S-1/A 1 g25907a1sv1za.htm FORM S-1/A sv1za
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As filed with the Securities and Exchange Commission on June 6, 2011
Registration No. 333-173547
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
Vanguard Health Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
         
Delaware
(State or other jurisdiction of
incorporation or organization)
  8062
(Primary Standard Industrial
Classification Code Number)
  62-1698183
(I.R.S. Employer
Identification Number)
 
Vanguard Health Systems, Inc.
20 Burton Hills Boulevard
Nashville, Tennessee 37215
(615) 665-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
Ronald P. Soltman
Executive Vice President, General Counsel and Secretary
Vanguard Health Systems, Inc.
20 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
(615) 665-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
With copies to:
     
Risë B. Norman, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
Tel: (212) 455-2000
Fax: (212) 455-2502
  John A. Tripodoro, Esq.
Douglas S. Horowitz, Esq.
Cahill Gordon & Reindel llp
80 Pine Street
New York, NY 10005
Tel: (212) 701-3000
Fax: (212) 269-5420
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
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 þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
    Proposed Maximum
     
Title of Each Class of
    Amount to
    Aggregate Offering
    Aggregate Offering
    Amount of
Securities to be Registered     be Registered (1)     Price per Share     Price (1) (2)     Registration Fee (3)
Common Stock, par value $0.01 per share
    28,750,000     $23     $661,250,000     $76,771.13
                         
 
(1)  Including shares to be sold upon exercise of the underwriters’ option. See “Underwriting.”
(2)  Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act.
(3)  $69,660 has been previously paid with respect to a proposed maximum aggregate offering price of $600,000,000 in respect of the filing that the Registrant made on April 15, 2011. An additional $7,111.13 is being paid with this Amendment No. 1 with respect to the $661,250,000 proposed maximum aggregate offering price being registered with this Amendment No. 1.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission (“SEC”), acting pursuant to said Section 8(a), may determine.
 
 


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The information in this prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED JUNE 6, 2011
 
PROSPECTUS
 
25,000,000 Shares
 
(VANGUARD HEALTH SYSTEMS, INC. LOGO)
 
Common Stock
 
 
 
 
This is the initial public offering of Vanguard Health Systems, Inc. We are offering 25,000,000 shares of common stock.
 
No public market currently exists for our common stock. We estimate the initial public offering price of our common stock will be between $21.00 and $23.00 per share. An application has been made for the listing of our common stock on The New York Stock Exchange (“NYSE”) under the symbol ‘‘VHS.”
 
After completion of this offering, the Sponsors (as defined herein) and certain members of our management who are party to the stockholders agreement will continue to own a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Principal Stockholders.”
 
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 17 of this prospectus to read about factors you should consider before buying shares of our common stock.
 
 
 
 
                 
   
Per Share
   
Total
 
 
Initial public offering price
  $           $        
Underwriting discounts and commissions
  $       $    
Proceeds, before expenses, to us
  $       $  
 
We have granted the underwriters an option for a period of 30 days to purchase up to 3,750,000 additional shares of common stock on the same terms and conditions set forth above to cover over-allotments, if any.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
 
The underwriters expect to deliver the shares of common stock against payment in New York, New York on or about          , 2011.
 
 
 
 
Joint Book-Running Managers
BofA Merrill Lynch Barclays Capital
 
Citi Deutsche Bank Securities   J.P. Morgan
 
Senior Co-Managers
Lazard Capital Markets Wells Fargo Securities
 
Co-Managers
 
RBC Capital Markets   Avondale Partners   Baird      Morgan Keegan
 
CRT Capital Group LLC   Gleacher & Company Leerink Swann Ticonderoga Securities
 
Prospectus dated          , 2011.


 

 
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You should rely only on the information contained in this prospectus or in any free writing prospectus we authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or such other date stated in this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
 
 
 
Unless otherwise indicated or the context otherwise requires, financial data in this prospectus reflects the consolidated business and operations of Vanguard Health Systems, Inc. and its consolidated subsidiaries.
 
 
 
 


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INDUSTRY AND MARKET DATA
 
This prospectus includes information and forecasts regarding the U.S. healthcare industry and other market data that has been prepared by (1) Centers for Medicare and Medicaid Services (“CMS”), a government agency, or (2) the U.S. Census Bureau, or compiled from market research reports, industry publications and surveys, internal company surveys or other publicly available information. All general U.S. healthcare industry data that are not cited as being from a specified source are from CMS and, respectively, all general U.S. population data that are not cited as being from a specified source are from the U.S. Census Bureau. Third-party industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. While we are not aware of any misstatements regarding any industry data presented herein, our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

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PROSPECTUS SUMMARY
 
This summary highlights significant aspects of our business and this offering, but it is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the section entitled “Risk Factors” and the historical financial data and related notes, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
 
Unless otherwise noted, references in this prospectus to “Vanguard,” the “Company,” “we,” “us,” and “our” refer to Vanguard Health Systems, Inc. and its consolidated subsidiaries. As used herein, the term “Acquisitions” refers to our acquisition of substantially all of the assets of The Detroit Medical Center and the acquisition of substantially all of the assets of Westlake Hospital and West Suburban Medical Center as described under “The Acquisitions.” We have a fiscal year end of June 30. Fiscal years are identified in this prospectus according to the calendar year in which they end. For example, fiscal 2010 refers to the year ended June 30, 2010.
 
Our Company
 
We are a leading operator of regionally-focused integrated healthcare delivery networks with significant presence in several large and attractive markets. At the core of our networks are our 26 hospitals which, together with our strategically-aligned outpatient facilities and related businesses, allow us to provide a complete range of services in the communities we serve. In certain of our markets, we also operate health plans that we believe complement and enhance our market position and provide us with expertise that we believe will be increasingly important as the healthcare market evolves. We enjoy an established reputation in our communities for high quality care due to our commitment to delivering a patient-centered experience in a highly reliable environment of care. Our significant scale, range of services, quality reputation and focus on helping our communities achieve “health for life” provide us with significant competitive advantages and growth opportunities in our chosen markets. We have recently executed a number of acquisitions that position us well in new markets and enhance our position in current markets and that we believe will result in attractive growth opportunities for us. During the year ended June 30, 2010 and the nine months ended March 31, 2011, we generated total revenues of $3,376.9 million and $3,394.1 million, respectively. During the same periods, we generated Adjusted EBITDA of $326.6 million and $292.7 million, respectively. See “—Summary Historical Financial and Other Data” for a reconciliation of net income (loss) attributable to Vanguard Health Systems, Inc. stockholders to Adjusted EBITDA for such periods.
 
Our hospitals offer a variety of medical and surgical services including emergency services, general surgery, internal medicine, cardiology, obstetrics, orthopedics and neurology, as well as select tertiary services such as open-heart surgery and level II and III neonatal intensive care at certain facilities. In addition, certain of our facilities provide on-campus and off-campus outpatient and ancillary services including outpatient surgery, physical therapy, radiation therapy, diagnostic imaging and laboratory services. Through our health plans segment, we operate three managed care health plans in Arizona and Illinois that together served approximately 242,300 members as of March 31, 2011. On a pro forma basis including the results of the Acquisitions, 85.5% of our total revenues for the nine months ended March 31, 2011 were derived from our acute care services segment.
 
Central to our strategy is our focus on building and operating regionally-focused integrated healthcare delivery networks that are recognized for providing high-performance and patient-centered care. We have instituted several corporate and regional initiatives that we believe will enhance our leading reputation in the markets we serve and lead to sustainable growth. We intend to continue to grow our business by pursuing in-market expansion initiatives in our current markets, capitalizing on the growth opportunities provided by our


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recent acquisitions, driving physician collaboration and alignment, leveraging our health plans and pursuing selective acquisitions that fit our strategic profile and operating strategies.
 
Our History and Sponsors
 
On September 23, 2004, pursuant to an agreement and plan of merger among us, VHS Holdings LLC and Health Systems Acquisition Corp., a newly formed Delaware corporation, The Blackstone Group, together with its affiliates (collectively, “Blackstone”), acquired securities representing a majority of our common equity (the “2004 Merger”). In connection with the 2004 Merger, Morgan Stanley Capital Partners, together with its affiliates (collectively, “MSCP”, and collectively with Blackstone, the “Sponsors”), certain senior members of management and certain other stockholders contributed a portion of the consideration they received in the 2004 Merger to acquire equity interests in us. We refer to the 2004 Merger, the financing transactions related to the 2004 Merger and other related transactions collectively as the “Recapitalization.” Immediately after completion of the Recapitalization, Blackstone, MSCP (together with Baptist Health Services, which purchased $5.0 million of our equity interests in connection with the 2004 Merger) and certain members of management held approximately 66.1%, 18.0% and 15.9%, respectively, of the common equity of Vanguard. In connection with this offering, Holdings (as defined herein) will merge with and into Vanguard with Vanguard as the surviving corporation. See “Holdings Merger” and “Compensation Discussion and Analysis—Conversion of Management’s Holdings LLC Units” for further information.
 
Since the Recapitalization, we have achieved significant financial, quality, service capability and operational efficiency improvements in our hospitals and have materially increased our total revenues, Adjusted EBITDA and cash flows from operating activities. Additionally, we have invested substantially in clinical information technology and increased our corporate and regional resources dedicated to physician alignment, nurse workforce and healthcare delivery services.
 
Our Industry
 
We believe efficient and well-capitalized operators of integrated healthcare delivery networks are favorably positioned to benefit from current industry trends, including:
 
  •     Growing need for healthcare services.  The U.S. Census Bureau estimates that the number of individuals age 65 and older has grown 1.3% compounded annually over the past 20 years and is expected to grow 3.0% compounded annually over the next 20 years, approximately three times faster than the overall population. We believe the anticipated increase in the number of individuals age 65 and older, together with expansion of health coverage, increased prevalence of chronic conditions such as diabetes and advances in technology will drive demand for our specialized medical services and generally favor providers that possess integrated networks and a wide array of services and capabilities.
 
  •     Growing premium on high-performance, patient-centered care networks.  The U.S. healthcare system continues to evolve in a manner that places an increasing emphasis on high-performance, patient-centered care supported by robust information technology and effective care coordination. We believe our focus on developing clinically integrated, comprehensive healthcare delivery networks, commitment to patient-centered care, our experience with risk-based contracting and our experienced management team position us well to respond to these emerging trends and manage the changing healthcare regulatory and reimbursement environment.
 
  •     Impact of health reform.  The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), is expected to have a substantial impact on the healthcare industry. We believe the expansion of insurance coverage mandated by the Health Reform Law will, over time, increase our reimbursement related to providing services to individuals who were previously uninsured.


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  Conversely, the contemplated reductions in the growth in Medicare payments and the decreases in disproportionate share hospital payments will adversely affect our government reimbursement. Significant uncertainty regarding the ultimate implementation of the Health Reform Law remains and therefore we are unable to predict its net impact on us. However, due to attributes such as our high-quality, patient-centered care model, well-developed integrated care networks and our alignment with physicians, we believe that we are well positioned to respond effectively to the opportunities and challenges presented by this important legislation.
 
Our Competitive Strengths
 
We believe the significant factors that will enable us to successfully implement our mission and business strategies include the following:
 
  •     Attractive markets with substantial growth opportunities.  We have established a significant presence in five large urban and suburban markets with attractive demographics, competitive landscapes, payer mixes and opportunities for expansion. We enjoy leading positions and unique capabilities in many of our markets and have attractive opportunities across our portfolio to expand our service capabilities to drive additional growth and market penetration.
 
  •     Regionally-focused integrated care networks.  We provide a broad range of services in all of our markets through established networks of acute care and specialty hospitals and complementary outpatient facilities. We believe our network approach allows us to more effectively collaborate with physicians and tailor our services to meet the needs of a broader population and enhance our market share. Additionally, we believe a broader network presence provides us with certain competitive advantages, particularly our ability to attract payers and recruit physicians and other medical personnel.
 
  •     Comprehensive portfolio of attractive facilities.  We have invested substantially to enhance the quality and range of services provided at our facilities. We believe that, as a result of our significant capital investments in our facilities, we have established a positive reputation among patients and referral sources, and are well positioned to attract leading physicians and other highly skilled healthcare professionals in our communities.
 
  •     Focus on high-quality, patient-centered care.  We are focused on providing high-performance, patient-centered care in our communities. Central to this mission is a significant focus on clinical quality, where we have implemented several initiatives to maintain and enhance our delivery of exceptional care. Likewise, we have made significant investments in providing a patient-centered experience and driving high patient satisfaction.
 
  •     Track record of consistent organic growth and cash flows.  Most of our growth during the past five years has been achieved by enhancing and expanding our services, improving our revenues and managing our costs in our existing markets. Through these efforts, we have generated consistent organic growth and strong cash flows, and our performance has enabled us to invest significant capital in our markets and facilities.
 
  •     Leverage our health plan experience to embrace value-based reimbursement models.  Central to the Health Reform Law is the principle of a value-based payment system — provider payments based on accountability, risk-sharing and the ability to optimize efficiency, quality and access. We operate strategically important health plans that we believe provide us with differentiated capabilities and competencies that will become increasingly important as the healthcare system evolves. More specifically, our managed care plans provide us with essential member data and insights into state care management initiatives; and our experience with risk-bearing contracts has established physician alignment and distinct accountability around the care that is provided. This alignment of health strategies between our health plans and our health network also promotes greater efficiency and quality of care in our care delivery processes. In addition, we were selected to participate in the Acute Care Episode (“ACE”) program for cardiology and orthopedic services in our San Antonio, Texas market for the past three years. The ACE program


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  is an experimental program under which providers are allowed to share in-risk based payments with physicians and patients based on quality outcomes and cost savings.
 
  •     Proven ability to complete and integrate acquisitions.  Since our founding in 1997, we have expanded our operations by acquiring hospital systems that fit our strategic profile and operating strategies. We have demonstrated a consistent ability to leverage our experience, access to capital, transformative clinical and business approaches and other capabilities to enhance the profitability of our acquired hospital systems and execute in-market development activities to expand our market presence and accelerate growth. For example, we acquired the Baptist Health System in San Antonio, Texas in 2003 with 1,537 licensed beds and annual revenues of approximately $431.0 million. Baptist Health System’s annual revenues had grown to approximately $905.0 million for the fiscal year ended June 30, 2010, and it currently has 1,753 licensed beds.
 
  •     Experienced and incentivized management team.  Our senior management team has an average of more than 20 years of experience in the healthcare industry and a proven track record of executing on strategic acquisitions and achieving strong operating results. Our management team collectively owns a substantial percentage of our equity, providing strong alignment with the long-term interests of stockholders.
 
Our Growth Strategy
 
The key elements of our strategy to achieve our mission and generate sustainable growth are outlined below:
 
  •     Pursue growth opportunities in established markets.  We continuously work to identify services that are in demand in the communities we serve that we do not provide or provide only on a limited basis. When such opportunities are identified, we employ a number of strategies to respond, including facility development, outpatient strategies and physician recruiting. Where appropriate, we will also make selective acquisitions. Recent examples include the acquisition of Arizona Heart Hospital and Arizona Heart Insititute in Phoenix, Arizona, the acquisition of West Suburban Hospital and Westlake Hospital in Chicago, Illinois and the construction of the new Mission Trail Baptist Hospital in San Antonio, Texas.
 
  •     Capitalize on recent acquisitions.  We have completed or announced several acquisitions recently that enhance our capabilities in existing markets and position us well in new markets. For example, through our acquisition of West Suburban Medical Center and Westlake Hospital and our pending acquisition of Holy Cross Hospital, we have substantially expanded our presence in the greater Chicago market. Additionally, we acquired The Detroit Medical Center, which we believe provides us a unique growth opportunity in a new market, including by expanding services.
 
  •     Continue to strengthen our market presence and leading reputation.  We intend to position ourselves to thrive in a changing healthcare environment by continuing to build and operate high-performance, patient-centered care networks, fully engaging in health and wellness, and enhancing our strong reputation in our markets. We believe these efforts, together with our local presence and trust, national scale and access to capital, will enable us to advance our reputation and generate sustainable growth.
 
  •     Drive physician collaboration and alignment.  We believe that we must work collaboratively with physicians to provide clinically superior healthcare services. Since the beginning of fiscal year 2009, we have recruited a significant number of physicians and have implemented multiple initiatives to effectively align the interests of all patient caregivers. In addition, we are aligning with our physicians to participate in various forms of risk contracting, including pay for performance programs, bundled payments and, eventually, global risk.


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  •     Leverage our health plan capabilities.  We operate strategically-important health plans in Arizona and Illinois that we believe provide us with differentiated capabilities in these markets and enable us to develop experience and competencies that we expect to become increasingly important as the healthcare system evolves.
 
  •     Pursue selective acquisitions.  We believe that our foundation built on patient-centered healthcare and clinical quality and efficiency in our existing markets will give us a competitive advantage in expanding our services in these and other markets through acquisitions or partnering opportunities. We continue to monitor opportunities to acquire hospitals or systems that strategically fit our vision and long-term strategies.
 
Risk Factors
 
Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with operating in the healthcare industry. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Some of the more significant risks to our success include the following:
 
  •     The current challenging economic environment could materially adversely affect our financial position, results of operations or cash flows, and we are unsure whether these conditions will improve in the near future.
 
  •     If we are unable to enter into favorable contracts with managed care plans, our operating revenues may be reduced.
 
  •     Our revenues may decline if federal or state programs reduce our Medicare or Medicaid payments.
 
  •     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.
 
  •     Our substantial debt could limit our ability to pursue our growth strategy.
 
  •     Our debt agreements contain restrictions that may limit our flexibility in operating our business.
 
  •     We face intense competition that could limit our growth opportunities.
 
  •     Legal proceedings and governmental investigations could negatively impact our business.
 
In addition, it is difficult to predict the impact on our Company of the Health Reform Law due to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual and potentially delayed implementation, pending court challenges, and possible amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the law. Because of the many variables involved, we are unable to predict the net effect on the Company of the Health Reform Law’s planned reductions in the growth of Medicare payments, the expected increases in our revenues from providing care to previously uninsured individuals, and numerous other provisions in the law that may affect us.
 
Our Recent Acquisitions
 
The Detroit Medical Center
 
Effective January 1, 2011, we purchased substantially all of the assets of The Detroit Medical Center, a Michigan non-profit corporation, and certain of its affiliates (collectively, “DMC”), which assets consist primarily of eight acute care and specialty hospitals with a combined 1,734 beds in the Detroit, Michigan metropolitan area and related healthcare facilities. We paid cash of $368.1 million ($4.8 million of this amount


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represented acquisition related expenses) to acquire the DMC assets using cash on hand. We also committed to spend $350.0 million during the five years subsequent to closing for the routine capital needs of the DMC facilities and an additional $500.0 million in capital expenditures during this same five-year period, which latter amount relates to a specific project list agreed to between the DMC board of representatives and us. DMC generated total revenues of approximately $2.1 billion during its most recent fiscal year.
 
See “Unaudited Pro Forma Condensed Combined Financial Information” included elsewhere in this prospectus for information regarding the impact of this acquisition on us.
 
