 2008, see Section
I. For members being auto-assigned in July 2008, the algorithm will be based on the CYE 08 Contract. For
members auto-assigned during August and September 2008, the algorithm will be based on the CYE 08
Contract with exiting Contractors in each GSA excluded, except in family continuity, newborn enrollment, and
90-day re-enrollment situations. For GSAs in which all Contractors are exiting, the CYE 08 algorithm will
remain in effect through September 30, 2008.

Post-Conversion Auto-Assignment

For purposes of determining the enhanced algorithm, new Contractors and Continuing Contractors still below
the thresholds on September 1, 2008 will receive members under the enhanced auto-assign algorithm
beginning October 1, 2008. The enhanced algorithm will continue to favor those Contractors below the
threshold, for at least three months but no longer than six months, regardless of their membership level during
or at the end of the time period. In this situation, the plans not qualifying for the enhanced autoassignment
algorithm will not receive any members via auto-assignment for the time period. After the
three to six month time period, the algorithm will revert to the initial methodology based on final awarded
capitation and Program Component score and all Contractors will again be included in the algorithm.

All efforts will be made to auto-assign members based on the methodology and thresholds above, however
amounts may not be exact due to issues such as family continuity, newborns, 90-day re-enrollment etc.

ATTACHMENT H(1): ENROLLEE GRIEVANCE SYSTEM STANDARDS AND POLICY

The Contractor shall have a written policy delineating its Grievance System which shall be in accordance with
applicable Federal and State laws, regulations and policies, including, but not limited to 42 CFR Part 438
Subpart F. The Contractor shall provide the ACOM Enrollee Grievance Policy to all providers and
subcontractors at the time of contract. The Contractor shall also furnish this information to enrollees within a
reasonable time after the Contractor receives notice of the enrollment. Additionally, the Contractor shall
provide written notification of any significant change in this policy at least 30 days before the intended
effective date of the change.

The written information provided to enrollees describing the Grievance System including the grievance process,
the appeals process, enrollee rights, the grievance system requirements and timeframes, shall be in each prevalent
non-English language occurring within the Contractor’s service area and in an easily understood language and
format. The Contractor shall inform enrollees that oral interpretation services are available in any language, that
additional information is available in prevalent non-English languages upon request and how enrollees may
obtain this information.

Written documents, including but not limited to the Notice of Action, the Notice of Appeal Resolution, Notice of
Extension for Resolution, and Notice of Extension of Notice of Action shall be translated in the enrollee’s
language if information is received by the Contractor, orally or in writing, indicating that the enrollee has a
limited English proficiency. Otherwise, these documents shall be translated in the prevalent non-English
language(s) or shall contain information in the prevalent non-English language(s) advising the enrollee that the
information is available in the prevalent non-English language(s) and in alternative formats along with an
explanation of how enrollees may obtain this information. This information must be in large, bold print
appearing in a prominent location on the first page of the document.

At a minimum, the Contractor’s Grievance System Standards and Policy shall specify:

1. That the Contractor shall maintain records of all grievances and appeals and requests for hearing.

2. Information explaining the grievance, appeal, and fair hearing procedures and timeframes. This
   information shall include a description of the circumstances when there is a right to a hearing, the method
   for obtaining a hearing, the requirements which govern representation at the hearing, the right to file
   grievance and appeals and the requirements and timeframes for filing a grievance, appeal, or request for
   hearing.

3. The availability of assistance in the filing process and the Contractor’s toll-free numbers that an enrollee
   can use to file a grievance or appeal by phone if requested by the enrollee.

4. That the Contractor shall acknowledge receipt of each grievance and appeal. For Appeals, the Contractor
   shall acknowledge receipt of standard appeals in writing within five business days of receipt and within
   one business day of receipt of expedited appeals.

5. That the Contractor shall permit both oral and written appeals and grievances and that oral inquiries
   appealing an action are treated as appeals.

6. That the Contractor shall ensure that individuals who make decisions regarding grievances and appeals are
   individuals not involved in any previous level of review or decision making and that individuals who make
   decisions regarding: 1) appeals of denials based on lack of medical necessity, 2) a grievance regarding
   denial of expedited resolution of an appeal or 3) grievances or appeals involving clinical issues are health
   care professionals as defined in 42 CFR 438.2 with the appropriate clinical expertise in treating the
   enrollee’s condition or disease.

7. The resolution timeframes for standard appeals and expedited appeals may be extended up to 14 days if
   the enrollee requests the extension or if the Contractor establishes a need for additional information and
   that the delay is in the enrollee’s interest.

8. That if the Contractor extends the timeframe for resolution of an appeal when not requested by the
   enrollee, the Contractor shall provide the enrollee with written notice of the reason for the delay.

9. The definition of grievance as a member’s expression of dissatisfaction with any aspect of their care, other
   than the appeal of actions.

10. That an enrollee must file a grievance with the Contractor and that the enrollee is not permitted to file a
   grievance directly with the AHCCCS Administration.

11. That the Contractor must dispose of each grievance in accordance with the ACOM Enrollee Grievance
   Policy, but in no case shall the timeframe exceed 90 days.

12. The definition of action as the [42 CFR 438.400(b)]:
                a. Denial or limited authorization of a requested service, including the type or level of service;
                b. Reduction, suspension, or termination of a previously authorized service;
                c. Denial, in whole or in part, of payment for a service;
                d. Failure to provide services in a timely manner;
                e. Failure to act within the timeframes required for standard and expedited resolution of appeals
                   and standard disposition of grievances; or
                f. Denial of a rural enrollee’s request to obtain services outside the Contractor’s network under
                   42 CFR 438.52(b)(2)(ii), when the contractor is the only Contractor in the rural area.

13. The definition of a service authorization request as an enrollee’s request for the provision of a service [42
   CFR 431.201].

14. The definition of appeal as the request for review of an action, as defined above.

15. Information explaining that a provider acting on behalf of an enrollee and with the enrollee’s written
   consent, may file an appeal.

16. That an enrollee may file an appeal of: 1) the denial or limited authorization of a requested service

   including the type or level of service, 2) the reduction, suspension or termination of a previously
   authorized service, 3) the denial in whole or in part of payment for service, 4) the failure to provide
   services in a timely manner, 5) the failure of the Contractor to comply with the timeframes for dispositions
   of grievances and appeals and 6) the denial of a rural enrollee’s request to obtain services outside the
   Contractor’s network under 42 CFR 438.52(b)(2)(ii) when the Contractor is the only Contractor in the rural
   area.