The Resurrection Facilities
 
On August 1, 2010, we completed the purchase of Westlake Hospital and West Suburban Medical Center (the “Resurrection Facilities”) in the western suburbs of Chicago, Illinois, from Resurrection Health Care for a purchase price of approximately $45.3 million. Westlake Hospital is a 225-bed acute care facility located in Melrose Park, Illinois, and West Suburban Medical Center is a 233-bed acute care facility located in Oak Park, Illinois. Both of these facilities are located less than seven miles from our MacNeal Hospital and will enable us to achieve a market presence in the western suburban area of Chicago. We expect the addition of these hospitals will allow us to provide services in those communities in a more efficient manner. The Resurrection Facilities generated total revenues of approximately $284.0 million during their most recent fiscal year.
 
See “Unaudited Pro Forma Condensed Combined Financial Information” included elsewhere in this prospectus for information regarding the impact of this acquisition on us.
 
Arizona Heart Hospital and Arizona Heart Institute
 
During October 2010, we completed the purchase of certain assets and liabilities of the 59-bed Arizona Heart Hospital and of the Arizona Heart Institute, both located in Phoenix, Arizona, for an aggregate purchase price of approximately $39.0 million, which we funded with cash on hand. We expect these acquisitions to provide a base upon which to formalize and expand a market-wide cardiology service strategy within the communities of metropolitan Phoenix that we serve.
 
Recent Developments
 
In December 2010, it was announced that we had entered into a definitive purchase agreement to acquire Holy Cross Hospital, a not-for-profit Catholic hospital. Holy Cross Hospital is a 274-bed hospital located in southwest Chicago, Illinois. Holy Cross Hospital generated revenues of approximately $115.0 million during its most recent fiscal year. Although we have entered into a definitive agreement to acquire Holy Cross Hospital, we cannot assure you that the conditions to closing will be met or that the acquisition will be consummated.
 
In February 2011, it was announced that we had entered into a non-binding letter of intent to form a joint venture with Valley Baptist Health System in the Rio Grande Valley of Texas to own and operate its existing health system. The system includes two hospitals, with a combined 866 licensed beds, located in Harlingen and Brownsville, a health plan and related ancillary services. Valley Baptist generated revenues of approximately $527.0 million during its most recent fiscal year. Since this is only a non-binding letter of intent, we cannot assure you that we will enter into a definitive agreement to form the joint venture.
 
Corporate Information
 
We are a corporation organized under the laws of the State of Delaware on July 1, 1997. Our principal executive offices are located at 20 Burton Hills Boulevard, Nashville, Tennessee 37215, and our telephone number is (615) 665-6000. Our website address is www.vanguardhealth.com. The information on our website is not part of this prospectus.


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Organizational Structure
 
In connection with this offering, we will enter into a merger transaction pursuant to which VHS Holdings LLC (“Holdings”) will merge with and into Vanguard with Vanguard as the surviving corporation and the holders of membership units of Holdings will receive shares of common stock, restricted stock and/or options to purchase common stock of Vanguard as described in further detail under “Holdings Merger” and “Compensation Discussion and Analysis—Conversion of Management’s Holdings LLC Units” (the “Holdings Merger”).
 
The diagram below depicts our organizational structure immediately following the closing of this offering and the Holdings Merger and the ownership percentages reflect common shares and equivalents outstanding to date.
 
(FLOW CHART)
 
 
(1) Includes Baptist Health Foundation of San Antonio, an affiliate of the former owner of our division, Baptist Health Systems of San Antonio, Texas, that owns approximately 0.4% of our common stock and certain non-management associates of management.
 
(2) Does not include the restricted stock and stock options to be received in connection with the Holdings Merger.
 
(3) In connection with the Holdings Merger, Blackstone, MSCP and the other equityholders of Holdings will receive common stock, and in certain instances, restricted stock and stock options to purchase common stock of Vanguard, in respect of their ownership in Holdings.
 
(4) The ownership percentages reflected above include common shares and equivalents and do not represent beneficial ownership as set forth in “Principal Stockholders” included elsewhere in this Prospectus because


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beneficial ownership percentages also include certain vested stock options that may or may not be out of the money.
 
(5) We issued $747,219,000 aggregate principal amount at maturity (generating approximately $444.7 million in gross proceeds) of our 10.375% Senior Discount Notes on January 26, 2011 in a private placement offering and we intend to use a portion of the net proceeds of this offering to redeem such 10.375% Senior Discount Notes. See “Use of Proceeds.”
 
(6) VHS Holdco II, Inc. is a wholly owned subsidiary of VHS Holdco II, LLC existing solely for the purpose of serving as co-issuer of the (i) $950.0 million aggregate principal amount of 8.0% Notes issued on January 29, 2010 (“Initial 8.0% Notes”), an additional $225.0 million aggregate principal amount of 8.0% Notes issued on July 14, 2010 (the “Add-on Notes”) and (ii) $350.0 million aggregate principal amount of 7.750% Notes issued on January 26, 2011 (the “7.750% Notes”). It does not have any operations or assets and does not generate any revenues.
 
(7) VHS Holdco II, LLC is the borrower under our 2010 Credit Facilities which consist of an $815.0 million senior secured term loan facility maturing in January 2016 and a $260.0 million senior secured revolving credit facility maturing in January 2015. The revolving credit facility is currently undrawn except for $36.1 million of outstanding letters of credit.
 
(8) VHS Holdco II, LLC and VHS Holdco II, Inc. issued the Initial 8.0% Notes on January 29, 2010 and the Add-on Notes on July 14, 2010, each in a private placement offering.
 
(9) VHS Holdco II, LLC and VHS Holdco II, Inc. issued the 7.750% Notes on January 26, 2011 in a private placement offering.
 
(10) Most of our wholly-owned domestic subsidiaries guarantee the 2010 Credit Facilities, the 8.0% Notes and the 7.750% Notes.


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The Offering
 
Common Stock We Are Offering 25,000,000 shares
 
Underwriters’ Option We have granted the underwriters a 30-day option to purchase up to 3,750,000 additional shares of our common stock at the initial public offering price to cover over-allotments, if any.
 
Common Stock to be Outstanding After This Offering 71,478,794 shares (75,228,794 shares if the option to purchase additional shares is exercised in full).
 
Use of Proceeds We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately $511.6 million, assuming the shares are offered at $22.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus.
 
We intend to use the anticipated net proceeds to redeem the $488.0 million estimated accreted value of our 10.375% Senior Discount Notes due 2016 (the “10.375% Senior Discount Notes”), including the 5% redemption premium relating to the notes. The remaining net proceeds will be used to make payments related to the $14.0 million net liability due to the Sponsors under the amended transaction and monitoring fee agreement (which we expect to execute concurrently with this offering) as such payments become due and for other general corporate purposes. See “Use of Proceeds.”
 
Dividend Policy We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our ability to pay dividends on our common stock is limited by the covenants of our 2010 Credit Facilities (as defined herein) as well as the indentures governing the 8.0% Senior Notes due 2018 (the “8.0% Notes”), the 7.750% Senior Notes due 2019 (the “7.750% Notes”) and our 10.375% Senior Discount Notes and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy” and “Description of Certain Indebtedness.”
 
Risk Factors You should carefully read and consider the information set forth under “Risk Factors” beginning on page 17 of this prospectus and all other information set forth in this prospectus before investing in our common stock.
 
Proposed NYSE Symbol “VHS”
 
Conflicts of Interest One of our directors, M. Fazle Husain, is an employee of Metalmark Capital LLC. All directors and employees of Metalmark Capital LLC (“Metalmark”) are also employees of an affiliate of Citigroup Global Markets Inc. (“Citigroup”), one of the underwriters in this offering, and, in such capacity, manage similar investment funds on behalf of Citigroup and its affiliates. As described on pages 209 and 210,


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Metalmark may be deemed to be the beneficial owner of 7,521,897 shares of our common stock representing a 16.9% beneficial ownership interest in us and will beneficially own approximately 9.9% of our common stock upon the completion of this offering (assuming the underwriters’ option to purchase additional shares is not exercised). As a result of Mr. Husain’s relationship with us and Metalmark and Metalmark’s current ownership interest in us, Citigroup is deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority. Accordingly, this offering is being conducted in accordance with Rule 5121, which requires, among other things, that a “qualified independent underwriter” (as such term is defined thereunder) participate in the preparation of the registration statement and prospectus and conduct due diligence. Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) is assuming the responsibilities of acting as the qualified independent underwriter in this offering. We have agreed to indemnify Merrill Lynch for acting as a qualified independent underwriter against certain liabilities, including liabilities under the Securities Act of 1933 (the “Securities Act”) and to contribute to payments that Merrill Lynch may be required to make for these liabilities. See “Underwriting — Conflicts of Interest.”
 
Certain Other Relationships Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory, investment banking, commercial banking and other services for us for which they received or will receive customary fees and expenses. See “Underwriting — Other Relationships.”
 
Lazard Frères & Co. LLC referred this transaction to Lazard Capital Markets LLC and is receiving a referral fee from Lazard Capital Markets LLC in connection therewith. Lazard Frères & Co. LLC is serving as our advisor in connection with this offering and is receiving a customary fee in connection therewith. See “Underwriting — Other Relationships.”
 
 
Unless we indicate otherwise or the context requires, all information in this prospectus:
 
  •     assumes (1) no exercise of the underwriters’ option to purchase additional shares of our common stock and (2) an initial public offering price of $22.00 per share, the midpoint of the initial public offering range indicated on the cover of this prospectus;
 
  •     reflects the estimated 59.584218 to 1 stock split that we will effectuate prior to the consummation of the offering;
 
  •     assumes the conversion of all of the membership units of Holdings into an estimated 1,866,837 incremental shares of common stock upon the consummation of this offering as described under “Holdings Merger” and “Compensation Discussion and Analysis — Conversion of Management’s Holdings LLC Units”;
 
  •     does not reflect (1) 3,978,065 outstanding stock options at an exercise price of $2.80; 142,394 outstanding stock options at an exercise price of $2.91 and 3,152,166 outstanding stock options (of which 1,283,884 will be issued upon the completion of the Holdings Merger) at an exercise price of $33.67; (2) restricted stock units related to 588,408 shares of our common stock outstanding prior to the conversion of all of the membership units of Holdings (see “Compensation Discussion and Analysis — Conversion of Management’s Holdings LLC Units”)


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  upon the completion of this offering; (3) 1,687,977 incremental shares of restricted stock issued in the Holdings Merger as described under “Holdings Merger” and “Compensation Discussion and Analysis — Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards in Fiscal 201 Table — Conversion of Management’s Holdings LLC Units”; and (4) shares of our common stock reserved for future grants under our 2011 Stock Incentive Plan; see “Management’s Discussion and Analysis of Financial Condition and Results of Information — Stock Compensation — Options Awards Summary and Features”; and
 
  •     does not reflect any cash to be received in lieu of fractional shares in respect of the Holdings Merger and the stock split.


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Summary Historical Financial and Other Data
 
The following table sets forth our summary historical consolidated financial and operating data for the fiscal years ended June 30, 2008, 2009 and 2010 and the nine months ended March 31, 2010 and 2011. Our statements of operations and balance sheet data as of and for the years ended June 30, 2008, 2009 and 2010 were derived from our audited consolidated financial statements for each fiscal year included elsewhere in this prospectus. The summary historical consolidated financial data as of and for the nine months ended March 31, 2010 and 2011 were derived from our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this prospectus, which have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly our financial position and results of operations. Operating results for the nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year ending June 30, 2011. The summary unaudited as adjusted balance sheet information as of March 31, 2011 has been prepared to give effect to this offering and the application of the net proceeds contemplated therefrom as if it had occurred on March 31, 2011. The summary unaudited as adjusted balance sheet information is for informational purposes only and does not purport to indicate balance sheet information as of any future date. You should read this information in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Historical Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the annual consolidated and interim condensed consolidated financial statements and related notes included elsewhere in this prospectus.
 
                                         
                Nine Months
  Nine Months
                Ended
  Ended
    Year Ended
  Year Ended
  Year Ended
  March 31,
  March 31,
    June 30,
  June 30,
  June 30,
  2010
  2011
   
2008
 
2009
 
2010
  (unaudited)  
(unaudited)
    (Dollars in millions, except per share data)
 
Statement of Operations Data:
                                       
Total revenues
  $ 2,775.6     $ 3,185.4     $ 3,376.9     $ 2,518.5     $ 3,394.1  
Costs and expenses:
                                       
Salaries and benefits (includes stock compensation of $2.5, $4.4, $4.2, $3.5 and $3.6)
    1,146.2       1,233.8       1,296.2       962.6       1,381.2  
Health plan claims expense
    328.2       525.6       665.8       499.9       508.0  
Supplies
    433.7       455.5       456.1       339.4       462.3  
Provision for doubtful accounts
    205.5       210.3       152.5       113.0       214.1  
Other operating expenses
    398.5       461.9       483.9       363.4       539.4  
Depreciation and amortization
    129.3       128.9       139.6       101.9       131.6  
Interest, net (1)
    122.1       111.6       115.5       84.7       117.9  
Debt extinguishment costs
                73.5       73.2        
Impairment and restructuring charges
          6.2       43.1       43.1       6.0  
Other expenses
    6.5       2.7       9.1       3.5       14.9  
                                         
Total costs and expenses
    2,770.0       3,136.5       3,435.3       2,584.7       3,375.4  
                                         
Income (loss) from continuing operations before income taxes
    5.6       48.9       (58.4 )     (66.2 )     18.7  
Income tax benefit (expense)
    (2.2 )     (16.8 )     13.8       18.2       (11.7 )
                                         
Income (loss) from continuing operations
    3.4       32.1       (44.6 )     (48.0 )     7.0  
Loss from discontinued operations, net of taxes
    (1.1 )     (0.3 )     (1.7 )     (1.9 )     (5.4 )
                                         
Net income (loss)
    2.3       31.8       (46.3 )     (49.9 )     1.6  
Less: Net income attributable to non-controlling interests
    (3.0 )     (3.2 )     (2.9 )     (2.1 )     (2.6 )
                                         
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders
  $ (0.7 )   $ 28.6     $ (49.2 )   $ (52.0 )   $ (1.0 )
                                         


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                Nine Months
  Nine Months
                Ended
  Ended
    Year Ended
  Year Ended
  Year Ended
  March 31,
  March 31,
    June 30,
  June 30,
  June 30,
  2010
  2011
   
2008
 
2009
 
2010
  (unaudited)  
(unaudited)
    (Dollars in millions, except per share data)
 
Per Share Data (2):
                                       
Basic earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders:
                                       
Continuing operations
  $ 0.01     $ 0.65     $ (1.06 )   $ (1.12 )   $ 0.10  
Discontinued operations
  $ (0.02 )   $ (0.01 )   $ (0.04 )   $ (0.04 )   $ (0.12 )
Net income (loss)
  $ (0.01 )   $ 0.64     $ (1.10 )   $ (1.16 )   $ (0.02 )
Diluted earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders:
                                       
Continuing operations
  $ 0.01     $ 0.64     $ (1.06 )   $ (1.12 )   $ 0.08  
Discontinued operations
  $ (0.02 )   $ (0.01 )   $ (0.04 )   $ (0.04 )   $ (0.10 )
Net income (loss)
  $ (0.01 )   $ 0.63     $ (1.10 )   $ (1.16 )   $ (0.02 )
Weighted average shares: (in thousands)
                                       
Basic
    44,661       44,661       44,650       44,655       44,646  
Diluted
    44,661       45,201       44,650       44,655       51,208  
Other Financial Data:
                                       
Capital expenditures
  $ 119.8     $ 132.0     $ 155.9     $ 111.1     $ 139.1  
Cash provided by operating activities
    176.3       313.1       315.2       218.7       210.0  
Cash used in investing activities
    (143.8 )     (133.6 )     (156.5 )     (111.4 )     (494.2 )
Cash provided by (used in) financing activities
    (11.0 )     (12.9 )     (209.3 )     (205.2 )     529.2  
Adjusted EBITDA (3)(4)
  $ 266.0     $ 302.7     $ 326.6     $ 243.7     $ 292.7  
Segment Data:
                                       
Acute care services:
                                       
Total revenues (5)
  $ 2,325.4     $ 2,507.4     $ 2,537.2     $ 1,890.5     $ 2,747.8  
Income (loss) from continuing operations before income taxes
    (39.4 )     1.3       (115.0 )     (107.4 )     (28.0 )
Segment EBITDA (6)
    221.3       251.6       266.6       199.8       243.7  
Health plans:
                                       
Total revenues
  $ 450.2     $ 678.0     $ 839.7     $ 628.0     $ 646.3  
Income from continuing operations before income taxes
    45.0       47.6       56.6       41.2       46.7  
Segment EBITDA (6)
    44.7       51.1       60.0       43.9       49.0  
 
                 
    As of
    March 31,
   
2011
   
Actual
 
As Adjusted(7)
 
Balance Sheet Data:
               
Cash and cash equivalents
  $ 502.6     $ 502.6  
Assets
    4,162.2       4,167.1  
Long-term debt and capital leases, including current portion
    2,779.1       2,325.9  
Working capital
    356.5       378.2  
 
 
(1) Interest, net for the year ended June 30, 2010 and the nine months ended March 31, 2011 as adjusted to give effect to the Acquisitions, the issuance of the 7.750% Notes and our 10.375% Senior Discount Notes in January 2011 and this offering and the application of the net proceeds received by us therefrom would have been $164.1 million and $125.8 million, respectively.
 
(2) Historical per share data gives effect to the estimated 59.584218 to 1 stock split that we will effectuate prior to the consummation of this offering. Weighted average basic shares as adjusted to reflect the impact of the Holdings Merger for the year ended June 30, 2010 and the nine months ended March 31, 2011 would have been 46,517 and 46,513, respectively. Weighted average diluted shares as adjusted to reflect the

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impact of the Holdings Merger for the year ended June 30, 2010 and the nine months ended March 31, 2011 would have been 46,517 and 51,380, respectively. Basic and diluted earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders as adjusted to reflect the impact of the Holdings Merger for the year ended June 30, 2010 and the nine months ended March 31, 2011 would have been $(1.06) and $(0.02), respectively.
 
(3) Adjusted EBITDA for Vanguard for the nine months ended March 31, 2011, as presented, includes the operating results of the Resurrection Facilities, that were acquired on August 1, 2010, for the months of August 2010 through March 2011, the operating results of Arizona Heart Hospital and Arizona Heart Institute for the months of October 2010 through March 2011 and the operating results of DMC from January through March 2011.
 
(4) Adjusted EBITDA is a measure used by management to evaluate its operating performance. We define Adjusted EBITDA as income (loss) attributable to Vanguard Health Systems, Inc. stockholders before interest expense (net of interest income), income taxes, depreciation and amortization, non-controlling interests, equity method income, stock compensation, gain or loss on disposal of assets, monitoring fees and expenses, realized gains or losses on investments, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges, pension expense (credits) and discontinued operations, net of taxes. Monitoring fees and expenses include fees and reimbursed expenses paid to affiliates of The Blackstone Group and Metalmark Subadvisor LLC for advisory and oversight services. It is reasonable to expect these reconciling items to occur in future periods, but for many of them the amounts recognized can vary significantly from period to period, do not relate directly to the ongoing operations of our healthcare facilities and complicate period comparisons of our results of operations and operations comparisons with other healthcare companies. Adjusted EBITDA is not intended as a substitute for net income (loss) attributable to Vanguard Health Systems, Inc. stockholders, operating cash flows or other cash flow statement data determined in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, since it does not consider certain cash requirements such as interest payments, tax payments and other debt service requirements. Because Adjusted EBITDA is not a GAAP measure and is susceptible to varying calculations, Adjusted EBITDA, as presented by us, may not be comparable to similarly titled measures of other companies. We believe that Adjusted EBITDA provides useful information as a measurement of our financial performance on the same basis as that viewed by management to investors, lenders, financial analysts and rating agencies. Since these groups have historically used EBITDA-related measures in the healthcare industry, along with other measures, to estimate the value of a company, to make informed investment decisions, to evaluate a company’s operating performance compared to that of other companies in the healthcare industry and to evaluate a company’s leverage capacity and its ability to meet its debt service requirements. Adjusted 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. Adjusted 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 a company’s operating performance. Many of the items excluded from Adjusted EBITDA result from decisions outside the control of operating management and may differ significantly from company to company due to differing long-term decisions regarding capital structure, capital investment strategies, the tax jurisdictions in which the companies operate and unique circumstances of acquired entities. Adjusted EBITDA is also used by us to measure individual performance for incentive compensation purposes and as an analytical indicator for purposes of allocating resources to our operating businesses and assessing their performance, both internally and relative to our peers, as well as to evaluate the performance of our operating


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management teams. The following table sets forth a reconciliation of Adjusted EBITDA to net income (loss) attributable to Vanguard Health Systems, Inc. stockholders for each respective period:
 
                                         
          Nine Months
 
          Ended
 
   
Year Ended June 30,
   
March 31,
 
   
2008
   
2009
   
2010
   
2010
   
2011
 
    (Dollars in millions)  
 
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders
  $ (0.7 )   $ 28.6     $ (49.2 )   $ (52.0 )   $ (1.0 )
Interest, net
    122.1       111.6       115.5       84.7       117.9  
Income tax expense (benefit)
    2.2       16.8       (13.8 )     (18.2 )     11.7  
Depreciation and amortization
    129.3       128.9       139.6       101.9       131.6  
Non-controlling interests
    3.0       3.2       2.9       2.1       2.6  
Equity method income
    (0.7 )     (0.8 )     (0.9 )     (0.8 )     (0.6 )
Stock compensation
    2.5       4.4       4.2       3.5       3.6  
Loss (gain) on disposal of assets
    0.8       (2.3 )     1.8       0.4       0.9  
Realized losses on investments
          0.6                   0.1  
Monitoring fees and expenses
    6.4       5.2       5.1       3.9       3.7  
Acquisition related expenses
                3.1             11.9  
Debt extinguishment costs
                73.5       73.2        
Impairment and restructuring charges
          6.2       43.1       43.1       6.0  
Pension credits
                            (1.1 )
Loss from discontinued operations, net of taxes
    1.1       0.3       1.7       1.9       5.4  
                                         
Adjusted EBITDA
  $ 266.0     $ 302.7     $ 326.6     $ 243.7     $ 292.7  
                                         
 
 
(5) Acute care services revenues as presented include reductions to revenues for the elimination in consolidation of revenues earned by our hospitals and related healthcare facilities attributable to services provided to enrollees in our owned health plans of $31.2 million, $34.0 million, $42.8 million, $31.7 million and $33.2 million for the years ended June 30, 2008, 2009 and 2010, and the nine months ended March 31, 2010 and 2011, respectively.
 
(6) Segment EBITDA is a measure used by management to evaluate the operating performance of our segments and to develop strategic objectives and operating plans for these segments. Segment EBITDA is defined as income (loss) from continuing operations before income taxes less interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, realized gains or losses on investments, monitoring fees and expenses, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges and pension expense (credits). 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 our segments. Management believes that Segment EBITDA provides useful information about the financial performance of our segments on the same basis as that viewed by management 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 measure determined in accordance with GAAP and is not a substitute for net income (loss), operating cash flows or other cash flow statement data. Segment EBITDA, as presented, may not be comparable to similarly titled measures of other companies. We have included below a reconciliation of Segment EBITDA as utilized by us in


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reporting our segment performance to its most directly comparable GAAP financial measure, income (loss) from continuing operations before income taxes, for each respective period.
 
                                         
          Nine Months
 
          Ended
 
   
Year Ended June 30,
   
March 31,
 
   
2008
   
2009
   
2010
   
2010
   
2011
 
    (Dollars in millions)  
 
Acute Care Services:
                                       
Income (loss) from continuing operations before income taxes
  $ (39.4 )   $ 1.3     $ (115.0 )   $ (107.4 )   $ (28.0 )
Interest, net
    126.6       112.2       116.5       85.3       118.9  
Depreciation and amortization
    125.1       124.8       135.2       98.6       128.3  
Equity method income
    (0.7 )     (0.8 )     (0.9 )     (0.8 )     (0.6 )
Stock compensation
    2.5       4.4       4.2       3.5       3.6  
Loss (gain) on disposal of assets
    0.8       (2.3 )     1.8       0.4       0.9  
Realized losses on investments
          0.6                   0.1  
Monitoring fees and expenses
    6.4       5.2       5.1       3.9       3.7  
Acquisition related expenses
                3.1             11.9  
Debt extinguishment costs
                73.5       73.2        
Impairment and restructuring charges
          6.2       43.1       43.1       6.0  
Pension credits
                            (1.1 )
                                         
Segment EBITDA
  $ 221.3     $ 251.6     $ 266.6     $ 199.8     $ 243.7  
                                         
Health Plans:
                                       
Income from continuing operations before income taxes
  $ 45.0     $ 47.6     $ 56.6     $ 41.2     $ 46.7  
Interest, net
    (4.5 )     (0.6 )     (1.0 )     (0.6 )     (1.0 )
Depreciation and amortization
    4.2       4.1       4.4       3.3       3.3  
Equity method income
                             
Stock compensation
                             
Gain (loss) on disposal of assets
                             
Realized holding losses on investments
                             
Monitoring fees and expenses
                             
Acquisition related expenses
                             
Debt extinguishment costs
                             
Impairment loss
                             
                                         
Segment EBITDA
  $ 44.7     $ 51.1     $ 60.0     $ 43.9     $ 49.0  
                                         
 
 
(7) Balance sheet data as of March 31, 2011, as adjusted gives effect to this offering and the application of the net proceeds contemplated to be received therefrom.


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RISK FACTORS
 
An investment in our common stock involves risk. You should carefully consider the following risks as well as the other information included in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes, before investing in our common stock. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. However, the selected risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of the common stock could decline and you may lose all or part of your investment in our company.
 
Risks Related to Our Business and Structure
 
The current challenging economic environment, along with difficult and volatile conditions in the capital and credit markets, could materially adversely affect our financial position, results of operations or cash flows, and we are unsure whether these conditions will improve in the near future.
 
The U.S. economy and global credit markets remain volatile. Instability in consumer confidence and increased unemployment have increased concerns of prolonged economic weakness. While certain healthcare spending is considered non-discretionary and may not be significantly impacted by economic downturns, other types of healthcare spending may be significantly adversely impacted by such conditions. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals. We are unable to determine the specific impact of the current economic conditions on our business at this time, but we believe that further deterioration or a prolonged period of economic weakness will have an adverse impact on our operations. Other risk factors discussed herein describe some significant risks that may be magnified by the current economic conditions such as the following:
 
  •     Our concentration of operations in a small number of regions, and the impact of economic downturns in those communities. To the extent the communities in and around San Antonio, Texas; Phoenix, Arizona; Chicago, Illinois; Detroit, Michigan; or certain communities in Massachusetts experience a greater degree of economic weakness than average, the adverse impact on our operations could be magnified.
 
  •     Our revenues may decline if federal or state programs reduce our Medicare or Medicaid payments or managed care companies (including managed Medicare and managed Medicaid payers) reduce our reimbursement. Current economic conditions have accelerated and increased the budget deficits for most states, including those in which we operate. These budgetary pressures may result in healthcare payment reductions under state Medicaid plans or reduced benefits to participants in those plans. Also, governmental, managed Medicare or managed Medicaid payers may defer payments to us to conserve cash. Managed care companies may also seek to reduce payment rates or limit payment rate increases to hospitals in response to reductions in enrolled participants.
 
  •     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. Higher unemployment, Medicaid benefit reductions and employer efforts to reduce employee healthcare costs may increase our exposure to uncollectible accounts for uninsured patients or those patients with higher co-pay and deductible limits.


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  •     Under extreme market conditions, there can be no assurance that funds necessary to run our business will be available to us on favorable terms or at all. Most of our cash and borrowing capacity under our $260.0 million revolving credit facility expiring in January 2015 (the “2010 Revolving Facility”) and our $815.0 million senior secured term loan maturing in January 2016 (the “2010 Term Loan Facility” and, together with the 2010 Revolving Facility, the “2010 Credit Facilities”) will be held with a limited number of financial institutions, which could increase our liquidity risk if one or more of those institutions become financially strained or are no longer able to operate.
 
We are unable to predict if the condition of the U.S. economy, the local economies in the communities we serve or global credit conditions will improve in the near future or when such improvements may occur.
 
We are unable to predict the impact of the Health Reform Law, which represents significant change to the healthcare industry.
 
As enacted, the Health Reform Law will change how healthcare services are covered, delivered, and reimbursed through expanded coverage of uninsured individuals, reduced growth in Medicare program spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality and integration. In addition, the new law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality and contains provisions intended to strengthen fraud and abuse enforcement.
 
The expansion of health insurance coverage under the Health Reform Law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. In addition, a disproportionately large percentage of the new Medicaid coverage is likely to be in states that currently have relatively low income eligibility requirements. Two such states are Texas and Illinois, where a significant portion of our licensed beds are located. Further, the Health Reform Law provides for a value-based purchasing program, the establishment of Accountable Care Organizations (“ACOs”) and bundled payment pilot programs, which will create possible sources of additional revenue.
 
However, it is difficult to predict the size of the potential revenue gains to us as a result of these elements of the Health Reform Law because of uncertainty surrounding a number of material factors including the following:
 
  •     how many previously uninsured individuals will obtain coverage as a result of the Health Reform Law (while the Congressional Budget Office (“CBO”) estimates 32 million, the Centers for Medicare & Medicaid Services (“CMS”) estimates almost 34 million; both agencies made a number of assumptions to derive that figure, including how many individuals will ignore substantial subsidies and decide to pay the penalty rather than obtain health insurance and what percentage of people in the future will meet the new Medicaid income eligibility requirements);
 
  •     what percentage of the newly insured patients will be covered under the Medicaid program and what percentage will be covered by private health insurers;
 
  •     the extent to which states will enroll new Medicaid participants in managed care programs;
 
  •     the pace at which insurance coverage expands, including the pace of different types of coverage expansion;
 
  •     the change, if any, in the volume of inpatient and outpatient hospital services that are sought by and provided to previously uninsured individuals;


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  •     the rate paid to hospitals by private payers for newly covered individuals, including those covered through the newly created American Health Benefit Exchanges (“Exchanges”) and those who might be covered under the Medicaid program under contracts with the state;
 
  •     the rate paid by state governments under the Medicaid program for newly covered individuals;
 
  •     how the value-based purchasing and other quality programs will be implemented;
 
  •     the percentage of individuals in the Exchanges who select the high deductible plans, since health insurers offering those kinds of products have traditionally sought to pay lower rates to hospitals;
 
  •     the extent to which the net effect of the Health Reform Law, including the prohibition on excluding individuals based on pre-existing conditions, the requirement to keep medical costs lower than a specified percentage of premium revenue, other health insurance reforms and the annual fee applied to all health insurers, will put pressure on the profitability of health insurers, which in turn might cause them to seek to reduce payments to hospitals with respect to both newly insured individuals and their existing business;
 
  •     the possibility that implementation of provisions expanding health insurance coverage will be delayed or even blocked due to court challenges or revised or eliminated as a result of efforts to repeal or amend the new law. Twenty-nine states and various private groups have challenged the constitutionality of the Health Reform Law in federal courts and lower courts have issued conflicting rulings on the constitutionality of the Health Reform Law, including specifically, the requirement that individuals maintain health insurance or pay a penalty. The Courts of Appeal for the Fourth, Sixth and Eleventh Circuits granted expedited review of conflicting lower court rulings. All three cases are scheduled to be heard in the first half of 2011. The Eleventh Circuit will review a Florida district court case in which the lower court ruled that the unconstitutional sections could not be severed thus rendering the entire Health Reform Law unconstitutional. On February 17, 2011, government attorneys filed a motion asking the district court to clarify that, pending appeal, the ruling was not intended to have an injunctive impact on currently-effective sections of the Health Reform Law or to halt implementation of those provisions of the Health Reform Law about to take effect. In response to the government’s motion, on March 3, 2011, the Florida district court stayed its decision pending appeal and the Department of Justice, on April 1, 2011, filed an appeal seeking expedited review from the Eleventh Circuit. On February 8, 2011, Virginia Attorney General Kenneth Cuccinelli filed a petition seeking expedited U.S. Supreme Court review of a Virginia district court’s holding that the provision requiring individuals to maintain health insurance or pay a penalty is unconstitutional, but leaving the remainder of the Health Reform Law intact. The U.S. Supreme Court announced on April 25, 2011 that it had turned down the Virginia Attorney General’s request for expedited review at the U.S. Supreme Court level, so the appeal will remain for review in the U.S. Court of Appeals for the Fourth Circuit; and
 
  •     on January 19, 2011, the U.S. House of Representatives voted 245-189 to repeal the Health Reform Law. However, the Senate rejected this proposal on February 2, 2011. Republicans have indicated, however, that in the event their efforts to repeal the Health Reform Law are unsuccessful, their intent is to seek to implement incremental revisions to many of the law’s provisions or to defund certain programs.
 
On the other hand, the Health Reform Law provides for significant reductions in the growth of Medicare spending, reductions in Medicare and Medicaid DSH payments and the establishment of programs where reimbursement is tied to quality and integration. Since approximately 55%, 56%, 57% and 59% of our net patient revenues during our fiscal years ended June 30, 2008, 2009 and 2010 and the nine months ended March 31, 2011, respectively, were from Medicare and Medicaid (including Medicare and Medicaid managed plans), reductions to these programs may significantly impact us and could offset any positive effects of the


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Health Reform Law. It is difficult to predict the size of the revenue reductions to Medicare and Medicaid spending because of uncertainty regarding a number of material factors including the following:
 
  •     the amount of overall revenues we will generate from Medicare and Medicaid business when the reductions are implemented;
 
  •     whether reductions required by the Health Reform Law will be changed by statute prior to becoming effective;
 
  •     the size of the Health Reform Law’s annual productivity adjustment to the market basket beginning in 2012 payment years;
 
  •     the amount of the Medicare DSH reductions that will be made, commencing in federal fiscal year 2014;
 
  •     the allocation to our hospitals of the Medicaid DSH reductions, commencing in federal fiscal year 2014;
 
  •     what the losses in revenues will be, if any, from the Health Reform Law’s quality initiatives;
 
  •     how successful ACOs, in which we participate, will be at coordinating care and reducing costs or whether they will decrease reimbursement;
 
  •     the scope and nature of potential changes to Medicare reimbursement methods, such as an emphasis on bundling payments or coordination of care programs;
 
  •     whether our revenues from upper payment limit (“UPL”) programs will be adversely affected, because there may be fewer indigent, non-Medicaid patients for whom we provides service pursuant to UPL programs in which we participate; and
 
  •     reductions to Medicare payments CMS may impose for “excessive readmissions.”
 
Because of the many variables involved, we are unable to predict the net effect on us of the expected decreases in uninsured individuals using our facilities, the reductions in Medicare spending, reductions in Medicare and Medicaid DSH funding and numerous other provisions in the Health Reform Law that may affect us. Further, it is unclear how federal lawsuits challenging the constitutionality of the Health Reform Law will be resolved or what the impact will be of any resulting changes to the law. For example, should the requirement that individuals maintain health insurance ultimately be deemed unconstitutional but the prohibition on health insurers excluding coverage due to pre-existing conditions be maintained, significant disruption to the health insurance industry could result, which could impact our revenues and operations.
 
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 56%, 58%, 59% and 54% of our net patient revenues for the years ended June 30, 2008, 2009 and 2010 and the nine months ended March 31, 2011, respectively. Managed care organizations offering prepaid and discounted medical services packages represent a significant portion of our admissions. 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 and greater


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enrollment in managed care programs such as health maintenance organizations and preferred provider organizations. The trend towards consolidation among private managed care payers tends to increase their bargaining prices over fee structures. As various provisions of the Health Reform Law are implemented, including the establishment of the Exchanges, nongovernment payers increasingly may demand reduced fees. In most cases, we negotiate our managed care contracts annually as they 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. For example, some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise restrict the ability of managed care companies to contract with us. It is not clear what impact, if any, the increased obligations on managed care payers and other payers imposed by the Health Reform Law will have on our ability to negotiate reimbursement increases. 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.
 
Approximately 55%, 56%, 57% and 59% of our net patient revenues for the years ended June 30, 2008, 2009 and 2010 and the nine months ended March 31, 2011, respectively, came from the Medicare and Medicaid programs, including Medicare and Medicaid managed plans. In recent years federal and state governments have made significant changes to 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. Changes in government healthcare programs may reduce the reimbursement we receive and could adversely affect our business and results of operations.
 
In recent years, legislative and regulatory changes have resulted in limitations on and, in some cases, reductions in levels of payments to healthcare providers for certain services under the Medicare program. For example, CMS completed a two-year transition to full implementation of the Medicare severity diagnosis-related group (“MS-DRG”) system, which represents a refinement to the existing diagnosis-related group system. Future realignments in the MS-DRG system could impact the margins we receive for certain services. Further, the Health Reform Law provides for material reductions in the growth of Medicare program spending, including reductions in Medicare market basket updates, and Medicare DSH funding. Medicare payments in federal fiscal year 2011 for inpatient hospital services were lower than payments for the same services in federal fiscal year 2010 because of reductions resulting from the Health Reform Law and the MS-DRG implementation and are expected to again be lower in federal fiscal year 2012.
 
Since most states must operate with balanced budgets and since the Medicaid program is often a state’s largest program, some states can be expected to enact or consider enacting legislation designed to reduce their Medicaid expenditures. The current weakened economic conditions have increased the budgetary pressures on many states, and these budgetary pressures have resulted, and likely will continue to result, in decreased spending for Medicaid programs and the Children’s Health Insurance Program (“CHIP”) in many states. Further, many states have also adopted, or are considering, legislation designed to reduce coverage, enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. For example, Arizona has discontinued a state health benefits program for low income patients and Arizona’s governor announced further cuts to the program in her 2012 fiscal plan. Effective April 1, 2011, Arizona’s Medicaid program reduced provider rates by 5% across all services (excluding long term care, which faced a 5% cumulative rate reduction from October 1, 2010 to April 1, 2011). Similarly, the Texas state House of Representatives passed a budget which includes deep cuts to the Texas Medicaid Program, including a reduction to Medicaid payment rates to healthcare providers in Texas by up to 10% (the Senate budget, still in development, is intended to mitigate some cuts). Our Texas hospitals participate in private supplemental Medicaid reimbursement programs that are structured to expand the community safety net by providing indigent healthcare services and result in additional revenues for participating hospitals. We cannot predict whether the


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Texas private supplemental Medicaid reimbursement programs will continue or guarantee that revenues recognized from the programs will not decrease. Additional Medicaid spending cuts may be implemented in the future in the states in which we operate. Effective March 23, 2010, the Health Reform Law requires states to at least maintain Medicaid eligibility standards established prior to the enactment of the law for adults until January 1, 2014 and for children until October 1, 2019. However, states with budget deficits may seek exceptions from this requirement to address eligibility standards that apply to adults making more than 133% of the federal poverty level. The Health Reform Law also provides for significant expansions to the Medicaid program, but these changes are not required until 2014. In addition, the Health Reform Law will result in increased state legislative and regulatory changes in order for states to comply with new federal mandates, such as the requirement to establish health insurance exchanges, and to participate in grants and other incentive opportunities. 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.
 