17. The definition of a standard authorization request. For standard authorization decisions, the Contractor
   must provide a Notice of Action to the enrollee as expeditiously as the enrollee’s health condition requires,
   but not later than 14 days following the receipt of the authorization request with a possible extension of up
   to 14 days if the enrollee or provider requests an extension or if the Contractor establishes a need for
   additional information and delay is in the enrollee’s best interest [42 CFR 438.210(d)(1)]. The Notice of
   Action must comply with the advance notice requirements when there is a termination or reduction of a
   previously authorized service OR when there is a denial of an authorization request and the physician
   asserts that the requested service/treatment is a necessary continuation of a previously authorized service.

18. The definition of an expedited authorization request. For expedited authorization decisions, the Contractor
   must provide a Notice of Action to the enrollee as expeditiously as the enrollee’s health condition requires,

   but not later than 3 business days following the receipt of the authorization request with a possible
   extension of up to 14 days if the enrollee or provider requests an extension or if the Contractor establishes
   a need for additional information and delay is in the enrollee’s interest [42 CFR 438.210(d)(2)].

19. That the Notice of Action for a service authorization decision not made within the standard or expedited
   timeframes, whichever is applicable, will be made on the date that the timeframes expire. If the Contractor
   extends the timeframe to make a standard or expedited authorization decision, the contractor must give the
   enrollee written notice of the reason to extend the timeframe and inform the enrollee of the right to file a
   grievance if the enrollee disagrees with the decision. The Contractor must issue and carry out its decision
   as expeditiously as the enrollee’s health condition requires and no later than the date the extension expires.

20. That the Contractor shall notify the requesting provider of the decision to deny or reduce a service
   authorization request. The notice to the provider must be written.

21. The definition of a standard appeal and that the Contractor shall resolve standard appeals no later than 30
   days from the date of receipt of the appeal unless an extension is in effect. If a Notice of Appeal
   Resolution is not completed when the timeframe expires, the member’s appeal shall be considered to be
   denied by the Contractor, and the member can file a request for hearing.

22. The definition of an expedited appeal and that the Contractor shall resolve all expedited appeals not later
   than three business days from the date the Contractor receives the appeal (unless an extension is in effect)
   where the Contractor determines (for a request from the enrollee), or the provider (in making the request
   on the enrollee’s behalf indicates) that the standard resolution timeframe could seriously jeopardize the
   enrollee’s life or health or ability to attain, maintain or regain maximum function. The Contractor shall
   make reasonable efforts to provide oral notice to an enrollee regarding an expedited resolution appeal. If a
   Notice of Appeal Resolution is not completed when the timeframe expires, the member’s appeal shall be
   considered to be denied by the Contractor, and the member can file a request for hearing.

23. That if the Contractor denies a request for expedited resolution, it must transfer the appeal to the 30-day
   timeframe for a standard appeal. The Contractor must make reasonable efforts to give the enrollee prompt
   oral notice and follow-up within two days with a written notice of the denial of expedited resolution.

24. That an enrollee shall be given 60 days from the date of the Contractor’s Notice of Action to file an appeal.

25. That the Contractor shall mail a Notice of Action: 1) at least 10 days before the date of a termination,
   suspension or reduction of previously authorized AHCCCS services, except as provided in (a)-(e) below;
   2) at least 5 days before the date of action in the case of suspected fraud; 3) at the time of any action
   affecting the claim when there has been a denial of payment for a service, in whole or in part; 4) within 14
   days from receipt of a standard service authorization request and within three business days from receipt
   of an expedited service authorization request, unless an extension is in effect. For service authorization
   decisions, the Contractor shall also ensure that the Notice of Action provides the enrollee with advance
   notice and the right to request continued benefits for all terminations and reductions of a previously
   authorized service and for denials when the physician asserts that the requested service/treatment which
   has been denied is a necessary continuation of a previously authorized service. As described below, the
   Contractor may elect to mail a Notice of Action no later than the date of action when:
                a. The Contractor receives notification of the death of an enrollee;
                b. The enrollee signs a written statement requesting service termination or gives information
                requiring termination or reduction of services (which indicates understanding that the
                termination or reduction will be the result of supplying that information);
                c. The enrollee is admitted to an institution where he is ineligible for further services;
                d. The enrollee’s address is unknown and mail directed to the enrollee has no forwarding
                address;
                e. The enrollee has been accepted for Medicaid in another local jurisdiction;

26. That the Contractor include, as parties to the appeal, the enrollee, the enrollee’s legal representative, or the
   legal representative of a deceased enrollee’s estate.

27. That the Notice of Action must explain: 1) the action the Contractor has taken or intends to take, 2) the
   reasons for the action, 3) the enrollee’s right to file an appeal with the Contractor, 4) the procedures for
   exercising these rights, 5) circumstances when expedited resolution is available and how to request it and
   6) the enrollee’s right to receive continued benefits pending resolution of the appeal, how to request
   continued benefits and the circumstances under which the enrollee may be required to pay for the cost of
   these services. The Notice of Action shall comply with ACOM Policy 414.

28. That benefits shall continue until a hearing decision is rendered if: 1) the enrollee files an appeal before
   the later of a) 10 days from the mailing of the Notice of Action or b) the intended date of the Contractor’s
   action, 2) a) the appeal involves the termination, suspension, or reduction of a previously authorized
   course of treatment or b) the appeal involves a denial and the physician asserts that the requested
   service/treatment is a necessary continuation of a previously authorized service, 3) the services were
   ordered by an authorized provider and 4) the enrollee requests a continuation of benefits.

   For purposes of this paragraph, benefits shall be continued based on the authorization which was in place
   prior to the denial, termination, reduction, or suspension which has been appealed.

29. That for appeals, the Contractor provides the enrollee a reasonable opportunity to present evidence and
   allegations of fact or law in person and in writing and that the Contractor informs the enrollee of the
   limited time available in cases involving expedited resolution.

30. That for appeals, the Contractor provides the enrollee and his representative the opportunity before and
   during the appeals process to examine the enrollee’s case file including medical records and other
   documents considered during the appeals process.

31. That the Contractor must ensure that punitive action is not taken against a provider who either requests an
   expedited resolution or supports an enrollee’s appeal.

32. That the Contractor shall provide written Notice of Appeal Resolution to the enrollee and the enrollee’s
   representative or the representative of the deceased enrollee’s estate which must contain: 1) the results of
   the resolution process, including the legal citations or authorities supporting the determination, and the
   date it was completed, and 2) for appeals not resolved wholly in favor of enrollees: a) the enrollee’s right
   to request a State fair hearing (including the requirement that the enrollee must file the request for a
   hearing in writing) no later than 30 days after the date the enrollee receives the Contractor’s notice of
   appeal resolution and how to do so, b) the right to receive continued benefits pending the hearing and how
   to request continuation of benefits and c) information explaining that the enrollee may be held liable for
   the cost of benefits if the hearing decision upholds the Contractor.

33. That the Contractor continues extended benefits originally provided to the enrollee until any of the
   following occurs: 1) the enrollee withdraws appeal, 2) the enrollee has not specifically requested
   continued benefits pending a hearing decision within 10 days of the Contractor mailing of the appeal
   resolution notice, or 3) the AHCCCS Administration issues a state fair hearing decision adverse to the
   enrollee.

34. That if the enrollee files a request for hearing the Contractor must ensure that the case file and all
   supporting documentation is received by the AHCCCS Office of Administrative Legal Services (OALS)
   as specified by OALS. The file provided by the Contractor must contain a cover letter that includes:

                a. Enrollee’s name
                b. Enrollee’s AHCCCS I.D. number

                c. Enrollee’s address
                d. Enrollee’s phone number (if applicable)
                e. date of receipt of the appeal
                f. summary of the Contractor’s actions undertaken to resolve the appeal and summary of the
                   appeal resolution

35. The following material shall be included in the file sent by the Contractor:

                a. the Enrollee’s written request for hearing
                b. copies of the entire appeal file which includes all supporting documentation including
                    pertinent findings and medical records;
                c. the Contractor’s Notice of Appeal Resolution
                d. other information relevant to the resolution of the appeal

36. That if the Contractor or the State fair hearing decision reverses a decision to deny, limit or delay services
   not furnished during the appeal or the pendency of the hearing process, the Contractor shall authorize or
   provide the services promptly and as expeditiously as the enrollee's health condition requires irrespective
   of whether the Contractor contests the decision..

37. That if the Contractor or State fair hearing decision reverses a decision to deny authorization of services
   and the disputed services were received pending appeal, the Contractor shall pay for those services, as
   specified in policy and/or regulation.

38. That if the Contractor or State fair hearing decision upholds a decision to deny authorization of services
   and the disputed services were received pending appeal, the Contractor may recover the cost of those
   services from the enrollee.

ATTACHMENT H(2): PROVIDER CLAIM DISPUTE STANDARDS AND POLICY

The Contractor shall have in place a written claim dispute policy for providers. The policy shall be in
accordance with applicable Federal and State laws, regulations and policies. The claim dispute policy shall
include the following provisions:

1. The Provider Claim Dispute Policy shall be provided to all subcontractors at the time of contract. For
   providers without a contract, the claim dispute policy may be mailed with a remittance advice,
   provided the remittance is sent within 45 days of receipt of a claim.

2. The Provider Claim Dispute Policy must specify that all claim disputes challenging claim payments,
   denials or recoupments must be filed in writing with the Contractor no later than 12 months from the
   date of service, 12 months after the date of eligibility posting or within 60 days after the payment,
   denial or recoupment of a timely claim submission, whichever is later.

3. Specific individuals are appointed with authority to require corrective action and with requisite
   experience to administer the claim dispute process.

4. A log is maintained for all claim disputes containing sufficient information to identify the
   Complainant, date of receipt, nature of the claim dispute and the date the claim dispute is resolved.
   Separate logs must be maintained for provider and behavioral health recipient claim disputes.

5. Within five business days of receipt, the Complainant is informed by letter that the claim dispute has
   been received.

6. Each claim dispute is thoroughly investigated using the applicable statutory, regulatory, contractual
   and policy provisions, ensuring that facts are obtained from all parties.

7. All documentation received by the Contractor during the claim dispute process is dated upon receipt.

8. All claim disputes are filed in a secure designated area and are retained for five years following the
   Contractor’s decision, the Administration’s decision, judicial appeal or close of the claim dispute,
   whichever is later, unless otherwise provided by law.

9. A copy of the Contractor’s Notice of Decision (hereafter referred to as Decision) shall be mailed to
   all parties no later than 30 days after the provider files a claim dispute with the Contractor, unless the
   provider and Contractor agree to a longer period. The Decision must include and describe in detail,
   the following:

                a. the nature of the claim dispute
                b. the issues involved
                c. the reasons supporting the Contractor’s Decision, including references to applicable statute,
                   rule, applicable contractual provisions, policy and procedure
                d. the Provider’s right to request a hearing by filing a written request for hearing to the
                   Contractor no later than 30 days after the date the Provider receives the Contractor’s decision.
                e. If the claim dispute is overturned, the requirement that the Contractor shall reprocess and pay
                the claim(s) in a manner consistent with the decision within 15 business days of the date of
                the Decision.

10. If the Provider files a written request for hearing, the Contractor must ensure that all supporting
   documentation is received by the AHCCCS Office Administrative Legal Services (OALS), no later
   than five business days from the date the Contractor receives the provider’s written hearing request.
   The file sent by the Contractor must contain a cover letter that includes:

                a. Provider’s name
                b. Provider’s AHCCCS ID number
                c. Provider’s address
                d. Provider’s phone number (if applicable)
                e. the date of receipt of claim dispute
                f. a summary of the Contractor’s actions undertaken to resolve the claim dispute and basis of the
                   determination

11. The following material shall be included in the file sent by the Contractor:

                a. written request for hearing filed by the Provider
                b. copies of the entire file which includes pertinent records; and the Contractor’s Decision
                c. other information relevant to the Notice of Decision of the claim dispute

12. If the Contractor’s decision regarding a claim dispute is reversed through the appeal process, the
   Contractor shall reprocess and pay the claim (s) in a manner consistent with the decision within 15
   business days of the date of the Decision.