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 financial position, results of operations and cash flows will be materially adversely affected.
 
In some cases, commercial third-party payers rely on all or portions of the MS-DRG system to determine payment rates, which may result in decreased reimbursement from some commercial third-party payers. Other changes to government healthcare programs may negatively impact payments from commercial third-party payers.
 
Current or future healthcare reform efforts, changes in laws or regulations regarding government healthcare programs, other changes in the administration of government healthcare programs and changes to commercial third-party payers in response to healthcare reform and other changes to government healthcare programs could have a material, adverse effect on our financial position and results of operations.
 
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.
 
On January 18, 2011, President Obama signed Executive Order 13563, requiring federal agencies to develop plans to periodically review existing significant regulations to identify outmoded, ineffective, insufficient or excessively burdensome regulations and to modify, streamline, expand, or repeal the regulations as appropriate. On May 26, 2011, the federal Office of Management and Budget (OMB) released preliminary regulatory review plans from 30 federal agencies, including the Department of Health and Human Services (“HHS”). The HHS plan specifically references 79 existing or proposed regulations for review. Seventeen of these existing or proposed regulations are under the authority of CMS. The CMS regulations designated for review and revision and that are relevant to our operations include rules related to:
 
  •     Hospital cost reporting of pension costs;
 
  •     Conditions of participation for hospitals and other health care facilities;
 
  •     Inpatient rehabilitation unit payment systems;


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  •     Outpatient hospital physician supervision requirements;
 
  •     Medicare reconsideration and appeals processes;
 
  •     Medicare Advantage and prescription drug plan marketing rules and comment process for annual policy changes;
 
  •     Physician documentation requirements;
 
  •     Ambulatory Surgical Center same-day services rules;
 
  •     Medicaid home and community-based services waivers; and
 
  •     State Innovation Waivers under PPACA.
 
The preliminary plan also notes that CMS has approximately 80 additional regulatory reform proposals under review and development. The HHS proposed plan also includes four HIPAA-related provisions for review that may be relevant to our operations. Although the regulatory review process is intended to result in less regulatory burden, the results of these reviews are uncertain and may result in regulatory changes that could adversely affect our operations.
 
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 the Medicare and Medicaid statute codified under Section 1128B(b) of the Social Security Act and known as the “Anti-Kickback Statute.” This statute prohibits providers and other persons 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. Courts have interpreted this statute broadly and held that there is a violation of the Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. Furthermore, the Health Reform Law provides that knowledge of the law or the intent to violate the law is not required. As authorized by the U.S. Congress, HHS has issued regulations which describe certain 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.
 
The safe harbor requirements are generally detailed, extensive, narrowly drafted and strictly construed. Many 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 billing for all of the designated health services referred by the physician, and, if paid for such services, is required to promptly repay such amounts. Most of the services furnished by our facilities are “designated health services” for Stark Law purposes, including inpatient and outpatient hospital services. There are multiple exceptions to the Stark Law, among others, for physicians having a compensation relationship with the facility as a result of employment agreements, leases, physician recruitment and certain


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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. Although there is an exception for a physician’s ownership interest in an entire hospital, the Health Reform Law prohibits newly created physician-owned hospitals from billing for Medicare patients referred by their physician owners. As a result, the new law effectively prevents the formation of physician-owned hospitals after December 31, 2010. While the new law grandfathers existing physician-owned hospitals, it does not allow these hospitals to increase the percentage of physician ownership and significantly restricts their ability to expand services. A March 31, 2011 decision by the U.S. District Court for the Eastern District Court of Texas upheld the constitutionality of this new law, but a notice of appeal was filed on May 27, 2011, for review of the decision by the Fifth Circuit Court of Appeals.
 
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. The most far-reaching of the changes made in this final July 2008 rule effectively prohibit, as of a delayed effective date of October 1, 2009, both “under arrangements” ventures between a hospital and any referring physician or entity owned, in whole or in part, by a referring physician and unit-of-service-based “per click” compensation and percentage-based compensation in office space and equipment leases between a hospital and any referring physician or entity owned, in whole or in part, by a referring physician. We examined all of our “under arrangement” ventures and space and equipment leases with physicians to identify those arrangements which would have failed to conform to these new Stark regulations as of October 1, 2009, and we restructured or terminated all such non-conforming arrangements so identified prior to October 1, 2009. Because the Stark Law and its implementing regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of this law and its regulations. We attempt to structure our relationships to meet an exception to the Stark Law, but the regulations implementing the exceptions are detailed and complex, and we cannot assure you that every relationship complies fully with the Stark Law. In addition, in the July 2008 final Stark 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 with physicians 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. For a discussion of remedies and penalties under the False Claims Act, see “—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” below.
 
Effective December 31, 2010, in connection with the impending acquisition of DMC, we and Detroit Medical Center entered into a Settlement Agreement with the Department of Justice and the Department of Health and Human Services Office of Inspector General (the “OIG”), releasing us from liability under the False Claims Act, the Civil Monetary Penalties Law, and the civil monetary penalties provisions of the Stark Law for certain disclosed conduct (the “Covered Conduct”) by Detroit Medical Center prior to our acquisition that may have violated the Anti-Kickback Statute or the Stark Law or failed to comply with governmental reimbursement rules. (A copy of the Settlement Agreement may be found as Exhibit 2.6 to our Current Report on Form 8-K dated January 5, 2011 filed with the Securities and Exchange Commission.) Detroit Medical


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Center paid $30 million to the government in connection with such settlement based upon the government’s analysis of Detroit Medical Center’s net worth and ability to pay, but not upon our net worth and ability to pay. The Settlement Agreement is subject to the government’s right of rescission in the event of Detroit Medical Center’s nondisclosure of assets or any misrepresentation in Detroit Medical Center’s financial statements disclosed to the government by Detroit Medical Center. While we are not aware of any such misrepresentation or nondisclosure at this time, such misrepresentation or nondisclosure by Detroit Medical Center would provide the government the right to rescind the Settlement Agreement. Additionally, while the scope of release for the Covered Conduct under the Stark Law is materially similar to or broader than that found in most similar publicly-available settlement agreements, the precise scope of such a release under the Stark Law and the False Claims Act as amended by the Fraud Enforcement and Recovery Act of 2009 and the Patient Protection and Affordable Care Act (“PPACA”) has not been interpreted by any court, and it is possible that a regulator or a court could interpret these laws such that the release would not extend to all possible liability for the Covered Conduct. If the Settlement Agreement were to be rescinded or so interpreted, this could have a material adverse effect on our business, financial condition, results of operations or prospects, and our business reputation could suffer significantly. In addition, the Department of Justice continues to investigate the Covered Conduct covered by the Settlement Agreement with respect to potential claims against individuals. It is possible that this investigation might result in adverse publicity or adversely impact our business reputation or otherwise have a material adverse impact on our business.
 
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 healthcare programs and, for violations of certain laws and regulations, criminal penalties. See “Business—Government Regulation and Other Factors” included elsewhere in this prospectus for further discussion.
 
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 (e.g., Medicare, Medicaid, TRICARE). Both Arizona Heart Hospital and Arizona Heart Institute had such “corporate integrity agreements” prior to our purchase of certain of their assets and liabilities that the OIG has not sought to impose on us. 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.
 
Federal law permits the OIG to impose civil monetary penalties, assessments and to exclude from participation in federal healthcare programs, individuals and entities who have submitted false, fraudulent or improper claims for payment. Improper claims include those submitted by individuals or entities who have been excluded from participation, or an order to prescribe a medical or other item or service during a period a person was excluded from participation, where the person knows or should know that the claim would be made to a federal healthcare program. These penalties may also be imposed on providers or entities who employ or enter


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into contracts with excluded individuals to provide services to beneficiaries of federal healthcare programs. Furthermore, if services are provided by an excluded individual or entity, the penalties may apply even if the payment is made directly to a non-excluded entity. Employers of, or entities that contract with, excluded individuals or entities for the provision of services may be liable for up to $10,000 for each item or service furnished by the excluded individual or entity, an assessment of up to three times the amount claimed and program exclusions. In order for the penalties to apply, the employer or contractor must have known or should have known that the person or entity was excluded from participation. On October 12, 2009, we voluntarily reported to OIG that two of our employees had been excluded from participation in Medicare at certain times during their employment. See “Business—Legal Proceedings” included elsewhere in this prospectus for further discussion. The OIG may seek to apply its exclusion authority to an officer or a managing employee of an excluded or convicted entity. The OIG has used the responsible corporate officer doctrine to apply this authority expansively. In fact, a recent federal district court case from the District of Columbia affirmed the OIG’s exclusion authority on the basis of the responsible corporate officer doctrine. Friedman et. al. v. Sebelius (1:09-cv-02028-ESH). In addition, a bill passed by the 2010 House of Representatives would expand this exclusion authority to include individuals and entities affiliated with sanctioned entities. A similar bill was re-introduced in the House of Representatives on February 11, 2011, but its chances of passage remain unclear given that the bill was previously blocked by an anonymous Senate hold.
 
Illinois, Michigan 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, see “Business—Government Regulation and Other Factors” included elsewhere in this prospectus.
 
Some of our hospitals may 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 intended 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 would 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 intended to use this data to determine whether these hospitals were in compliance with the Stark Law and implementing regulations during the reporting period, 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. In December 2008, CMS re-published a Paperwork Reduction Act package and proposed to send the DFRR to 400 hospitals. In June 2010, CMS announced that it had determined that mandating hospitals to complete the DFRR may duplicate some of the reporting obligations related to physician ownership or investment in hospitals set forth in the Health Reform Law, and, as a result, it had decided to delay implementation of the DFRR and instead focus on implementation of these new reporting provisions as to physician-owned hospitals only. CMS also explained in this June 2010 announcement that it remained interested in analyzing physicians’ compensation relationships with hospitals, and that after it collected and examined information related to ownership and investment interests of physicians in hospitals pursuant to the reporting obligations in the Health Reform Law, it would


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determine if it was necessary to capture information related to compensation arrangements from non-physician owned hospitals as well pursuant to reimplementation of its DFRR initiative. We have no physician ownership in our hospitals, so our hospitals will not be subject to these new physician ownership and investment reporting obligations under the Health Reform Law.
 
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.
 
Depending on the final format of the DFRR, responding hospitals may be subject to substantial penalties as a result of enforcement actions brought by government agencies and whistleblowers acting pursuant to the False Claims Act and similar state laws, based on such allegations like failure to respond within required deadlines, that the response is inaccurate or contains incomplete information or that the response indicates a potential violation of the Stark Law or other requirements.
 
Any governmental investigation or enforcement action which results from the DFRR process could materially adversely affect our results of 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.
 
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.
 
The Health Reform Law includes additional federal funding of $350 million over the next 10 years to fight healthcare fraud, waste and abuse, including $95 million for federal fiscal year 2011, $55 million in federal fiscal year 2012 and additional increased funding through 2016.
 
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 the False Claims Act may be substantial. Liability arises when an entity knowingly submits a false claim for reimbursement to the federal government. The Fraud Enforcement and Recovery Act, which became law on May 20, 2009, changes the scienter requirements for liability under the False Claims


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Act. An entity may now violate the False Claims Act if it “knowingly and improperly avoids or decreases an obligation” to pay money to the United States. This includes obligations based on an “established duty . . . arising from . . . the retention of any overpayment.” Thus, if a provider is aware that it has retained an overpayment that it has an obligation to refund, this may form the basis of a False Claims Act violation even if the provider did not know the claim was “false” when it was submitted. The Health Reform Law expressly requires healthcare providers and others to report and return overpayments. The term overpayment is defined as “any funds that a person receives or retains under title XVIII or XIX to which the person, after applicable reconciliation, is not entitled under such title.” The Health Reform Law also defines the period of time in which an overpayment must be reported and returned to the government. The Health Reform Law provides that “[a]n overpayment must be reported and returned” within “60 days after the date on which the overpayment was identified,” or “the date any corresponding cost report is due,” whichever is later. The provision explicitly states that if the overpayment is retained beyond the 60-day period, it becomes an “obligation” sufficient for reverse false claim liability under the False Claims Act, and is therefore subject to treble damages and penalties if there is a “knowing and improper” failure to return the overpayment. In some cases, courts have held that violations of the Stark Law and Anti-Kickback Statute can properly form the basis of a False Claims Act case, finding that in cases where providers allegedly violated other statutes and have submitted claims to a governmental payer during the time period they allegedly violated these other statutes, the providers thereby submitted false claims under the False Claims Act. Some states have adopted similar whistleblower and false claims provisions. The Health Reform Law now explicitly links violations of the Anti-Kickback Statute to the False Claims Act.
 
The Health Reform Law changes the intent requirement for healthcare fraud under 18 U.S.C. § 1347, such that “a person need not have actual knowledge or specific intent to commit a violation.” In addition, the Health Reform Law significantly changes the False Claims Act by removing the jurisdictional bar for allegations based on publicly disclosed information and by loosening the requirements for a qui tam relator to qualify as an “original source,” by permitting the Department of Justice to oppose a defendant’s motion to dismiss on “public disclosure bar” grounds and by narrowing the definition of what prior disclosures constitute “public disclosure” for the purpose of the bar. These changes will effectively increase False Claims Act exposure by enabling a greater number of whistleblowers to bring a claim.
 
Should we be found out of compliance with any of these laws, regulations or programs, depending on the nature of the findings, our business, financial position and results of operations could be negatively impacted. See “Business—Legal Proceedings”.
 
As required by statute, CMS has implemented the Recovery Audit Contractor (“RAC”) program on a nationwide basis. Under the program, CMS contracts with RACs to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. The Health Reform Law expands the RAC program’s scope to include managed Medicare plans and to include Medicaid claims by requiring all states to have entered into contracts with RACs by December 31, 2010. In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The Health Reform Law increases federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to RACs and MICs, several other contractors, including the state Medicaid agencies, have increased their review activities.
 
The Office of the Inspector General of the U.S. Department of Health and Human Services and the U.S. Department of Justice have, from time to time, including for fiscal year 2011 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, home health and durable medical equipment billing practices. As a result of these 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


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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. With the exception of the acquisition of the assets of DMC and its affiliates (See “Prospectus Summary—The Acquisitions—The Detroit Medical Center” included elsewhere in this prospectus for information regarding our commitment to payments arising from certain pre-closing violations), 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, 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 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. 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 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 had conspired with one another 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. 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 or hospital systems in three other cities (Chicago, Illinois; Albany, New York; and Memphis, Tennessee), with a fifth suit instituted against hospitals or hospital systems in Detroit, Michigan later in 2006, one of which hospital systems was DMC. A negative outcome in the San Antonio and/or the Detroit actions could materially affect our business, financial condition or results of operations. See “Business—Legal Proceedings” included elsewhere in this prospectus for further discussion of these lawsuits.


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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, CMS publicizes on its Medicare website performance data related to quality measures and data on patient satisfaction surveys hospitals submit in connection with their Medicare reimbursement. Federal law provides for the future expansion of the number of quality measures that must be reported. Additional quality measures and future trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volumes. Further, the Health Reform Law requires all hospitals to annually establish, update and make public a list of the hospital’s standard charges for items and services. If any of our hospitals achieve poor results (or results that are lower than our competitors) on these quality measures or on patient satisfaction surveys or if our standard charges are higher than our competitors, our patient volumes could decline.
 
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. 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 “Business—Competition” included elsewhere in this prospectus.
 
Our PHP also faces competition within the Arizona markets that it serves. As in the case of our hospitals, some of our health plan competitors in these markets are owned by governmental agencies or not-for-profit corporations that have greater financial resources than we do. The revenues we derive from PHP could significantly decrease if new plans operating in the Arizona Health Care Cost Containment System (“AHCCCS”), which is Arizona’s state Medicaid program, enter these markets or other existing AHCCCS plans increase their number of members. Moreover, a failure to attract future members 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 such as class actions and those in the ordinary course of business such as malpractice lawsuits. Some of these actions may involve large claims as well as significant defense costs. See “Business—Legal Proceedings” included elsewhere in this prospectus for additional information.
 
We maintain professional and general liability insurance with unrelated commercial insurance carriers to provide for losses in excess of our self-insured retention (such retention maintained by our captive insurance subsidiaries and/or other of our subsidiaries) of $10.0 million through June 30, 2010 but increased to $15.0 million for our Illinois hospitals subsequent to June 30, 2010. As a result, a few successful claims against us that are within our self-insured retention amounts could have an adverse effect on our results of operations, cash flows, financial condition or liquidity. We also maintain umbrella coverage for an additional $65.0 million above our self-insured retention with independent third party carriers. There can be no assurance that one or more claims might not exceed the scope of this third-party coverage.


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Additionally, we experienced unfavorable claims development during fiscal 2010, which is reflected in our professional and general liability costs. 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 2010. 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, uninsured discounts and charity care deductions as a percentage of acute care service segment revenues (prior to these adjustments) was 11.6% (adjusted for the impact of the uninsured discount and Medicaid pending policies implemented in our Illinois hospitals effective April 1, 2009) during 2009. This ratio increased to 15.8% for the year ended June 30, 2010 and to 16.3% for the nine months ended March 31, 2011. Approximately 330 basis points of the increase from fiscal 2009 to fiscal 2010 related to the uninsured discount and Medicaid pending policy changes implemented in our Illinois hospitals effective April 1, 2009 and in our Phoenix and San Antonio hospitals effective July 1, 2009. These ratios were 15.7% for the nine months ended March 31, 2010 and 15.5% for the three months ended March 31, 2011. Our self-pay discharges as a percentage of total discharges were approximately 3.3% during each of the past three fiscal years (as adjusted for our Medicaid pending policy changes in Illinois on April 1, 2009 and in Phoenix and San Antonio on July 1, 2009). Our self-pay discharges as a percentage of total discharges during the nine months ended March 31, 2011 increased by 700 basis points compared to the nine months ended March 31, 2010. 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 revenues prior to the Health Reform Law being fully implemented, our results of operations and cash flows 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.
 
The Health Reform Law seeks to decrease over time the number of uninsured individuals. Among other things, the Health Reform Law will, effective January 1, 2014, expand Medicaid and incentivize employers to offer, and require individuals to carry, health insurance or be subject to penalties. However, it is difficult to predict the full impact of the Health Reform Law due to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual implementation and possible amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the law. In addition, even after implementation of the Health Reform Law, we may continue to experience bad debts and have to provide uninsured discounts and charity care for undocumented aliens who are not permitted to enroll in a health insurance exchange or government healthcare programs.