ATTACHMENT I: RESERVED

ATTACHMENT J: OFFEROR’S CHECKLIST

Offerors must submit all items below, unless otherwise noted. In the column titled “Offeror’s Page #”, the
Offeror must enter the appropriate page number(s) from its proposal where the AHCCCS Evaluation Panel
may find the Offeror’s response to the specified requirement.

I. GENERAL MATTERS

Subject	Reference	Offeror’s Page #
Offeror’s signature page	(Front Page)	N/A
Solicitation Amendment #1 signature page	(Front Page of Amendment)
Solicitation Amendment #2 signature page	(Front Page of Amendment)
Offeror’s Checklist (this attachment)	N/A
Completion of all items in Section G of the RFP	Section G

II. PROVIDER NETWORK

Subject	Reqmt. #	Offeror’s Page #
Provider Network Management
	1
Provider Network Development
	2
	3
	4
	5
	6
	7
	8
	9
	10
	11

III. CAPITATION

Subject	Reqmt. #	Offeror’s Page #
Capitation	12

IV. PROGRAM

Subject	Reqmt. #	Offeror’s Page #
Quality Management
	13
	14
	15
	16
	17
	18
	19
	20
	21
	22
Medical Management
	23
	24
	25
	26
	27
	28
	29
EPSDT/Maternal Health
	30
	31
	32
	33
	34
	35
	36
	37
	38
Behavioral Health
	39
	40
	41
	42
Medical Homes
	43

V. ORGANIZATION

Subject	Reqmt. #	Offeror’s Page #
Organization and Staffing
	44
	45
	46
	47
	48
	49
	50
Information Systems
	51
	52
	53
	54
	55
Claims
	56
	57
	58
Corporate Compliance
	59
	60
Encounters
	61
Member Services
	62
	63
	64
	65
Grievance and Appeals
	66
	67
Finance
	68
	69
	70
	71
	72
	73
	74
	75

VI. OTHER

Subject	Reqmt. #	Offeror’s Page #
KidsShare
	76

ATTACHMENT K: COST SHARING COPAYMENTS

I.              EXEMPT POPULATIONS (REGARDLESS OF RATE CODE)
                The following populations are exempt from copayments for ALL services ($0 copay):
                • All members under the age of 19, including all KidsCare members
                • All Pregnant Women
                • All ALTCS enrolled members
                • All persons with Serious Mental Illness receiving RBHA services
                • All members who are receiving CRS services
                • SOBRA Family Planning Services Only members

                Additionally, no member may be asked to make a copayment for family planning services or
                supplies.

II.            STANDARD COPAYMENTS APPLY TO THE TITLE XIX WAIVER GROUP
                Services to this population may not be denied for failure to pay copayment.

                The standard copayments apply to the Title XIX Waiver Group, including RBHA General Mental
                Health and Substance Abuse service members. The standard copayments are as follows:

Service	Copayment
Generic Prescriptions or Brand Name if generic not available	$  0
Brand Name Prescriptions when generic is available	$ 0
Non Emergency Use of ER	$ 1
Physician Office Visits	$ 1

III.           STANDARD COPAYMENTS APPLY TO THE FOLLOWING POPULATIONS
                Services to this population may not be denied for failure to pay copayment.

            • AHCCCS for Families with Children
                • Supplemental Security Income with and without Medicare

Service	Copayment
Generic Prescriptions or Brand Name if generic not available	$  0
Brand Name Prescriptions when generic is available	$  0
Non Emergency Use of ER	$  1
Physician Office Visits	$  0

EX-10.71

EXHIBIT 10.71

SOLICITATION AMENDMENT   Solicitation Number: RFP YH09-0001
  Amendment Number One
  Solicitation Due Date: March 28, 2008, 3:00 PM (MST)   Arizona Health Care Cost Containment
  System (AHCCCS)
  701 East Jefferson
  Phoenix, Arizona 85034   Solicitation Contact Person:
  Michael Veit, Contracts and Purchasing
  Administrator
  E-mail: Michael.Veit@azahcccs.gov

A signed copy of this amendment must be returned with the proposal and received by AHCCCSA on or prior to the Solicitation due date and time.  This solicitation is amended as follows:

1.	AMENDSection C. DEFINITIONS to reflect correct reference for WWHP as follows: “(See AMPM Chapter 300, Section 320).”
2.	AMENDSection D. ¶16 STAFF REQUIREMENTS AND SUPPORT SERVICES to include a new second sentence in subparagraph 2 “All staff or functions designated with an asterisk must be located within the State of Arizona at all times throughout the term of the Contract.”
3.	REPLACESection D. ¶16 STAFF REQUIREMENTS AND SUPPORT SERVICES third sentence of subparagraph 3 with the following: “The Contractor must obtain approval from AHCCCS prior to moving any functions not designated with an asterisk outside the State of Arizona after Contract initiation.”
4.	ADDSection D. ¶38 CLAIM PAYMENT/HEALTH INFORMATION SYSTEM subparagraph 6 below second bullet of subparagraph 5 which will read “The findings of the audits described above must be documented and any deficiencies noted in the resulting reports must be met with corrective action.”
5.	AMENDSection D. ¶38 CLAIMS PAYMENT/HEALTH INFORMATION SYSTEM subparagraph 15 to read as follows: “…with 50,000 or more members shall ensure that for each form type (Dental/Professional/Institutional), 95% of all clean claims are adjudicated within 30 days of receipt of the clean claim and 99% are adjudicated within 60 days of receipt of the clean claim. Unless a subcontract specifies otherwise, a Contractor with fewer than 50,000 members shall ensure that for each form type (Dental/Professional/Institutional), 90% of all clean claims are adjudicated within 30 days of receipt of the clean claim and 99% are adjudicated within 60 days…”
6.	AMENDSection E. ¶8 INDEMNIFICATION final two sentences will now read as follows: “…shall be responsible for its own negligence and/or willful misconduct. Each party to this contract is responsible for its own negligence and/or willful misconduct.”
7.	AMENDSection E. ¶19 TEMPORARY MANAGEMENT/OPERATION OF A CONTRACTION AND TERMINATION subparagraph 3, final sentence will  now read as follows: “…proceeding in which the Contractor may be a third party; such powers shall only apply with respect to activities occurring after AHCCCS undertakes direct operation of the Contractor in connection with this Section.”
8.	AMENDSection G. REPRESENTATIONS AND CERTIFICATIONS OF OFFEROR “Offeror General Information” pagination reference to read as follows: “(Page 1 of 1)”
9.	REPLACESection I. INSTRUCTIONS TO OFFERORS with Attachment A of this Solicitation Amendment (#1) within the ACUTE CARE RFP YH09-0001.
10.	REPLACESection I. ¶ 6 AMENDMENTS TO RFP second sentence with the following: “Receipt of solicitation amendments must be acknowledged by signing and returning the signature pages of each amendment with the proposal submission to the Solicitation Contact Person listed in Section A.”
11.	REPLACESection I. ¶14 CONTENTS OF OFEEROR’S PROPOSAL subparagraph 5, second sentence beginning “For example…” with the following sentence: “For example, “Network” would begin with the page number following the last page number in “General Matters”.”
12.	AMENDSection I . ¶14 CONTENTS OF OFFEROR’S PROPOSAL Submission Requirement #28 to read as follows: “Describe existing or planned relationships with Medicare plans (MA, MAPDP or PDP) that will allow for coordination of care between Medicare and Medicaid services.” No changes made to references.
13.	ADDSection I. ¶14 CONTENTS OF OFFEROR’S PROPOSAL to Submission Requirement #43 the following parenthetical notation after the concluding sentence of paragraph 1: “(not to exceed 10 pages total)”
14.	ADDSection I. ¶CONTENTS OF OFFEROR’S PROPOSAL to Submission Requirement #45 the following parenthetical notation after the concluding sentence of paragraph 1: “(no page limit)”; and the following third bullet point: “Provide (in parentheses next to title) the physical location of each functional area.”
15.	ADDSection I. ¶14 CONTENTS OF OFFEROR’S PROPOSAL to Submission Requirement #47 the following parenthetical notation after the concluding sentence of paragraph 1: “(narrative response limited to 3 pages; tables may exceed this limit).”
16.	ADDSection I. ¶14 CONTENTS OF OFFEROR’S PROPOSAL to Submission Requirement #50 the following parenthetical notation after the concluding sentence of paragraph 1: “(narrative response limited to 3 pages; tables may exceed this limit).”
17.	REMOVEAttachment B. MINIMUM NETWORK STANDARDS under District 2 of Hospitals in Tucson Metropolitan Area the following hospital requirement: El Dorado Hospital.
18.	REPLACEAttachment E. INSTRUCTIONS FOR PREPARING CAPITATION PROPOSAL Paragraph 2, Sentence 2, with the following: “In the event that the Web Tool bid submission differs from the bid submission included with Section B of the RFP, the hard copy submission will prevail.”
19.	REPLACEAttachment J. OFFEROR’S CHECKLIST with Attachment B of this Solicitation Amendment (#1) within the ACUTE CARE RFP YH009-0001.  Amended to include acknowledgement of Solicitation Amendments under I. General Matters; and to include a listing of GSAs bid under VI. Other.
20.	INCORPORATEthe Questions and Responses, Attachment C to this Solicitation Amendment (#1), as part of the ACUTE CARE RFP YH009-0001.

Offeror hereby acknowledges receipt and understanding of this Solicitation Amendment.	This Solicitation Amendment is hereby executed this 29th day of February, 2008, in Phoenix, Arizona.
/s/ Nancy Novick                                    3/17/08 NANCY NOVICK, CEO VHS Phoenix Health Plan, LLC	Michael Veit Contracts and Purchasing Administrator

SOLICITATION AMENDMENT   Solicitation Number: RFP YH09-0001
  Amendment Number Two
  Solicitation Due Date: March 28, 2008, 3:00 PM (MST)   Arizona Health Care Cost Containment
  System (AHCCCS)
  701 East Jefferson
  Phoenix, Arizona 85034   Solicitation Contact Person:
  Michael Veit, Contracts and Purchasing
  Administrator
  E-mail: Michael.Veit@azahcccs.gov

A signed copy of this amendment must be returned with the proposal and received by AHCCCSA on or prior to the Solicitation due date and time.  This solicitation is amended as follows:

1.	AMENDSection D. ¶1, TERM OF CONTRACT AND OPTION TO RENEW item “f.” in the listing to read as follows: “Cooperation with any open reconciliation activities including, but not limited to, PPC, MED Prospective or SSDI-TMC until release has been granted by AHCCCS.”
2.	ADDSection D. ¶53, COMPENSATION below the subparagraph titled “Reconciliation of PPC Costs to Reimbursement” the following subparagraph: “Reconciliation of Prospective MED costs to Reimbursement: AHCCCS will reconcile the Contractor’s prospective MED medical cost expenses to prospective MED net capitation paid to the Contractor for dates of service during the contract year being reconciled. This reconciliation will limit the Contractor’s profits and losses to 3%. Any losses in excess of 3% will be reimbursed to the Contractor, and likewise, profits in excess of 3% will be recouped. Encounter data will be used to determine medical expenses. Refer to the Prospective MED Reconciliation Policy included in the ACOM for further details. For all Contractors, the PPC TWG population, both MED and non-MED, will be reconciled with the PPC reconciliation referred to above.”
3.	REPLACESection I. INSTRUCTIONS TO OFFEROR’S with Attachment A of this Soliciation Amendment (#2) with the ACUTE CARE RFP YH09-0001.
4.	REPLACESection I. ¶14, CONTENTS OF OFFEROR’S PROPOSAL Subsection III. CAPITATION, Subparagraph 2 with the following: “Prior Period Coverage (PPC), MED Prospective, Delivery Supplement, SOBRA Family Planning, SSDI-TMC and State Only Transplant rates will be set by the AHCCCS actuaries and not bid by the Contractor, See Section D, Paragraph 53, Compensation, for information regarding risk sharing for the PPC time period, MED Prospective members and the SSDITMC members. All other risk groups will be subject to competitive bidding.”
5.	AMENDAttachment E. INSTRUCTIONS FOR PREPARING CAPTITATION PROPOSAL the listing of risk groups to exclude MED as follows: 1. TANF <1 2. TANF 1-13 3. TANF 14-44 Female 4. TANF 14-44 Male 5. TANF 45+ 6. SSI with Medicare 7. SSI without Medicare 8. AHCCCS Care (Non-MED)
6.	AMENDSection E. CONTRACT CLAUSES Paragraph 26, Disputes, first sentence of subparagraph two to read “Except as provided by 9 A.A.C. Chapter 22, Article 6, the exclusive manner…” formerly read “Except as provided by 9 A.A.C. Chapter 28, Article 6, the exclusive manner…”
7.	REPLACEAttachment A. MINIMUM SUBCONTRACT PROVISIONS with Attachment B of this Solicitation Amendment (#2) within the ACUTE CARE RFP YH09-0001.
8.	REPLACEAttachment A. MINIMUM SUBCONTRACT PROVISIONS Paragraph 8, Confidentiality Requirement, with the following: “The Subcontractor shall safeguard confidential information in accordance with federal and state laws and regulations, including but not limited to, 42 CFR Part 431, Subpart F, ARS §36-107, 36-2903, 41-1959 and 46-135, AHCCCS Rules, the Health Insurance Portability and Accountability Act (Public Law 107-191, 110 Statutes 1936), and 45 CFR Parts 160 and 164.”
9.	REPLACEAttachment A. MINIMUM SUBCONTRACT PROVISIONS Paragraph 10, Contract Claims and Disputes, with the following: “Contract claims and disputes arising under A.R.S Title 36, Chapter 29 shall be adjudicated in accordance with AHCCCS Rules and A.R.S. §36-2903.01.”
10.	AMENDAttachment C. of Amendment #1 QUESTIONS AND RESPONSES, AHCCCS Response to Question Number 15, Sentence four to read “8.5%” where it formerly read “9%” as follows: “Administrative trends are included at 8.5% of gross medical costs and 2% of gross medical for risk contingency.”
11.	ADDAttachment C. of Amendment #1 QUESTIONS AND RESPONSES, AHCCCS Response to Question Number 15, the following paragraph to the end of the Response: “Based on continued analysis as part of the capitation rate range development and the resulting change in the base capitation rates since the last RFP rebase, AHCCCS has determined that a lower Administrative percentage is appropriate and will utilize 8.5% as the administrative percentage. Any policies, RFP amendments or other documentation that refer to a 9% Administrative percentage will be changed to read 8.5%. However, the Administrative Cost Percentage for the Financial Viability Standards referred to in Section D, Paragraph 50, will remain at 10%.”
12.	INCORPORATEthe Questions and Responses, Attachment C to this Solicitation Amendment (#2), as part of the ACUTE CARE RFP YH09-0001.

Offeror hereby acknowledges receipt and understanding of this Solicitation Amendment.	This Solicitation Amendment is hereby executed this 14th day of March, 2008, in Phoenix, Arizona.
/s/ Nancy Novick                                    3/17/08 NANCY NOVICK, CEO VHS Phoenix Health Plan, LLC	Michael Veit Contracts and Purchasing Administrator

SOLICITATION AMENDMENT   Solicitation Number: RFP YH09-0001
  Amendment Number Three
  Solicitation Due Date: March 28, 2008, 3:00 PM (MST)   Arizona Health Care Cost Containment
  System (AHCCCS)
  701 East Jefferson
  Phoenix, Arizona 85034   Solicitation Contact Person:
  Michael Veit, Contracts and Purchasing
  Administrator
  E-mail: Michael.Veit@azahcccs.gov

A signed copy of this amendment must be returned with the proposal and received by AHCCCSA on or prior to the Solicitation due date and time.  This solicitation is amended as follows:

1.	ADDSection I. ¶6, AMENDMENTS TO RFP after the last sentence of the paragraph the following language: “Receipt of solicitation amendment #3, which will contain the response to submission requirements 12 (Capitation), 72 (Organization), and 73 (Organization), should be acknowledged by signing and returning the signature page on April 18thwith the response to these requirements and a copy of Attachment J(2) of this document “Checklist for April 18thSubmission”.”
2.	ADD Section I. ¶11, RFP MILESTONE DATES an asterisk next to the words “Proposals Due By 3:00PM MST” in the table of milestone dates and a paragraph of notation below the table of milestone dates stating the following: “*The due date for Submission Requirements numbered 12 (Capitation), 72 (Organization) and 73 (Organization), will be April 18th at 3:00 PM MST. No late submissions will be accepted. Any submission of responses to these requirements that is received as part of the March 28th submission will be treated as confidential and not scored. Offerors may reclaim these submissions from the Contract Solicitation Person listed in Section A. Offerors are encouraged to continue to check the Open RFPs section of the AHCCCS website for additional information.”
3.	ADDAttachment J(2) CHECKLIST FOR APRIL 18th SUBMISSION to the document from Attachment A of this Solicitation Amendment (#3) within the ACUTE CARE RFP YH09-0001.

Offeror hereby acknowledges receipt and understanding of this Solicitation Amendment.	This Solicitation Amendment is hereby executed this 26th day of March, 2008, in Phoenix, Arizona.
/s/ Nancy Novick                                    4/16/08 NANCY NOVICK, CEO VHS Phoenix Health Plan, LLC	Michael Veit Contracts and Purchasing Administrator

SOLICITATION AMENDMENT   Solicitation Number: RFP YH09-0001
  Amendment Number Four
  Solicitation Due Date: March 28, 2008, 3:00 PM (MST)   Arizona Health Care Cost Containment
  System (AHCCCS)
  701 East Jefferson
  Phoenix, Arizona 85034   Solicitation Contact Person:
  Michael Veit, Contracts and Purchasing
  Administrator
  E-mail: Michael.Veit@azahcccs.gov

A signed copy of this amendment must be returned with the proposal and received by AHCCCSA on or prior to the Solicitation due date and time.

Amendment #3 to the RFP extending the Capitation Bid and Related Finance Submissions resulted from changes made to the Reinsurance Offsets and further clarifications/changes to the proposed risk adjustment that will be applied to the capitation rates.

New reinsurance offsets will be posted to the Bidder’s Library, Section N, Reinsurance Offsets, no later than April 2, 2008. The Bid Submission Tool will be updated by the AHCCCS Information Systems Division to accommodate the revised reinsurance offsets shortly thereafter.