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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 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, 2010, we employed more than 300 practicing physicians, excluding residents. We have employed a significant number of additional physicians since June 30, 2010 primarily through acquisitions, including 19 physicians comprising the Arizona Heart Institute, assets of which we purchased in October 2010 and approximately 160 physicians from the DMC acquisition. A physician employment strategy includes increased salary and benefits 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. In addition, if we raise wages in response to our competitors’ wage increases and are unable to pass such increases on to our clients, our margins could decline, which could adversely affect our business, financial condition and results of operations.
 
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. As previously discussed, we have acquired two hospitals in Chicago, Illinois, one hospital in Phoenix, Arizona and eight hospitals in metropolitan Detroit, Michigan. There is no guarantee that we will be able to successfully integrate these or any other hospital acquisitions, which limits our ability to complete future acquisitions.
 
Potential future acquisitions may be on less than favorable terms. We may have difficulty obtaining financing, if necessary, for future acquisitions on satisfactory terms. The DMC acquisition includes and other future acquisitions may include significant capital or other funding commitments that we may not be able to finance through operating cash flows or additional debt or equity proceeds. We sometimes agree not to sell an acquired hospital for some period of time (currently no longer than 10 years) after purchasing it and/or grant the seller a right of first refusal to purchase the hospital if we agree to sell it to a third party.
 
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


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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.
 
We may not be able to successfully integrate our acquisition of DMC or realize the potential benefits of the acquisition, which could cause our business to suffer.
 
We may not be able to combine successfully the operations of DMC with our operations and, even if such integration is accomplished, we may never realize the potential benefits of the acquisition. The integration of DMC with our operations requires significant attention from management and may impose substantial demands on our operations or other projects. The integration of DMC also involves a significant capital commitment, and the return that we achieve on any capital invested may be less than the return that we would achieve on our other projects or investments. Any of these factors could cause delays or increased costs of combining the companies, which could adversely affect our operations, financial results and liquidity.
 
Future acquisitions or joint ventures may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
 
As part of our growth strategy, we may pursue acquisitions or joint ventures of hospitals or other related healthcare facilities and services. These acquisitions or joint ventures may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that could have a material adverse effect on our financial condition, results of operations and cash flows. Acquisitions or joint ventures involve numerous risks, including:
 
  •     difficulty and expense of integrating acquired personnel into our business;
 
  •     diversion of management’s time from existing operations;
 
  •     potential loss of key employees or customers of acquired companies; and
 
  •     assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.
 
We cannot assure you that we will succeed in obtaining financing for acquisitions or joint ventures at a reasonable cost, or that such financing will not contain restrictive covenants that limit our operating flexibility. We also may be unable to operate acquired hospitals profitably or succeed in achieving improvements in their financial performance.
 
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, general 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 between June 1, 2002 and June 30,


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2010, we self-insured our professional and general liability risks, either through our captive subsidiary or through another of our subsidiaries, in respect of losses up to $10.0 million. For claims subsequent to June 30, 2010, we increased this self-insured retention to $15.0 million for our Illinois hospitals. We have also purchased umbrella excess policies for professional and general liability insurance for all periods through June 30, 2011 with unrelated commercial carriers to provide an additional $65.0 million of coverage in the aggregate above our self-insured retention. While our premium prices have not fluctuated significantly 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, results of operations and cash flows 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 since we are often sued in the same malpractice suits brought against physicians on our medical staffs who are not employed by us.
 
We have employed a significant number of additional physicians from our fiscal 2011 acquisitions. Also, effective with the DMC acquisition, we now provide malpractice coverage through certain of our insurance captive subsidiaries to more than 1,100 non-employed attending physicians, which creates additional risks for us. We expect to continue to employ additional physicians during the near future. A significant increase in employed physicians could significantly increase our professional and general liability risks and related costs in future periods since for employed physicians there is no insurance coverage from unaffiliated insurance companies.
 
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 March 31, 2011, five hospitals and various related healthcare businesses were located in San Antonio, Texas; six hospitals and related healthcare businesses were located in metropolitan Phoenix, Arizona; four hospitals and related healthcare businesses were located in metropolitan Chicago, Illinois; eight hospitals and various related healthcare businesses were located in metropolitan Detroit, Michigan; and three hospitals and related healthcare businesses were located in Massachusetts.


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For the years ended June 30, 2008, 2009 and 2010, the nine months ended March 31, 2011 and the pro forma nine months ended March 31, 2011 (adjusted for the Acquisitions), our total revenues were generated as follows:
 
                                         
                            Pro Forma
 
                      Nine Months
    Nine Months
 
                      Ended
    Ended
 
   
Year Ended June 30,
    March 31,
    March 31,
 
   
2008
   
2009
   
2010
   
2011
   
2011
 
 
San Antonio
    32.1 %     29.6 %     26.8 %     22.4 %     17.1 %
PHP and AAHP
    14.1 %     19.3 %     23.1 %     17.7 %     13.5 %
Massachusetts
    19.7 %     18.3 %     18.2 %     13.4 %     10.2 %
Metropolitan Phoenix, excluding PHP and AAHP
    18.8 %     17.9 %     17.5 %     14.1 %     10.7 %
Metropolitan Chicago (1)
    14.9 %     14.6 %     14.1 %     16.6 %     12.7 %
Metropolitan Detroit
    0.0 %     0.0 %     0.0 %     15.6 %     35.6 %
Other
    0.4 %     0.3 %     0.3 %     0.2 %     0.2 %
                                         
      100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
                                         
 
 
(1) Includes MHP.
 
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 five 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 years ended June 30, 2008, 2009 and 2010 and the nine months ended March 31, 2011, PHP generated approximately 12.7%, 18.1%, 22.1% and 17.0% of our total revenues, respectively. 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 members. 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 current contract with AHCCCS began October 1, 2008 and expires September 30, 2011. This 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 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.


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For the years ended June 30, 2008, 2009 and 2010 and the nine months ended March 31, 2011, AAHP generated 1.4%, 1.2%, 1.0% and 0.7% of our total revenues, respectively. AAHP began providing healthcare coverage to Medicare and Medicaid dual-eligible members 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, 2011. 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; Bradley A. Perkins, MD, our Executive Vice President and Chief Transformation Officer 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.
 
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. For example, the Health Reform Law potentially expands the use of prepayment review by Medicare contractors by eliminating statutory restrictions on their use. 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.
 
There has been recent increased scrutiny of a hospital’s “Medicare Observation Rate” from outside auditors, government enforcement agencies and industry observers. The term “Medicare Observation Rate” is defined as total unique observation claims divided by the sum of total unique observation claims and total inpatient short-stay acute care hospital claims. A low rate may raise suspicions that a hospital is inappropriately admitting patients that could be cared for in an observation setting. On April 11, 2011, Tenet Healthcare Corporation (“Tenet”) filed a complaint against Community Health Systems, Inc. (“CHS”) alleging that CHS admitted patients at a higher rate than was medically necessary, resulting in higher reimbursements than it should have received. As support for its allegation, Tenet cited CHS’ Medicare Observation Rate for CY 2009 of 5.11%, compared with a national average rate of 12.6% for the same period (as such national average was reported by Tenet in Exhibit 99.2 to its Form 8-K dated April 11, 2011), and CHS’ use of its own internally-developed admission criteria. Tenet reported in said Form 8-K that its source for such national average was the Centers for Medicare & Medicaid Services’ Outpatient Standard Analytic Files (“SAFs”) for CYs 2006-2009 and the Inpatient Prospective Payment System SAFs for CYs 2006-2009. Our rate for CY 2009 was 10.8%, as


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compared to the national rate of 12.6%. In our affiliated hospitals, we use the independent, evidence-based clinical criteria developed by McKesson Corporation, commonly known as InterQual Criteria, to determine whether a patient qualifies for inpatient admission. On April 25, 2011, CHS filed a Form 8-K notifying investors that it received confirmation from the United States Department of Justice (“DOJ”) that the government considers Tenet’s allegations to be related to ongoing qui tam suits filed against CHS in Texas and Indiana. The government has consolidated its investigation of CHS related to the Tenet allegations and the qui tam suits. CHS also stated that HHS has begun a national audit of certain of CHS’ Medicare claims related to the allegations. On May 18, 2011, CHS filed a Form 8-K to further notify investors that it had received a subpoena from the SEC on May 13, 2011, requesting documents relating to emergency room admissions and other observation practices at its hospitals and on May 16, 2011, received a subpoena from the OIG for patient medical records from a CHS facility in Tennessee. The industry may anticipate increased regulatory scrutiny of inpatient admission decisions and the Medicare Observation Rate in the future.
 
The industry trend towards value-based purchasing may negatively impact our revenues.
 
There is a trend in the healthcare industry towards value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events (also called “never events”). Many large commercial payers currently require hospitals to report quality data, and several commercial payers do not reimburse hospitals for certain preventable adverse events.
 
The Health Reform Law contains a number of provisions intended to promote value-based purchasing. Effective July 1, 2011, the Health Reform Law will prohibit the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (“HACs”). Beginning in federal fiscal year 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard.
 
The Health Reform Law also requires HHS to implement a value-based purchasing program for inpatient hospital services. Beginning in federal fiscal year 2013, HHS will reduce inpatient hospital payments for all discharges by a percentage beginning at 1% in federal fiscal year 2013 and increasing by 0.25% each fiscal year up to 2% in federal fiscal year 2017 and subsequent years; and pool the total amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. CMS estimates that the total fund available for distribution under the value-based purchasing program for federal fiscal year 2013 will be $850 million.
 
We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our revenues.
 
Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of individually identifiable information.
 
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) required HHS to adopt standards to protect the privacy and security of individually identifiable health-related information. The department released final regulations containing privacy standards in December 2000 and published revisions to the final regulations in August 2002. The Health Information Technology for Economic and Clinical Health Act


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(“HITECH Act”) — one part of the American Recovery and Reinvestment Act of 2009 (“ARRA”) — significantly broadened the scope of the HIPAA privacy and security regulations. On October 30, 2009, HHS issued an Interim Final Rule implementing amendments to the enforcement regulations under HIPAA and on July 14, 2010, HHS issued a Proposed Rule containing modifications to privacy standards, security standards and enforcement actions. In addition, on May 27, 2011, HHS issued a proposed amendment to the existing accounting for disclosures standard of the HIPAA privacy regulations. The proposed amendment would implement a HITECH Act provision that requires covered entities to account for disclosures of electronic protected health information (“EPHI”) for treatment, payment and health care operations purposes if the disclosure is made through an electronic health record. The proposed amendment goes beyond the HITECH Act provision and would require covered entities, including our hospitals and health plans, to provide a report identifying each instance that a natural person or organization accessed EPHI in any of our electronic treatment and billing record systems during the three-year period ending on the date the report is requested. The report must track access even if the access did not involve a disclosure outside of the covered entity. If HHS adopts the proposed amendments, beginning January 1, 2013, we would be required to report access within our electronic record systems acquired after January 1, 2009. Beginning January 1, 2014, the proposed amendment requires us to report access within our electronic record systems acquired on or before January 1, 2009. Modifying our electronic record systems to prepare such access reports would require a significant commitment, action and cost by us. In addition, HHS is currently in the process of finalizing regulations addressing security breach notification requirements. HHS initially released an Interim Final Rule for breach notification requirements on August 24, 2009. HHS then drafted a Final Rule which was submitted to OMB but subsequently withdrawn by HHS on July 29, 2010. Currently, the Interim Final Rule remains in effect but the withdrawal suggests that when HHS issues the Final Rule, which it has indicated it intends to do in the next several months, the requirements for how covered entities should respond in the event of a potential security breach involving protected health information are likely to be more onerous than those contained in the Interim Final Rule.
 
Violations of HIPAA could result in civil or criminal penalties. In fact, on February 22, 2011, the Department of Health and Human Services Office for Civil Rights imposed, for the first time, civil monetary penalties on a covered entity for violating HIPAA’s privacy rule by denying patients timely access to their medical records when requested. Two days later, on February 24, 2011, the settlement of another enforcement action was announced, with the covered entities agreeing to a monetary settlement and the imposition of a resolution agreement and corrective action plan. An investigation or initiation of civil or criminal actions could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly. In addition, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state and could impose additional penalties. We have developed a comprehensive set of policies and procedures in our efforts to comply with HIPAA and other privacy laws. Our compliance officers are responsible for implementing and monitoring compliance with our privacy and security policies and procedures at our facilities. We believe that the cost of our compliance with HIPAA and other federal and state privacy laws will not have a material adverse effect on our business, financial condition, results of operations or cash flows.
 
As a result of increased post-payment reviews of claims we submit to Medicare and Medicaid for our services, we may incur additional costs and may be required to repay amounts already paid to us.
 
We are subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare for payment for our services. These post-payment reviews are increasing as a result of new government cost-containment initiatives, including enhanced medical necessity reviews for Medicare patients admitted to long-term care hospitals, and audits of Medicare claims under the Recovery Audit Contractor program (“RAC”). The RAC program began as a demonstration project in 2005 in three states (New York, California and Florida) and was expanded into the three additional states of Arizona, Massachusetts and South Carolina in July 2007. The program was made permanent by the Tax Relief and Health Care Act of 2006 enacted in December 2006. CMS ended the demonstration project in March 2008 and commenced the permanent RAC program in all states beginning in 2009, with a permanent national RAC program in all 50 states in 2010.


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RACs utilize a post-payment targeted review process employing data analysis techniques in order to identify those Medicare claims most likely to contain overpayments, such as incorrectly coded services, incorrect payment amounts, non-covered services and duplicate payments. The RAC review is either “automated”, for which a decision can be made without reviewing a medical record, or “complex”, for which the RAC must contact the provider in order to procure and review the medical record to make a decision about the payment. 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.
 
Under a proposed Medicaid rule published November 10, 2010, each state must establish a Medicaid RAC program. While it was expected to be fully implemented by April 1, 2011, CMS has stated that when the Final Rule is published, a new implementation date will be specified. CMS is also mandated to issue proposed rules on RACs for Medicare Advantage plans and Medicare Part D by the end of the year.
 
These additional post-payment reviews may require us to incur additional costs to respond to requests for records and to pursue the reversal of payment denials, and ultimately may require us to refund amounts paid to us by Medicare or Medicaid that are determined to have been overpaid. We are subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare for payment for our services.
 
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. If we fail to remain current with the technological advancements of the medical community, our volumes and revenue may be negatively impacted.
 
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.
 
The U.S. Congress has considered a bill called the Employee Free Choice Act of 2009 (“EFCA”), which organized labor, a major supporter of the Obama administration, has called its number one legislative objective.


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EFCA would amend the National Labor Relations Act to establish a procedure whereby the National Labor Relations Board (“NLRB”) would certify a union as the bargaining representative of employees, without a NLRB-supervised secret ballot election, if a majority of unit employees sign valid union authorization cards (the “card-check provision”). Additionally, under EFCA, parties that are unable to reach a first contract within 90 days of collective bargaining could refer the dispute to mediation by the Federal Mediation and Conciliation Service (the “Service”). If the Service is unable to bring the parties to agreement within 30 days, the dispute then would be referred to binding arbitration. Also, the bill would provide for increased penalties for labor law violations by employers. In July 2009, due to intense opposition from the business community, alternative draft legislation became public, dropping the card-check provision, but putting in its place new provisions making it easier for employees to organize including provisions to require shorter unionization campaigns, faster elections and limitations on employer-sponsored anti-unionization meetings, which employees are required to attend. It is uncertain whether this legislation will continue to be considered in the current Congress, with the House of Representatives now controlled by the Republican Party. However, this legislation, if passed by this or a subsequent Congress, would make it easier for our nurses or other hospital employees to unionize, which could materially increase our labor costs.
 
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.
 
Our pension plan obligations under one of DMC’s pension plans are currently underfunded, and we may have to make significant cash payments to this plan, which would reduce the cash available for our businesses.
 
Effective January 1, 2011, we acquired all of DMC’s assets (other than donor-restricted assets and certain other assets) and assumed all of its liabilities (other than its outstanding bonds and similar debt and certain other liabilities). The assumed liabilities include a pension liability under a “frozen” defined benefit pension plan of DMC (estimated at approximately $228.0 million as of December 31, 2010), which liability we anticipate that we will fund over 15 years after closing based upon current actuarial assumptions and estimates (such assumptions and estimates are subject to periodic adjustment). As a result of our assumption of this DMC pension liability in connection with the acquisition, we have underfunded obligations under this pension plan. The funded status of the pension plan referred to above is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to recognize pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our businesses. In addition, a decrease in the discount rate used to determine this pension obligation could result in an increase in the valuation of this pension obligation, which could affect the reported funded status of this pension plan and necessary future contributions, as well as the periodic pension cost in respect of this plan in subsequent fiscal years.
 
Under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded tax-qualified pension plan under limited circumstances. In the event that the tax-qualified pension plan referred to above is terminated by the PBGC, we could be liable to the PBGC for the entire amount of the underfunding.
 
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 (“Section 404”) requires us to perform an evaluation of our internal control over financial reporting and file management’s attestation with our annual report. We have evaluated, tested and implemented internal controls over financial reporting to enable management to


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report on such internal controls under Section 404. However, we cannot assure you that the conclusions we reached in our June 30, 2010 management report will represent conclusions we reach in future periods. Failure on our part to comply with Section 404 may subject us to regulatory scrutiny and a loss of public confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control over financial reporting and hiring additional personnel. Any such actions could negatively affect our results of operations.
 
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:
 
  •     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 compliance with laws or regulations.
 
If we fail to effectively and timely implement electronic health record systems, our operations could be adversely affected.
 
As required by ARRA, HHS has adopted an incentive payment program for eligible hospitals and health care professionals that implement certified electronic health record (“EHR”) technology and use it consistently with “meaningful use” requirements. If our hospitals and employed or contracted professionals do not meet the Medicare or Medicaid EHR incentive program requirements, we will not receive Medicare or Medicaid incentive payments to offset some of the costs of implementing EHR systems. Further, beginning in federal fiscal year 2015, eligible hospitals and physicians that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare. Failure to implement EHR systems effectively and in a timely manner could have a material, adverse effect on our financial position and results of operations.
 
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.
 
During fiscal year 2010, we entered into a contract to construct a replacement facility for our Southeast Baptist Hospital in San Antonio, which we expect will cost $86.2 million to construct and equip. We may also 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. Additionally, the DMC purchase includes a commitment by us to fund $500.0 million of specified construction projects at the DMC facilities during the five years subsequent to the closing of the acquisition, many of which include substantial physical plant expansions. The $500.0 million commitment for specified construction projects includes the


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following annual aggregate spending amounts — $80.0 million for calendar 2011; $160.0 million for calendar 2012; $240.0 million for calendar 2013; $320.0 million for calendar 2014; and $500.0 million for calendar 2015. 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 would involve a significant commitment of capital with no revenues associated with the projects during construction, which also could have a future 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 years 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.
 
In giving approval, these states consider the need for additional or expanded healthcare facilities or services. Illinois, Michigan 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.


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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 March 31, 2011, we had approximately $786.9 million of goodwill recorded on our financial statements. There is no guarantee that we will be able 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 MacNeal and Weiss hospitals in Illinois to their fair values. We performed an interim goodwill impairment test during the quarter ended December 31, 2009 and, based upon revised projected cash flows, market participant data and appraisal information, we determined that the $43.1 million remaining goodwill related to these hospitals was impaired. We recorded the $43.1 million ($31.8 million, net of taxes) non-cash impairment loss during the quarter ended December 31, 2009.
 