See also Section F – Bid Submission Information in the Bidder’s Library for further information regarding the Capitation Bid Submission.

Questions regarding the information in Amendment #4 ONLY will be accepted in the format previously communicated through this document and previous amendments and are due to AHCCCS by noon Monday, April 7th. Answers will be posted on the RFP Website by Thursday, April 10th. Any questions deemed by AHCCCS to be unrelated to Amendment #4 will be disregarded.

This solicitation is amended as follows:

1.	REPLACESection D. ¶53, COMPENSATION subparagraph 5 after list 2 with the following language: “AHCCCS will be utilizing a national episodic/diagnostic risk adjustment model that will be applied to all Contractor specific capitation rates for all non-reconciled risk groups. Further methodology details will be shared with the Contractor prior to implementation. Given anticipated membership changes that may be occurring due to the enhanced auto-assignment discussed in Section I Paragraph 9, Award of Contract, AHCCCS anticipates applying these risk factors by April 1, 2009 retroactively to the October 1, 2008, awarded capitation rates. For CYE 09, AHCCCS will apply approximately 80% of the capitation rate risk adjustment factor. Effective October 1, 2009, the full impact of the model will be applied.”
2.	ADDSection I. ¶11, RFP MILESTONE DATES two rows below “Proposals Due By 3:00PM MST” in the table of milestone dates that states the following: Reponses to Submission Requirements 12, 72, and 73 by 3:00 P.M. MST*               April 18, 2008 Contracts Awarded                                                                                   No later than May 23, 2008
3.	ADDSection I. ¶14, CONTENTS OF OFFEROR’S PROPOSAL under section III. Capitation, Question 12, following the sentence reading “The Offeror should assume that all AHCCCS-covered medical services are included in the capitation rates.” the following language: “Bidders are to bid rates by GSA and risk category reflecting the expected average monthly cost of an enrollee who has average demographic and health status using the data provided by AHCCCS in the Bidder’s Library. Bidders should not take into account their own unique membership demographic or diagnosis experience, but can factor in the anticipated impact of the Contractor’s unique medical management and/or unit cost experience.” The sentence beginning “The Offeror must prepare and submit its capitation proposal…” now begins a separate paragraph in this section.

Offeror hereby acknowledges receipt and understanding of this Solicitation Amendment.	This Solicitation Amendment is hereby executed this 28th day of March, 2008, in Phoenix, Arizona.
/s/ Nancy Novick                                    4/16/08 NANCY NOVICK, CEO VHS Phoenix Health Plan, LLC	Michael Veit Contracts and Purchasing Administrator

SOLICITATION AMENDMENT   Solicitation Number: RFP YH09-0001
  Amendment Number Five
  Solicitation Due Date: March 28, 2008, 3:00 PM (MST)  Submission Due Date for Items Related to Amendments
 Three, Four and Five:
 April 18, 2008, 3:00 PM (MST)   Arizona Health Care Cost Containment
  System (AHCCCS)
  701 East Jefferson
  Phoenix, Arizona 85034   Solicitation Contact Person:
  Michael Veit, Contracts and Purchasing
  Administrator
  E-mail: Michael.Veit@azahcccs.gov

A signed copy of this amendment must be received by AHCCCSA, concurrent with the submission of submission requirements 12, 72, and 73, on or prior to April 18, 2008.

All submissions with regard to this amendment should follow the format and content requirements of Section I of this document.

This solicitation is amended as follows:

1.	REPLACESection I. INSTRUCTIONS TO OFFERORS with Attachment A of this Solicitation Amendment (#5) within the ACUTE CARE RFP YH09-0001.
2.	AMENDSection I. ¶6, AMENDMENTS TO RFP third sentence of the first subparagraph to read as follows: “Receipt of solicitation amendments #3, #4, and #5, with regard to the response to submission requirements 12 (Capitation), 72 (Organization), and 73 (Organization), should be acknowledged by signing and returning the signature pages on April 18th with the response to these requirements and a copy of Attachment J(2) of this document “Checklist for April 18thSubmission”.
3.	REPLACEAttachment J(2), CHECKLIST FOR APRIL 18th SUBMISSION with Attachment B of this Solicitation Amendment (#5) within the ACUTE CARE RFP YH09-0001.
4.	INCORPORATEthe Questions and Responses, Attachment C to this Solicitation Amendment (#5), as part of the ACUTE CARE RFP YH09-0001.

Offeror hereby acknowledges receipt and understanding of this Solicitation Amendment.	This Solicitation Amendment is hereby executed this 10th day of April, 2008, in Phoenix, Arizona.
/s/ Nancy Novick                                    4/16/08 NANCY NOVICK, CEO VHS Phoenix Health Plan, LLC	Michael Veit Contracts and Purchasing Administrator

EX-12.1

EXHIBIT 12.1

Vanguard Health Systems, Inc.
Computations of Ratios of Earnings to Fixed Charges
(unaudited)
(dollars in millions)

		Predecessor		Combined Basis				Year ended June 30, 2006			Year ended June 30, 2007			Year ended June 30, 2008			Predecessor July 1, 2004 through September 22, 2004			Successor September 23, 2004 through June 30, 2005
		Year ended June 30 2004		Year ended June 30, 2005
EARNINGS:
Income (loss) from continuing operations before    income taxes	$	57.6		$	(114.5	)	$	39.7		$	(125.2	)	$	1.3		$	(164.3	)	$	49.8
Minority interest expense (income)		(2.5	)		(0.3	)		2.6			2.6			3.0			(0.5	)		0.2
Equity method income		(1.5	)		(1.0	)		(0.2	)		(0.9	)		(0.7	)		(0.2	)		(0.8	)
Fixed charges, exclusive of capitalized interest (a)		47.1			91.3			118.8			140.9			138.9			11.7			79.6
Earnings	$	100.7		$	(24.5	)	$	160.9		$	17.4		$	142.5		$	(153.3	)	$	128.8
FIXED CHARGES:
Interest charged to expense (b)	$	41.8		$	84.5		$	110.3		$	131.6		$	128.4		$	10.4		$	74.1
Portion of rents representing interest (c)		5.3			6.8			8.5			9.3			10.5			1.3			5.5
Fixed charges, exclusive of capitalized interest		47.1			91.3			118.8			140.9			138.9			11.7			79.6
Capitalized interest		0.2			4.3			8.3			3.0			1.4			1.1			3.2
Total fixed charges	$	47.3		$	95.6		$	127.1		$	143.9		$	140.3		$	12.8		$	82.8
Ratio of earnings to fixed charges		2.13x			n/a			1.27x			n/a			1.02x			n/a			1.56x
Amount by which earnings are inadequate to cover
fixed charges		n/a		$	120.1			n/a		$	126.5			n/a		$	166.1			n/a

____________________
(a) Calculated in fixed charges section below.
(b) Excludes interest income.
(c) Estimated to be 25% of consolidated rental expense.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF VANGUARD HEALTH SYSTEMS, INC.