Our hospitals are subject to potential responsibilities and costs under environmental laws that could lead to material expenditures or liability.
 
We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. We could incur substantial costs to maintain compliance with these laws and regulations. To our knowledge, we have not been and are not currently the subject of any material investigations relating to noncompliance with environmental laws and regulations. We could become the subject of future investigations, which could lead to fines or criminal penalties if we are found to be in violation of these laws and regulations. The principal environmental requirements and concerns applicable to our operations relate to proper management of regulated materials, hazardous waste, low-level radioactive and other medical waste, above-ground and underground storage tanks, operation of boilers, chillers and other equipment, and management of building conditions, such as the presence of mold, lead-based paint or asbestos. Our hospitals engage independent contractors for the transportation, handling and disposal of hazardous waste, and we require that our hospitals be named as additional insureds on the liability insurance policies maintained by these contractors.
 
We also may be subject to requirements related to the remediation of hazardous substances and other regulated materials that have been released into the environment at properties now or formerly owned or operated by us or our predecessors, or at properties where such substances and materials were sent for off-site treatment or disposal. Liability for costs of investigation and remediation may be imposed without regard to fault, and under certain circumstances on a joint and several basis and can be substantial.
 
Risks Related to Our Indebtedness
 
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 indebtedness. As of March 31, 2011, we had $2,779.1 million of indebtedness, $808.9 million of which was senior secured indebtedness (excluding letters of credit and guarantees). As of March 31, 2011, we also would have had $223.9 million of secured indebtedness available for borrowing under our 2010 Revolving Facility (as defined below), after taking into account $36.1 million of outstanding letters of credit. In addition, we may request an incremental term loan facility to be added to our 2010 Term Loan Facility to issue additional term loans in such amounts as we determine subject to the receipt of lender commitments and subject to certain other conditions. Similarly, we may seek to increase the borrowing availability under the 2010 Revolving Facility to an amount larger than $260.0 million, subject to the receipt of lender commitments and subject to certain other conditions. The amount of our outstanding indebtedness is substantial compared to the net book value of our assets.


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Our substantial indebtedness could have important consequences, including the following:
 
  •     our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to our existing notes;
 
  •     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 all of our borrowings under our 2010 Credit Facilities 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.
 
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.
 
Despite our current 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 governing the 8.0% Notes, the 7.750% Notes, the 10.375% Senior Discount Notes and the 2010 Credit Facilities do not fully prohibit us or our subsidiaries from doing so. Our 2010 Revolving Facility provides commitments of up to $260.0 million (not giving effect to any outstanding letters of credit, which would reduce the amount available under our 2010 Revolving Facility), of which $223.9 million was available for future borrowings as of March 31, 2011. In addition, we may seek to increase the borrowing availability under the 2010 Revolving Facility and to increase the amount of our 2010 Term Loan Facility (as defined below) as previously described. All of those borrowings would be senior and secured, and as a result, would be effectively senior to the 8.0% Notes, the 7.750% Notes, the 10.375% Senior Discount Notes, the guarantees of the 8.0% Notes and the guarantees of the 7.750% Notes by the guarantors. If we incur any additional indebtedness that ranks equally with the 8.0% Notes and the 7.750% Notes, the holders of that debt


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will be entitled to share ratably with the holders of the 8.0% Notes and the 7.750% Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
 
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.
 
All of the borrowings under the 2010 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. A 0.25% increase in the expected rate of interest under the 2010 Term Loan Facility would increase our annual interest expense by approximately $2.0 million. The impact of such an increase would be more significant than it would be for some other companies because of our substantial debt. We have from time to time managed our exposure to changes in interest rates through the use of interest rate swap agreements on certain portions of our previously outstanding debt and may elect to enter into similar instruments in the future for the 2010 Credit Facilities. If we enter into such derivative instruments, our ultimate interest payments may be greater than those that would be required under existing variable interest rates.
 
Operating and financial restrictions in our debt agreements limit our operational and financial flexibility.
 
The 2010 Credit Facilities and the indentures under which the 8.0% Notes, the 7.750% Notes and our 10.375% Senior Discount Notes were issued 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 the issuers of the notes or other restricted subsidiaries;
 
  •  create liens without securing the 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 2010 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 2010 Credit Facilities. In the event of default, the lenders could elect to declare all amounts borrowed under the 2010 Credit Facilities, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness. Borrowings under the 2010 Credit Facilities are senior in right of payment to our existing notes. If any of our indebtedness were to be accelerated, our assets may not be sufficient to repay in full our indebtedness.


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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 are contractually obligated to make significant capital expenditures relating to the newly acquired DMC facilities. 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 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 our existing notes allow us to make significant dividend payments, investments and other 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 in an attempt to meet our debt service and other obligations. The 2010 Credit Facilities and the indentures governing our existing notes 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. See “Description of Certain Indebtedness.”
 
Vanguard must rely on payments from its subsidiaries to fund payments on its indebtedness. Such funds may not be available in certain circumstances.
 
Vanguard is a holding company and all of its operations are conducted through its subsidiaries. Therefore, Vanguard depends on the cash flows of its subsidiaries to meet its obligations, including its indebtedness. The ability of these subsidiaries to distribute to Vanguard by way of dividends, distributions, interest, return on investments, or other payments (including loans) is subject to various restrictions, including restrictions imposed by the 2010 Credit Facilities and the indentures relating to our existing notes; and future debt may also limit such payments.
 
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on our existing notes.
 
Any default under the agreements governing our indebtedness, including a default under our 2010 Credit Facilities that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on our existing notes and substantially decrease the market value of our existing notes. If we are unable to generate sufficient cash flows and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any,


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and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our 2010 Credit Facilities), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our 2010 Revolving Facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.
 
If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under our 2010 Credit Facilities to avoid being in default. If we breach our covenants under our 2010 Credit Facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our 2010 Credit Facilities, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.
 
Risks Relating to This Offering and Ownership of Our Common Stock
 
An active, liquid trading market for our common stock may not develop.
 
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the New York Stock Exchange or otherwise or how active and liquid that market may become. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all.
 
You will incur immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.
 
Prior investors have paid substantially less per share of our common stock than the price in this offering. The initial public offering price of our common stock is substantially higher than the net tangible book value per share of outstanding common stock prior to completion of the offering. Based on our net tangible book value as of March 31, 2011 and upon the issuance and sale of 25,000,000 shares of common stock by us at an assumed initial public offering price of $22.00 per share (the midpoint of the initial public offering price range indicated on the cover of this prospectus), if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $30.46 per share in net tangible book value. We also have a large number of outstanding stock options to purchase common stock with exercise prices that are below the estimated initial public offering price of our common stock. To the extent that these options are exercised, you will experience further dilution.
 
You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.
 
After this offering and upon the completion of the Holdings Merger, we will have 428,521,206 shares of common stock authorized but unissued. Our certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved 14,000,000 shares for issuance under our 2011 Stock Incentive Plan. See “Management — 2011 Stock Incentive Plan.” Any common stock that we issue, including under our 2011 Stock Incentive Plan or other equity incentive plans that we may adopt in the


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future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.
 
If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, the price of our stock could decline.
 
The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock or our industry, or the stock of any of our competitors, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.
 
Our stock price may change significantly following the offering, and you could lose all or part of your investment as a result.
 
We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “—Risks Related to our Business and Structure” and the following, some of which are beyond are control:
 
  •     quarterly variations in our results of operations;
 
  •     results of operations that vary from the expectations of securities analysts and investors;
 
  •     results of operations that vary from those of our competitors;
 
  •     changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
 
  •     announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint ventures or capital commitments;
 
  •     announcements by third parties of significant claims or proceedings against us;
 
  •     future sales of our common stock; and
 
  •     general domestic economic conditions.
 
Furthermore, the stock market has experienced extreme volatility that in some cases has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance.
 
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
 
If we or our existing investors sell additional shares of our common stock after this offering, the market price of our common stock could decline.
 
The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market after this offering, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After the completion of this offering and the


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Holdings Merger, we will have 71,478,794 shares of common stock outstanding. This number includes 25,000,000 shares being sold in this offering, which may be resold immediately in the public market.
 
We, our directors and executive officers, Blackstone, MSCP and affiliated funds and other equity co-investors, have agreed not to offer or sell, dispose of or hedge, directly or indirectly, any common stock for a period of 180 days from the date of this prospectus, subject to certain exceptions and automatic extension in certain circumstances. In addition, pursuant to a registration rights agreement, we have granted certain members of our management and other stockholders the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act covering resales of our common stock held by them. These shares will represent approximately 65.0% of our outstanding common stock after this offering. These shares also may be sold pursuant to Rule 144 under the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our stock could decline if the holders of restricted shares sell them or are perceived by the market as intending to sell them. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”
 
Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
 
We may retain future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our 2010 Credit Facilities and the indentures governing the 8.0% Notes, 7.750% Notes and our 10.375% Senior Discount Notes. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.
 
Our Sponsors and certain members of our management will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control.
 
We are controlled, and after this offering and the Holdings Merger are completed will continue to be controlled, by private equity funds associated with Blackstone and MSCP (the “Sponsors”) and certain members of our management who are party to a stockholders agreement between such shareholders and us. As set forth on page 7 of this prospectus, our Sponsors will continue to own approximately 51.9% of our common stock after the completion of this offering and the Holdings Merger through various investment funds affiliated with our Sponsors. Certain members of our management who are party to the stockholders agreement will continue to own approximately 9.1% of our common stock after the completion of this offering and the Holdings Merger. In addition, our Sponsors will have the ability to nominate a number of our directors provided certain ownership thresholds are maintained, including a majority of our directors immediately following this offering and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our certificate of incorporation and bylaws and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, under the stockholders agreement, Blackstone will have consent rights over certain extraordinary transactions by Vanguard, including mergers and sales of all or substantially all of our assets, provided a certain ownership threshold is maintained. In addition, the Sponsors may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to you. For example, the Sponsors could cause us to make acquisitions that increase our indebtedness or to sell revenue-generating assets. See “Management”,


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“Principal Stockholder” and “Certain Relationships and Related Party Transactions.” As a result, the Sponsors will have control over our decisions to enter into any corporate transaction regardless of whether others believe that the transaction is in our best interests. So long as the Sponsors and certain members of our management who are party to the stockholders agreement continue to beneficially own a majority of our outstanding common stock, they will have the ability to control the vote in any election of directors.
 
Our Sponsors are also 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. Our Sponsors may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as the Sponsors and certain members of our management who are party to the stockholders agreement continue to beneficially own a significant amount of our outstanding common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions and the Sponsors will have the right to nominate a certain number of our directors. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
 
We are a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
 
After completion of this offering and the Holdings Merger, the Sponsors and certain members of our management who are party to the stockholders agreement will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:
 
  •     the requirement that a majority of the board of directors consist of independent directors;
 
  •     the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
 
  •     the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
 
  •     the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
 
Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors, our nominating and corporate governance committee and compensation committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. See “Management—Composition of the Board of Directors—Controlled Company Exception.” Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.
 
Anti-takeover provisions in our certificate of incorporation and by-laws and Delaware law could delay or prevent a change in control.
 
Our certificate of incorporation and by-laws may delay or prevent a merger, acquisition or other change of control transaction that a stockholder may consider favorable by, among other things, providing for


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a classified board consisting of three classes of directors, permitting our board of directors to issue one or more series of preferred stock, requiring advance notice for stockholder proposals and nominations, placing limitations on convening stockholder meetings and restricting certain business combinations with stockholders other than Blackstone who obtain beneficial ownership of a certain percentage of our outstanding common stock. These provisions may also discourage third parties from making acquisition proposals, which could impede the ability of our stockholders to realize a premium for the shares of common stock beneficially owned by them and otherwise harm our stock price. See “Description of Capital Stock.”
 
In addition, in connection with this offering, we will be entering into a stockholders agreement with the Sponsors and certain members of our management pursuant to which the Sponsors will be entitled to nominate a number of directors provided certain ownership thresholds are maintained. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains “forward-looking statements” within the meaning of the federal securities laws which are intended to be covered by the safe harbors created thereby. Forward-looking statements are those statements that are based upon management’s current plans and expectations as opposed to historical and current facts and are often identified in this prospectus by use of words including but not limited to “may,” “believe,” “will,” “project,” “expect,” “estimate,” “anticipate,” and “plan.” These statements are based upon estimates and assumptions made by Vanguard’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. These factors, risks and uncertainties include, among others, the following:
 
  •     Our high degree of leverage and interest rate risk;
 
  •     Our ability to incur substantially more debt;
 
  •     Operating and financial restrictions in our debt agreements;
 
  •     Our ability to generate cash necessary to service our debt;
 
  •     Weakened economic conditions and volatile capital markets;
 
  •     Post-payment claims reviews by governmental agencies;
 
  •     Our ability to successfully implement our business strategies;
 
  •     Our ability to successfully integrate DMC, the Resurrection Facilities (as defined herein) and future acquisitions;
 
  •     Conflicts of interest that may arise as a result of our control by a small number of stockholders;
 
  •     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, implementation of existing reform legislation and potential modifications to such legislation;
 
  •     Future governmental investigations;
 
  •     Our ability to adequately enhance our facilities with technologically advanced equipment;
 
  •     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;


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  •     Changes in general economic conditions;
 
  •     Our exposure to the increased amounts of and collection risks associated with uninsured accounts and the co-pay and deductible portions of insured accounts;
 
  •     Dependence on our senior management team and local management personnel;
 
  •     Volatility of professional and general liability insurance for us and the physicians who practice at our hospitals 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;
 
  •     Increased costs from further government regulation of healthcare and 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 and shift demand for inpatient services to outpatient settings;
 
  •     A failure of our information systems would adversely impact our ability to manage our operations;
 
  •     Costs and compliance risks associated with Section 404 of the Sarbanes-Oxley Act of 2002;
 
  •     Material non-cash charges to earnings from impairment of goodwill associated with declines in the fair market values of our reporting units; and
 
  •     Volatility of materials and labor costs for potential construction projects that may be necessary for future growth.
 
Our forward-looking statements speak only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of new information, future events or otherwise. We advise you, however, to consult any additional disclosures we make in filings with the SEC, including, without limitation, the discussion of risks and other uncertainties under the caption “Risk Factors.” You are cautioned to not rely on such forward-looking statements when evaluating the information contained in this prospectus. In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, you should not regard the inclusion of such information as a representation by us that our objectives and plans anticipated by the forward-looking statements will occur or be achieved, or if any of them do, what impact they will have on our results of operations and financial condition.


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USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from the sale of 25,000,000 shares of our common stock in this offering, after deducting underwriting discounts and commissions and estimated expenses payable by us, will be approximately $511.6 million. This estimate assumes an initial public offering price of $22.00 per share, the midpoint of the range set forth on the cover page of this prospectus. If the underwriters exercise their option to purchase additional shares in full, the net proceeds to us will be approximately $589.2 million.
 
We intend to use the anticipated net proceeds to redeem the $488.0 million estimated accreted value of our 10.375% Senior Discount Notes due 2016 including the 5% redemption premium thereof. We used the net proceeds from the offering of our 10.375% Senior Discount Notes to pay a dividend to our existing equity holders. The remaining net proceeds will be used to make payments related to the $14.0 million net liability due to the Sponsors under the amended transaction and monitoring fee agreement (which we expect to execute concurrently with this offering) as such payments become due and for other general corporate purposes.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $22.00 per share, based on the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $23.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
As of the date hereof, there is approximately $747,219,000 aggregate principal amount at maturity of 10.375% Senior Discount Notes outstanding, which mature on February 1, 2016.


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DIVIDEND POLICY
 
Following completion of the offering, we have no current plans to pay any cash dividends on our common stock for the foreseeable future and instead may retain earnings, if any, for future operations, expansions and debt repayments. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our 2010 Credit Facilities and in the indentures governing the 8.0% Notes, 7.750% Notes and our 10.375% Senior Discount Notes, and any financing arrangements that we may enter into in the future. See “Description of Certain Indebtedness” for restrictions on our ability to pay dividends.
 
On January 29, 2010, we repurchased 14,458,646 shares (adjusted to give effect to the expected stock split) of our common stock from our stockholders for a purchase price of approximately $300.6 million in the aggregate. On January 26, 2011, we paid dividends to our equity holders of approximately $444.7 million in the aggregate.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2011:
 
  •     on an actual basis after giving effect to the estimated 59.584218 to 1 stock split that will be effectuated prior to the consummation of this offering; and
 
  •     on an as adjusted basis to give effect to (1) the Holdings Merger; (2) the issuance of           shares of common stock by us in this offering, after deducting underwriting discounts and commissions and estimated offering expenses; and (3) the application of the estimated net proceeds from the offering as described in “Use of Proceeds”.
 
You should read this table in conjunction with the information contained in “Use of Proceeds,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the audited financial statements and unaudited condensed consolidated financial statements of Vanguard and DMC and the notes thereto included in this prospectus.
 
                 
    As of March 31,
 
   
2011
 
   
Actual
   
As Adjusted(1)
 
    (Dollars in millions)  
 
Cash and cash equivalents
  $ 502.6     $ 502.6  
                 
Long-term debt obligations:
               
2010 Credit Facilities:
               
Revolving Facility
  $     $  
Term Loan Facility
    808.9       808.9  
8.0% Notes (2)
    1,155.6       1,155.6  
7.750% Notes
    350.0       350.0  
10.375% Senior Discount Notes (2)
    453.2        
Other (3)
    11.4       11.4  
                 
Total long-term debt obligations
    2,779.1       2,325.9  
Equity (Deficit)
               
Common stock, $0.01 par value: 500,000,000 shares authorized, 44,701,472 shares and 71,418,614 shares (as adjusted) issued and outstanding
          0.3  
Additional paid-in capital (distributions in excess of paid in capital)
    (88.5 )     400.1  
Accumulated other comprehensive income
    0.9       0.9  
Retained deficit
    (106.9 )     (116.0 )
                 
Total Vanguard Health Systems, Inc. stockholders’ equity (deficit)(1)
    (194.5 )     285.3  
Non-controlling interests
    7.9       7.9  
                 
Total equity (deficit)
    (186.6 )     293.2  
                 
Total capitalization
  $ 2,592.5     $ 2,619.1  
                 
 
 
(1) To the extent we change the number of shares of common stock sold by us in this offering from the shares we expect to sell or we change the initial public offering price from the $22.00 per share assumed initial public offering price, representing the mid-point of the estimated price range set forth on the cover page of this prospectus, or any combination of these events occurs, the net proceeds to us from this offering and


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each of total stockholders’ equity and total capitalization may increase or decrease. A $1.00 increase (decrease) in the assumed initial public offering price per share of the common stock, assuming no change in the number of shares of common stock to be sold, would increase (decrease) the net proceeds that we receive in this offering and each of total equity and total capitalization by approximately $23.5 million. An increase (decrease) of 1,000,000 shares in the expected number of shares to be sold in the offering, assuming no change in the assumed initial offering price per share, would increase (decrease) our net proceeds from this offering and our total equity and total capitalization by approximately $20.7 million.
 
(2) Excludes approximately $19.4 million of original issue discount for the 8.0% Notes and $294.0 million for the 10.375% Senior Discount Notes.
 
(3) Reflects debt assumed related to the Arizona Heart Hospital, Arizona Heart Institute and DMC acquisitions, substantially all of which is capital leases.


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DILUTION
 
If you invest in our common stock, you will experience dilution to the extent of the difference between the initial public offering price per share of our common stock and the adjusted net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing equityholders.
 
Our net tangible book value as of March 31, 2011 was a deficit of approximately $(1,069.7) million, or $(14.98) per share, on a post-split basis, of our common stock based on the number of shares outstanding at the end of the most recent quarter for which financial statements are available. Net tangible book value per share represents the amount of total tangible assets less total liabilities divided by the number of outstanding shares at March 31, 2011. Adjusted net tangible book value per share represents adjusted net tangible book value divided by the number of shares of common stock outstanding after giving effect to the offering.
 
After giving effect to the sale of 25,000,000 shares of common stock in this offering by us at the assumed initial public offering price of $22.00 per share (the midpoint of the range on the cover page of this prospectus), the Holdings Merger and the application of the net proceeds from this offering (after deducting underwriting discounts and commissions and estimated offering expenses payable by us), our adjusted net tangible book value would have been a deficit of $(604.3) million, or $(8.46) per share. This represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of $6.52 per share to existing equityholders and an immediate dilution in net tangible book value of $30.46 per share to new investors.
 
The following table illustrates the per share dilution:
 
         
Assumed initial public offering price per share
  $ 22.00  
Net tangible book value (deficit) per share before the change attributable to new investors
    (14.98 )
Increase in tangible book value per share attributable to new investors
    6.52  
         
Adjusted net tangible book value (deficit) per share after this offering
    (8.46 )
         
Dilution per share to new investors
  $ 30.46  
         
 
Dilution is determined by subtracting adjusted net tangible book value per share of common stock after the offering from the initial public offering price per share of common stock.
 
If the underwriters exercise their over-allotment option in full, the adjusted tangible book value per share after giving effect to the offering would be a deficit of $(7.01) per share. This represents an increase in adjusted net tangible book value (or a decrease in net tangible book value deficit) of $(7.97) per share to existing stockholders and dilution in adjusted net tangible book value of $29.01 per share to new investors.
 
A $1.00 increase (decrease) in the assumed initial public offering of $22.00 per share, would increase (decrease) our adjusted net tangible book value after this offering by $23.5 million and the dilution per share to new investors to $31.13 per share, in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
The following table summarizes, on an as adjusted basis as of March 31, 2011, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors in this offering. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid. The table below assumes an initial public offering price of $22.00 per share for shares


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purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:
 
                                                 
                            Average
       
    Shares Purchased     Total Consideration     Price Per
       
    Number     Percent     Amount     Percent     Share        
                (millions)                    
 
Existing stockholders
    46,418,668       65.0 %   $ 747.7       57.6 %   $ 16.11          
New investors
    25,000,000       35.0       550.0       42.4       22.00          
                                                 
Total
    71,418,668       100.0 %   $ 1,297.7       100.0 %   $ 18.17          
                                                 
 
If the underwriters were to fully exercise the underwriters’ option to purchase 3,750,000 additional shares of our common stock, the percentage of shares of our common stock held by existing stockholders who are directors, officers or affiliated persons would be 61.8%, and the percentage of shares of our common stock held by new investors would be 38.2%.
 
To the extent that we grant options to our employees in the future and those options are exercised or other issuances of common stock are made, there will be further dilution to new investors.


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HOLDINGS MERGER
 
In connection with and immediately prior to the completion of this offering, we will complete the Holdings Merger, pursuant to which Holdings will merge with and into Vanguard with Vanguard surviving the merger. As a result of the Holdings Merger, (1) each holder of Class A units of Holdings will receive in respect of such units a number of shares of our common stock, (2) each holder of Class B units of Holdings will receive in respect of such units a number of shares of common stock, (3) each holder of Class C units of Holdings will receive in respect of such units a number of shares of restricted stock and unrestricted common stock, and (4) each holder of Class D units of Holdings will receive in respect of such units a number of shares of common stock and stock options to acquire shares of our common stock, in each case, based on the economic benefits of the units surrendered calculated based on a deemed equity value for Vanguard derived from the equity value implied by this offering. Since all Class C units will be unvested at the time of this offering, the restricted stock that will be issued in respect of any Class C units will remain subject to the same vesting schedule that previously applied to the Class C units. See “Compensation Discussion and Analysis—Conversion of Management’s Holdings LLC Units.” No fractional shares will be issued in connection with the Holdings Merger. Any holder of units who would otherwise be entitled to a fractional share of restricted or unrestricted common stock will receive a cash amount in lieu thereof calculated based on the purchase price in this offering. Unless we indicate otherwise or the context requires, all information in this prospectus does not reflect any cash to be received in lieu of fractional shares in respect of the Holdings Merger. Restricted Stock and options received in connection with the Holdings Merger will be issued under the 2011 Stock Plan and registered on the Form S-8 Registration Statement as described under “Shares Available for Future Sales — Form S-8 Registration Statements.”


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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
 
The following unaudited pro forma condensed combined financial information with respect to Vanguard is based upon the historical consolidated financial statements of Vanguard. The unaudited pro forma condensed combined financial information includes the following:
 
  •     The unaudited pro forma condensed combined balance sheet as of March 31, 2011, which assumes this offering was completed (including the impact of the expected 59.584218 to 1 stock split), the Holdings Merger was completed and the net proceeds from this offering were applied as set forth in “Use of Proceeds” as of March 31, 2011.
 
  •     The unaudited pro forma condensed combined statement of operations for the twelve months ended June 30, 2010 (which assumes this offering, the offerings of the 7.750% Notes, our 10.375% Senior Discount Notes and the 8.0% Notes were completed and the Acquisitions occurred on July 1, 2009) and for the nine months ended March 31, 2011 (which assumes these same equity and debt offerings described above were completed and the acquisition of DMC occurred on July 1, 2009).
 
Our fiscal year and the fiscal year of the Resurrection Facilities end on June 30 of each year. DMC’s fiscal year ends on December 31. The unaudited pro forma condensed combined statement of operations for the twelve months ended June 30, 2010 combines our audited consolidated statement of operations for the fiscal year ended June 30, 2010 and the audited combined statement of operations of the Resurrection Facilities for the fiscal year ended June 30, 2010 with DMC’s unaudited condensed consolidated statement of operations for the twelve months ended June 30, 2010 (which was derived from DMC’s audited consolidated statement of operations for the year ended December 31, 2009 less DMC’s unaudited consolidated statement of operations for the six months ended June 30, 2009 plus DMC’s unaudited consolidated statement of operations for the six months ended June 30, 2010). The unaudited pro forma condensed combined statement of operations for the nine months ended March 31, 2011 combines our unaudited condensed consolidated statement of operations for the nine months ended March 31, 2011 with DMC’s unaudited consolidated statement of operations for the six months ended December 31, 2010 and does not include the Resurrection Facilities for the period from July 1, 2010 through August 1, 2010, the date of the acquisition of the Resurrection Facilities.
 
The unaudited pro forma condensed combined financial information is presented for informational purposes only, is based on certain assumptions that we believe are reasonable and is not intended to represent our financial condition or results of operations had the offerings described above or the Acquisitions occurred on the dates noted above or to project the results for any future date or period. In the opinion of management, all adjustments have been made that are necessary to present fairly the unaudited pro forma condensed combined financial information.
 
The unaudited pro forma condensed combined financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional 3,750,000 shares of common stock from us and that the shares of common stock to be sold in this offering are sold at $22.00 per share of common stock, which is the midpoint of the price range indicated on the front cover of this prospectus.
 
The unaudited pro forma condensed combined financial information includes adjustments, which are based upon preliminary estimates, to reflect the purchase price allocations to the fair values of acquired assets and assumed liabilities of DMC and the Resurrection Facilities. The final purchase price allocations will be based upon the fair values of actual net tangible and intangible assets acquired and liabilities assumed. The preliminary purchase price allocations for DMC and the Resurrection Facilities are subject to revision as more detailed analysis is completed and additional information related to the fair value of the assets acquired and liabilities assumed becomes available. Any change in the fair value of the net assets will change the amount of


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the purchase price allocable to goodwill. Due to these varying assumptions, final purchase accounting adjustments may differ materially from the pro forma adjustments presented herein.
 
The unaudited pro forma condensed combined financial information should be read in conjunction with the consolidated financial statements, combined financial statements and unaudited condensed consolidated financial statements and related notes of Vanguard, DMC and the Resurrection Facilities, included elsewhere in this prospectus, and the information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of March 31, 2011
 
                                 
          Pro Forma
             
    Actual
    Equity Offering
    Pro Forma
       
   
Vanguard
   
Adjustments
   
Vanguard
       
    (Dollars in millions)        
 
ASSETS
Current assets:
                               
Cash and cash equivalents
  $ 502.6     $  (a)   $ 502.6          
Restricted cash
    2.3             2.3          
Accounts receivable, net of allowance for doubtful accounts
    517.0             517.0          
Prepaid expenses and other current assets
    248.4             248.4          
Deferred income taxes
    18.3             18.3          
                                 
Total current assets
    1,288.6             1,288.6          
Property, plant and equipment, net
    1,795.9             1,795.9          
Goodwill
    786.9             786.9          
                                 
Intangible assets
    96.2             96.2          
Other assets
    194.6       4.9  (b)     199.5          
                                 
                                 
                                 
Total assets
  $ 4,162.2     $ 4.9     $ 4,167.1          
                                 
 
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
                               
Accounts payable and accrued expenses
  $ 919.1     $ (21.7 ) (c)   $ 897.4          
                                 
Current maturities of debt
    13.0             13.0          
                                 
Total current liabilities
    932.1       (21.7 )     910.4          
Other liabilities
    650.6             650.6          
                                 
Long-term debt
    2,766.1       (453.2 ) (d)     2,312.9          
Equity (deficit):
                               
Common stock
          0.3  (e)     0.3          
Additional paid in capital (distributions in excess of paid in capital)
    (88.5 )     488.6  (e)     400.1          
Accumulated other comprehensive loss
    0.9             0.9          
Retained deficit
    (106.9 )     (9.1 ) (b)     (116.0 )        
                                 
Total equity (deficit) attributable to parent
    (194.5 )     479.8       285.3          
Non-controlling interests
    7.9             7.9          
                                 
Total equity (deficit)
    (186.6 )     479.8       293.2          
                                 
Total liabilities and equity
  $ 4,162.2     $ 4.9     $ 4,167.1          
                                 
 
See notes to unaudited pro forma condensed combined balance sheet.


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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
 
(a) To reflect the cash transactions associated with the offering of shares of our common stock and the application of the net proceeds therefrom and related transactions as follows:
 
         
Cash received from the issuance of our common shares net of underwriter discounts and estimated costs to complete the offering
  $ 511.6  
Cash paid to redeem our 10.375% Senior Discount Notes, including the 5.0% redemption premium
    (475.9 )
Remaining net proceeds from the offering used for general corporate purposes
    (35.7 )
         
    $  
         
 
(b) To reflect the impact to retained deficit and deferred tax assets associated with the recognition of the net liability due to the Sponsors under the amended transaction and monitoring fee agreement (which we expect to execute concurrently with this offering).
 
(c) To reflect the use of $35.7 million of remaining net offering proceeds for general corporate purposes and the recognition of the $14.0 million net liability due to the Sponsors under the amended transaction and monitoring fee agreement.
 
(d) To reflect the redemption of our 10.375% Senior Discount Notes from the application of the net proceeds from the offering.
 
(e) To reflect the additional equity issued associated with the Holdings Merger and in the offering, net of the impact of underwriting discounts and estimated costs to complete the offering.


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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Twelve Months Ended June 30, 2010
 
                                                         
                      Pro Forma
    Pro Forma
    Pro Forma
       
    Actual
    DMC
    Resurrection
    Acquisition
    Debt Offerings
    Equity Offering
    Pro Forma
 
   
Vanguard
   
Acquisition
   
Facilities
   
Adjustments
   
Adjustments
   
Adjustments
   
Vanguard
 
    (Dollars in millions except per share amounts)        
 
Revenues:
                                                       
Patient service revenues
  $ 2,537.2     $ 1,976.6     $ 271.0     $ (81.2 ) (a)   $     $     $ 4,703.6  
Premium revenues
    839.7                                     839.7  
Other revenues
          150.0       13.0       (7.6 ) (g)                 155.4  
                                                         
Total revenues
    3,376.9       2,126.6       284.0       (88.8 )                 5,698.7  
Costs and expenses:
                                                       
Salaries and benefits (1)
    1,296.2       899.4       126.5       (23.5 ) (i)                 2,300.4  
                              1.8   (d)                        
Provision for doubtful accounts
    152.5       272.1       28.0       (81.2 ) (a)                 371.4  
Supplies
    456.1       281.4       42.5       7.8   (b)                        
                              11.7   (c)                 799.5  
Other operating expenses
    1,149.7       531.9       66.1       13.2   (f)                        
                              (1.7 ) (k)                 1,759.2  
Depreciation and amortization
    139.6       80.1       12.3       (23.1 ) (j)                 208.9  
Interest, net
    115.5       30.8       4.3       (34.0 ) (e)     98.5  (e)     (51.0 ) (m)     164.1  
Acquisition related expenses
    3.1                   1.7   (k)                 4.8  
Pension expense
                      23.5   (i)                 23.5  
Management fees
                30.2                         30.2  
Impairment and restructuring charges
    43.1       1.3       84.6                         129.0  
Debt extinguishment costs
    73.5                                     73.5  
Other
    6.0       (11.6 )     0.2       4.8   (h)                        
                              (3.8 ) (g)             (n)     (4.4 )
                                                         
Total costs and expenses
    3,435.3       2,085.4       394.7       (102.8 )     98.5       (51.0 )     5,860.1  
                                                         
Income (loss) from continuing operations before income taxes
    (58.4 )     41.2       (110.7 )     14.0       (98.5 )     51.0       (161.4 )
Income tax benefit (expense)
    13.8                   18.6   (l)     34.5  (l)     (17.9 )     49.0  
                                                         
Income (loss) from continuing operations
  $ (44.6 )   $ 41.2     $ (110.7 )   $ 32.6     $ (64.0 )   $ 33.1     $ (112.4 )
                                                         
Basic earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders: (2)
                                                       
Continuing operations
  $ (1.06 )                                           $ (1.66 )
Discontinued operations
    (0.04 )                                             (0.02 )
Net income (loss)
    (1.10 )                                             (1.68 )
Diluted earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders: (2)
                                                       
Continuing operations
  $ (1.06 )                                           $ (1.66 )
Discontinued operations
    (0.04 )                                             (0.02 )
Net income (loss)
    (1.10 )                                             (1.68 )
Weighted average shares outstanding: (2)
(in thousands)
                                                       
Basic
    44,650                                               69,650  
Diluted
    44,650                                               69,650  
 
 
(1) Includes $4.2 million of Vanguard stock compensation.
(2) Per share data gives effect to the estimated stock split of 59.584218 to 1 that Vanguard will effectuate prior to the consummation of the offering but does not reflect the 1,866,837 incremental common shares resulting from the Holdings Merger.
 
See notes to unaudited pro forma condensed combined statements of operations.


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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 2011
 
                                                 
                Pro Forma
    Pro Forma
    Pro Forma
       
    Actual
    DMC
    Acquisition
    Debt Offerings
    Equity Offering
    Pro Forma
 
   
Vanguard
   
Acquisition
   
Adjustments
   
Adjustments
   
Adjustments
   
Vanguard
 
    (Dollars in millions except per share amounts)        
 
Revenues:
                                               
Patient service revenues
  $ 2,747.8     $ 956.5           $     $     $ 3,704.3  
Premium revenues
    646.3                               646.3  
Other revenues
          102.7       (6.3 ) (g)                 96.4  
                                                 
Total revenues
    3,394.1       1,059.2       (6.3 )                 4,447.0  
Costs and expenses:
                                               
Salaries and benefits (1)
    1,381.2       459.6       (8.0 ) (i)                 1,833.7  
                      0.9   (d)                        
Provision for doubtful accounts
    214.1       103.8                         317.9  
Supplies
    462.3       139.3       3.0   (b)                        
                      5.6   (c)                 610.2  
Other operating expenses
    1,047.4       249.7       4.2   (f)                        
                      (3.2 ) (k)                 1,298.1  
Depreciation and amortization
    131.6       40.2       (7.1 ) (j)                 164.7  
Interest, net
    117.9       14.4       (13.9 ) (e)     48.8  (e)     (41.4 ) (m)     125.8  
Acquisition related expenses
    11.9             8.0   (k)                 19.9  
Pension expense
                8.0   (i)                 8.0  
Regulatory settlement expense (2)
          30.0                         30.0  
Impairment and restructuring charges
    6.0                               6.0  
Other expenses
    3.0       (8.1 )     11.3   (h)                        
                      (5.9 ) (g)             (n)     0.3  
                                                 
Total costs and expenses
    3,375.4       1,028.9       2.9       48.8       (41.4 )     4,414.6  
                                                 
Income (loss) from continuing operations before income taxes
    18.7       30.3       (9.2 )     (48.8 )     41.4       32.4  
Income tax benefit (expense)
    (11.7 )           (18.3 ) (l)     17.1  (l)     (14.5 ) (o)     (27.4 )
                                                 
Income (loss) from continuing operations
  $ 7.0     $ 30.3     $ (27.5 )   $ (31.7 )   $ 26.9     $ 5.0  
                                                 
Basic earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders: (3)
                                               
Continuing operations
  $ 0.10                                     $ 0.03  
Discontinued operations
    (0.12 )                                     (0.07 )
Net income (loss)
    (0.02 )                                     (0.04 )
Diluted earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders: (3)
                                               
Continuing operations
  $ 0.08                                     $ 0.03  
Discontinued operations
    (0.10 )                                     (0.07 )
Net income (loss)
    (0.02 )                                     (0.04 )
Weighted average shares outstanding: (3)
(in thousands)
                                               
Basic
    44,646                                       69,646  
Diluted
    51,208                                       69,646  
 
 
(1) Includes $3.6 million of Vanguard stock compensation.
(2) Represents DMC’s settlement with the Department of Justice and OIG related to certain disclosed conduct by DMC prior to Vanguard’s acquisition of DMC that may have violated the Anti-Kickback Statute or the Stark Law. See “Risks Related to Our Business and Structure” included elsewhere in this prospectus.
(3) Per share data gives effect to the estimated stock split of 59.584218 to 1 that Vanguard will effectuate prior to the consummation of the offering but does not reflect the 1,866,837 incremental shares resulting from the Holdings Merger.
 
See notes to unaudited pro forma condensed combined statements of operations.


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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
 
 
(a) To reclassify estimated DMC charity care expense of $81.2 million for the twelve months ended June 30, 2010 to a revenue deduction instead of additional provision for doubtful accounts to be consistent with Vanguard’s presentation. Such presentation is already reflected on the statement of operations for the six months ended March 31, 2011.
 
(b) To eliminate certain estimated DMC and Resurrection Facilities pharmacy supply discounts of $7.8 million for the twelve months ended June 30, 2010 and $3.0 million for DMC for the six months ended December 31, 2010 that will no longer be available to Vanguard as a for profit healthcare provider.
 