Subsidiaries Incorporated or Organized in the State of Delaware
Anaheim VHS Limited Partnership (The)
Baptist Medical Management Service Organization, LLC
Healthcare Access Development Company, LLC
Hospital Development Company Number 1, Inc.
Hospital Development Company Number 2, Inc.
Hospital Development of West Phoenix, Inc.
Huntington Beach VHS Limited Partnership (The)
Lakefront Medical Associates, LLC
MacNeal Physicians Group, LLC
MacNeal Medical Records, Inc.
Magnolia Surgery Center Limited Partnership
Paradise Valley Surgery Center, LLC
Vanguard Health Financial Company, LLC
Vanguard Health Holding Company I, LLC
Vanguard Health Holding Company II, LLC
Vanguard Health Management, Inc.
Vanguard Holding Company I, Inc.
Vanguard Holding Company II, Inc.
VHS Acquisition Company Number 2, LLC
VHS Acquisition Corporation
VHS Acquisition Partnership Number 1, L.P.
VHS Acquisition Partnership Number 2, L.P.
VHS Acquisition Subsidiary Number 1, Inc.
VHS Acquisition Subsidiary Number 2, Inc.
VHS Acquisition Subsidiary Number 3, Inc.
VHS Acquisition Subsidiary Number 4, Inc.
VHS Acquisition Subsidiary Number 5, Inc.
VHS Acquisition Subsidiary Number 6, Inc.
VHS Acquisition Subsidiary Number 7, Inc.
VHS Acquisition Subsidiary Number 8, Inc.
VHS Acquisition Subsidiary Number 9, Inc.
VHS Acquisition Subsidiary Number 10, Inc.
VHS Acquisition Subsidiary Number 11, Inc.
VHS Acquisition Subsidiary Number 12, Inc.
VHS Arizona Imaging Centers Limited Partnership (The)
VHS Chicago Market Procurement, LLC
VHS Genesis Labs, Inc.
VHS Holding Company, Inc.
VHS Imaging Centers, Inc.
VHS of Anaheim, Inc.
VHS of Arrowhead, Inc.
VHS of Huntington Beach, Inc.
VHS of Illinois, Inc.
VHS of Orange County, Inc.
VHS of Phoenix, Inc.
VHS of South Phoenix, Inc.
VHS Outpatient Clinics, Inc.
VHS Phoenix Health Plan, LLC
VHS San Antonio Imaging Partners, L.P.
VHS San Antonio Partners, LLC
West Anaheim MSO, LLC

Subsidiaries Incorporated or Organized in the State of Arizona
Abrazo Advantage Health Plan, Inc.

Subsidiaries Incorporated or Organized in the County of Bermuda
Volunteer Insurance Ltd.

Subsidiaries Incorporated or Organized in the State of California
North Anaheim Surgicenter, Ltd.

Subsidiaries Incorporated or Organized in the District of Columbia
Healthcare Compliance, L.L.C.

Subsidiaries Incorporated or Organized in the State of Illinois
MacNeal Health Providers, Inc.
MacNeal Management Services, Inc.
Midwest Claims Processing, Inc.
Primary Care Physicians Center, LLC
Pros Temporary Staffing, Inc.
Watermark Physician Services, Inc.
The 6300 West Roosevelt Limited Partnership

Subsidiaries Incorporated or Organized in the Commonwealth of Pennsylvania
V-II Acquisition Co., Inc.

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CEO PURSUANT TO
RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

            I, Charles N. Martin, Jr., Chairman and Chief Executive Officer of Vanguard Health Systems, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Vanguard Health Systems, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,  results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))  for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the registrant’s disclosure  controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of  the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 23, 2008

                                                            /s/ Charles N. Martin, Jr.                     
                                                            Charles N. Martin, Jr.
                                                            Chairman of the Board and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CFO PURSUANT TO
RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

            I, Phillip W. Roe, Executive Vice President, Chief Financial Officer and Treasurer of Vanguard Health Systems, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Vanguard Health Systems, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,  results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the registrant’s disclosure  controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of  the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  September 23, 2008

                                                            /s/ Phillip W. Roe                                 
                                                            Phillip W. Roe
                                                            Executive Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Vanguard Health Systems, Inc. (the “Company”) for the 12 months ended June 30, 2008 (the “Report”), I, Charles N. Martin, Jr., Chairman of the Board and Chief Executive Officer of the Company, certify, for the purpose of complying with 18 U.S.C. Section 1350 and Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

            (1)        The Report fully complies with the requirements of Section 13(a) or 15(d)
                        of the Exchange Act; and

            (2)        The information contained in the Report fairly presents, in all material
                        respects, the financial condition and results of operations of the Company.

/s/ Charles N. Martin, Jr.                     
Charles N. Martin, Jr.
Chairman of the Board and Chief Executive Officer

September 23, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Vanguard Health Systems, Inc. (the “Company”) for the 12 months ended June 30, 2008 (the “Report”), I, Phillip W. Roe, Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, for the purpose of complying with 18 U.S.C. Section 1350 and Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

            (1)        The Report fully complies with the requirements of Section 13(a) or 15(d)
                        of the Exchange Act; and

            (2)        The information contained in the Report fairly presents, in all material
                        respects, the financial condition and results of operations of the Company.

/s/ Phillip W. Roe                                 
Phillip W. Roe
Executive Vice President, Chief Financial Officer and Treasurer

September 23, 2008