(c) To reflect estimated additional sales taxes for DMC and the Resurrection Facilities of $11.7 million for the twelve months ended June 30, 2010 and $5.6 million for DMC for the six months ended December 31, 2010 that Vanguard will be required to pay as a for profit healthcare provider.
 
(d) To reflect estimated additional unemployment taxes for DMC of $1.8 million for the twelve months ended June 30, 2010 and $0.9 million for the six months ended December 31, 2010 that Vanguard will be required to pay as a for profit healthcare provider.
 
(e) To adjust net interest to reflect the following:
 
                 
    Twelve Months
    Nine Months
 
    Ended
    Ended
 
   
June 30, 2010
   
March 31, 2011
 
 
Elimination of historical DMC interest expense for debt repaid at transaction closing
  $ (29.7 )   $ (13.9 )
Elimination of historical interest expense of the Resurrection Facilities not acquired by Vanguard
    (4.3 )      
                 
      (34.0 )     (13.9 )
Interest expense relating to the 8.0% Notes, the 7.750% Notes and our 10.375% Senior Discount Notes
    95.4       47.2  
Interest expense related to amortization of capitalized debt issuance costs
    3.1       1.6  
                 
      98.5       48.8  
                 
Net interest adjustment
  $ 64.5     $ 34.9  
                 
 
(f) To reflect estimated additional property taxes for DMC and the Resurrection Facilities of $13.2 million for the twelve months ended June 30, 2010 and $4.2 million for DMC for the six months ended December 31, 2010 that Vanguard will be required to pay as a for profit healthcare provider. The estimated amounts for DMC are presented net of the impact of certain tax abatements Vanguard will receive from Wayne County and the State of Michigan.
 
(g) To reclassify $7.6 million and $6.3 million of realized gains and investment income related to DMC board-restricted and donor-restricted assets from revenues to a reduction in other expenses for the twelve months ended June 30, 2010 and the six months ended December 31, 2010, respectively, to be consistent with Vanguard’s presentation and to eliminate $3.8 million and $0.4 million of these realized gains and investment income related to DMC board-restricted and donor-restricted assets that were not acquired by Vanguard but were retained by the seller or utilized as part of the purchase price to retire certain DMC debt at closing for the twelve months ended June 30, 2010 and the six months ended December 31, 2010, respectively.
 
(h) To eliminate $4.8 million and $11.3 million of unrealized gains related to DMC board-restricted and donor-restricted assets that were not acquired by Vanguard but were retained by the seller or utilized as


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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS—(Continued)
 
part of the purchase price to retire certain DMC debt at closing for the twelve months ended June 30, 2010 and the six months ended December 31, 2010, respectively.
 
(i) To reclassify $23.5 million and $8.0 million of DMC pension expense from salaries and benefits to the pension expense line item for the twelve months ended June 30, 2010 and the six months ended December 31, 2010, respectively.
 
(j) To eliminate the historical depreciation and amortization of DMC of $80.1 million and $40.2 million for the twelve months ended June 30, 2010 and for the six months ended December 31, 2010, respectively, and $12.3 million for the Resurrection Facilities for the twelve months ended June 30, 2010; and to record Vanguard’s estimate of post-acquisition depreciation and amortization of $66.1 million and $33.1 million for DMC for the twelve months ended June 30, 2010 and the six months ended December 31, 2010, respectively, and $3.2 million for the Resurrection Facilities for the twelve months ended June 30, 2010. The post-acquisition estimates were determined using the acquisition date estimated fair values of property, plant and equipment (as discussed in Note (c) to the Notes to Unaudited Pro Forma Condensed Combined Balance Sheet with respect to DMC) and using average estimated remaining useful lives of 15 years for real property and three years for personal property for DMC and based upon fair value and remaining economic useful life estimates obtained from appraisal data for the Resurrection Facilities.
 
(k) To reclassify acquisition related expenses incurred by DMC prior to the closing of its acquisition by Vanguard of $1.7 million and $3.2 million for the twelve months ended June 30, 2010 and the six months ended December 31, 2010, respectively, from other operating expenses to a separate line item and to record the $4.8 million of acquisition-related expenses paid at closing for the six months ended December 31, 2010.
 
(l) To record the income tax benefit of $18.6 million related to the acquired DMC and Resurrection Facilities operations including the impact of Acquisition-related pro forma adjustments for the twelve months ended June 30, 2010 and the income tax expense of $18.3 million related to the acquired DMC operations including the impact of Acquisition-related pro forma adjustments for the six months ended December 31, 2010; and to record the income tax benefit related to the 8.0% Notes, the 7.750% Notes and our 10.375% Senior Discount Notes offerings pro forma adjustments of $34.5 million and $17.1 million for the twelve months ended June 30, 2010 and the nine months ended March 31, 2011, respectively.
 
(m) To deduct the pro forma interest related to the 10.375% Senior Discount Notes, which Vanguard intends to redeem with the net proceeds from the equity offering, of $51.0 million and $41.4 million for the twelve months ended June 30, 2010 and the nine months ended March 31, 2011, respectively.
 
(n) The $14.0 million net liability due to the Sponsors under the amended transaction and monitoring fee agreement is not reflected as a pro forma equity offering adjustment herein since the expense associated with this liability is non-recurring. The payment of the additional $11.5 million of financial advisory fees to the Sponsors as provided for under our transaction and monitoring fee agreement with the Sponsors and the payment of bonuses to management of $4.5 million are not reflected as pro forma equity offering adjustments herein because such payments are not directly related to the equity offering.
 
(o) To record income tax expense of $13.0 million and $9.6 million, respectively, for the twelve months ended June 30, 2010 and the nine months ended March 31, 2011 related to the equity offering pro forma adjustments previously described.


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SELECTED HISTORICAL FINANCIAL AND OTHER 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, 2010 and as of March 31, 2011 and for the nine months periods ended March 31, 2010 and 2011. The selected historical financial data as of and for the year ended June 30, 2006 were derived from our audited consolidated financial statements adjusted for the retrospective presentation impact of changes in accounting guidance related to non-controlling interests. The selected historical financial data as of and for the years ended June 30, 2007, 2008, 2009 and 2010 were derived from our audited consolidated financial statements for each fiscal year presented. The operations of dispositions completed during fiscal 2007 are included in discontinued operations, net of taxes, for all periods presented. The selected historical financial data for the nine months ended March 31, 2010 and 2011 were derived from our unaudited interim condensed consolidated financial statements. Our historical results are not necessarily indicative of future operating results. In the opinion of management, the interim financial data set forth below include all adjustments, consisting of normal recurring accruals, necessary to present fairly our financial position and results of operations. Operating results for the nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year. This table should be read in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this prospectus.
 
                                                         
                                  Nine
    Nine
 
    Year
    Year
    Year
    Year
    Year
    Months
    Months
 
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
 
    June 30,
    June 30,
    June 30,
    June 30,
    June 30,
    March 31,
    March 31,
 
   
2006
   
2007
   
2008
   
2009
   
2010
   
2010
   
2011
 
    (Dollars in millions except per share amounts)  
 
Statement of Operations Data:
                                                       
Total revenues
  $ 2,400.2     $ 2,563.9     $ 2,775.6     $ 3,185.4     $ 3,376.9     $ 2,518.5     $ 3,394.1  
Costs and expenses:
                                                       
Salaries and benefits (includes stock compensation of $1.7, $1.2, $2.5, $4.4, $4.2, $3.5 and $3.6 respectively)
    985.0       1,061.4       1,146.2       1,233.8       1,296.2       962.6       1,381.2  
Health plan claims expense
    270.3       297.0       328.2       525.6       665.8       499.9       508.0  
Supplies
    392.9       420.8       433.7       455.5       456.1       339.4       462.3  
Provision for doubtful accounts
    156.6       174.8       205.5       210.3       152.5       113.0       214.1  
Other operating expenses
    345.2       367.6       398.5       461.9       483.9       363.4       539.4  
Depreciation and amortization
    98.7       117.0       129.3       128.9       139.6       101.9       131.6  
Interest, net
    103.8       123.8       122.1       111.6       115.5       84.7       117.9  
Debt extinguishment costs
    0.1                         73.5       73.2        
Impairment and restructuring charges
          123.8             6.2       43.1       43.1       6.0  
Other expenses
    6.5       0.2       6.5       2.7       9.1       3.5       14.9  
                                                         
Subtotal
    2,359.1       2,686.4       2,770.0       3,136.5       3,435.3       2,584.7       3,375.4  
                                                         
Income (loss) from continuing operations before income taxes
    41.1       (122.5 )     5.6       48.9       (58.4 )     (66.2 )     18.7  
Income tax benefit (expense)
    (16.2 )     11.6       (2.2 )     (16.8 )     13.8       18.2       (11.7 )
                                                         
Income (loss) from continuing operations
    24.9       (110.9 )     3.4       32.1       (44.6 )     (48.0 )     7.0  
Income (loss) from discontinued operations, net of taxes
    (9.4 )     (19.2 )     (1.1 )     (0.3 )     (1.7 )     (1.9 )     (5.4 )
                                                         
Net income (loss)
    15.5       (130.1 )     2.3       31.8       (46.3 )     (49.9 )     1.6  
Less: Net income attributable to non-controlling interests
    (2.6 )     (2.6 )     (3.0 )     (3.2 )     (2.9 )     (2.1 )     (2.6 )
                                                         
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders
  $ 12.9     $ (132.7 )   $ (0.7 )   $ 28.6     $ (49.2 )   $ (52.0 )   $ (1.0 )
                                                         


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                                  Nine
    Nine
 
    Year
    Year
    Year
    Year
    Year
    Months
    Months
 
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
    Ended
 
    June 30,
    June 30,
    June 30,
    June 30,
    June 30,
    March 31,
    March 31,
 
   
2006
   
2007
   
2008
   
2009
   
2010
   
2010
   
2011
 
    (Dollars in millions except per share amounts)  
 
Per Share Data (1):
                                                       
Basic earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders:
                                                       
Continuing operations
  $ 0.50     $ (2.54 )   $ 0.01     $ 0.65     $ (1.06 )   $ (1.12 )   $ 0.10  
Discontinued operations
  $ (0.21 )   $ (0.43 )   $ (0.02 )   $ (0.01 )   $ (0.04 )   $ (0.04 )   $ (0.12 )
Net income (loss)
  $ 0.29     $ (2.97 )   $ (0.01 )   $ 0.64     $ (1.10 )   $ (1.16 )   $ (0.02 )
Diluted earnings (loss) per share attributable to Vanguard Health Systems, Inc. stockholders:
                                                       
Continuing operations
  $ 0.49     $ (2.54 )   $ 0.01     $ 0.64     $ (1.06 )   $ (1.12 )   $ 0.08  
Discontinued operations
  $ (0.21 )   $ (0.43 )   $ (0.02 )   $ (0.01 )   $ (0.04 )   $ (0.04 )   $ (0.10 )
Net income (loss)
  $ 0.28     $ (2.97 )   $ (0.01 )   $ 0.63     $ (1.10 )   $ (1.16 )   $ (0.02 )
Weighted average shares:
                                                       
(in thousands)
                                                       
Basic
    44,661       44,661       44,661       44,661       44,650       44,655       44,646  
Diluted
    45,736       44,661       44,661       45,201       44,650       44,655       51,208  
Dividends paid per share
                                      $ 10.02  
                                                         
Other Financial Data:
                                                       
Capital expenditures
  $ 275.5     $ 164.3     $ 119.8     $ 132.0     $ 155.9     $ 111.1     $ 139.1  
Cash provided by operating activities
    152.4       125.6       176.3       313.1       315.2       218.7       210.0  
Cash used in investing activities
    (245.4 )     (118.5 )     (143.8 )     (133.6 )     (156.5 )     (111.4 )     (494.2 )
Cash provided by (used in) financing activities
    137.4       (10.6 )     (11.0 )     (12.9 )     (209.3 )     (205.2 )     529.2  
Adjusted EBITDA (2)
    251.9       243.5       266.0       302.7       326.6       243.7       292.7  
                                                         
Segment Data:
                                                       
Acute care services:
                                                       
Total revenues (3)
  $ 2,025.2     $ 2,162.5     $ 2,325.4     $ 2,507.4     $ 2,537.2     $ 1,890.5     $ 2,747.8  
Income (loss) from continuing operations before income taxes
    10.5       (152.0 )     (39.4 )     1.3       (115.0 )     (107.4 )     (28.0 )
Segment EBITDA (4)
    219.3       215.5       221.3       251.6       266.6       199.8       243.7  
Health plans:
                                                       
Total revenues
  $ 375.0     $ 401.4     $ 450.2     $ 678.0     $ 839.7     $ 628.0     $ 646.3  
Income from continuing operations before income taxes
    30.6       29.5       45.0       47.6       56.6       41.2       46.7  
Segment EBITDA (4)
    32.6       28.0       44.7       51.1       60.0       43.9       49.0  
                                                         
Operating Statistical Data:
                                                       
Discharges
    162,446       166,873       169,668       167,880       168,370       126,211       158,770  
Adjusted discharges
    274,451       277,231       283,250       288,807       295,702       220,063       283,739  
Patient revenue per adjusted discharge
  $ 7,230     $ 7,674     $ 8,047     $ 8,503     $ 8,408     $ 8,410     $ 9,392  
Health plan member lives
    146,200       145,600       149,600       218,700       241,200       240,300       242,300  
                                                         
Balance Sheet Data:
                                                       
Cash and cash equivalents
  $ 123.6     $ 120.1     $ 141.6     $ 308.2     $ 257.6     $ 210.3     $ 502.6  
Assets
    2,650.5       2,538.1       2,582.3       2,731.1       2,729.6       2,627.7       4,162.2  
Long-term debt and capital leases, including current portion
    1,519.2       1,528.7       1,537.5       1,551.6       1,752.0       1,751.6       2,779.1  
Working capital
    193.0       156.4       217.8       251.6       105.0       106.6       356.5  
 
(1) Historical per share data gives effect to the estimated stock split of 59.584218 to 1 that Vanguard will effectuate prior to the consummation of the offering. Weighted average basic shares as adjusted to reflect the impact of the Holdings Merger for the year ended June 30, 2010 and the nine months ended March 31, 2011 would have been 46,517 and 46,513, respectively. Weighted average diluted shares as adjusted to reflect the impact of the Holdings Merger for the year ended June 30, 2010 and the nine months ended

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March 31, 2011 would have been 46,517 and 51,380, respectively. Basic and diluted earnings (loss) attributable to Vanguard Health Systems, Inc. stockholders per share as adjusted to reflect the impact of the Holdings Merger for the year ended June 30, 2010 and the nine months ended March 31, 2011 would have been $(1.06) and $(0.02), respectively.
 
(2) Adjusted EBITDA is a measure used by management to evaluate its operating performance. We define Adjusted EBITDA as income (loss) attributable to Vanguard Health Systems, Inc. stockholders before interest expense (net of interest income), income taxes, depreciation and amortization, non-controlling interests, equity method income, stock compensation, gain or loss on disposal of assets, monitoring fees and expenses, realized gains or losses on investments, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges, pension expense (credits) and discontinued operations, net of taxes. Monitoring fees and expenses include fees and reimbursed expenses paid to affiliates of The Blackstone Group and Metalmark Subadvisor LLC for advisory and oversight services. It is reasonable to expect these reconciling items to occur in future periods, but for many of them the amounts recognized can vary significantly from period to period, do not relate directly to the ongoing operations of our healthcare facilities and complicate period comparisons of our results of operations and operations comparisons with other healthcare companies. Adjusted EBITDA is not intended as a substitute for net income (loss) attributable to Vanguard Health Systems, Inc. stockholders, operating cash flows or other cash flow statement data determined in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow available for management’s discretionary use, since it does not consider certain cash requirements such as interest payments, tax payments and other debt service requirements. Because Adjusted EBITDA is not a GAAP measure and is susceptible to varying calculations, Adjusted EBITDA, as presented by us, may not be comparable to similarly titled measures of other companies. We believe that Adjusted EBITDA provides useful information as a measurement of our financial performance on the same basis as that viewed by management to investors, lenders, financial analysts and rating agencies. Since these groups have historically used EBITDA-related measures in the healthcare industry, along with other measures, to estimate the value of a company, to make informed investment decisions, to evaluate a company’s operating performance compared to that of other companies in the healthcare industry and to evaluate a company’s leverage capacity and its ability to meet its debt service requirements. Adjusted 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. Adjusted 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 a company’s operating performance. Many of the items excluded from Adjusted EBITDA result from decisions outside the control of operating management and may differ significantly from company to company due to differing long-term decisions regarding capital structure, capital investment strategies, the tax jurisdictions in which the companies operate and unique circumstances of acquired entities. Adjusted EBITDA is also used by us to measure individual performance for incentive compensation purposes and as an analytical indicator for purposes of allocating resources to our operating businesses and assessing their performance, both internally and relative to our peers, as well as to evaluate the performance of our operating


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management teams. The following table sets forth a reconciliation of Adjusted EBITDA to net income (loss) attributable to Vanguard Health Systems, Inc. stockholders for each respective period:
 
                                                         
          Nine Months
 
          Ended
 
    Year Ended June 30,    
March 31,
 
   
2006
   
2007
   
2008
   
2009
   
2010
   
2010
   
2011
 
    (Dollars in millions)  
 
Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders
  $ 12.9     $ (132.7 )   $ (0.7 )   $ 28.6     $ (49.2 )   $ (52.0 )   $ (1.0 )
Interest, net
    103.8       123.8       122.1       111.6       115.5       84.7       117.9  
Income tax expense (benefit)
    16.2       (11.6 )     2.2       16.8       (13.8 )     (18.2 )     11.7  
Depreciation and amortization
    98.7       117.0       129.3       128.9       139.6       101.9       131.6  
Non-controlling interests
    2.6       2.6       3.0       3.2       2.9       2.1       2.6  
Equity method income
    (0.2 )     (1.0 )     (0.7 )     (0.8 )     (0.9 )     (0.8 )     (0.6 )
Stock compensation
    1.7       1.2       2.5       4.4       4.2       3.5       3.6  
Loss (gain) on disposal of assets
    1.5       (4.0 )     0.8       (2.3 )     1.8       0.4       0.9  
Realized losses on investments
                      0.6                   0.1  
Monitoring fees and expenses
    5.2       5.2       6.4       5.2       5.1       3.9       3.7  
Acquisition related expenses
                            3.1             11.9  
Debt extinguishment costs
    0.1                         73.5       73.2        
Impairment and restructuring charges
          123.8             6.2       43.1       43.1       6.0  
Pension credits
                                        (1.1 )
Loss from discontinued operations, net of taxes
    9.4       19.2       1.1       0.3       1.7       1.9       5.4  
                                                         
Adjusted EBITDA
  $ 251.9     $ 243.5     $ 266.0     $ 302.7     $ 326.6     $ 243.7     $ 292.7  
                                                         
 
(3) Acute care services revenues as presented include reductions to revenues for the elimination in consolidation of revenues earned by our hospitals and related healthcare facilities attributable to services provided to enrollees in our owned health plans of $40.0 million, $34.2 million, $31.2 million, $34.0 million, $42.8 million, $31.7 million and $33.2 million for the years ended June 30, 2006, 2007, 2008, 2009 and 2010 and the nine months ended March 31, 2010 and 2011, respectively.
 
(4) Segment EBITDA is a measure used by management to evaluate the operating performance of our segments and to develop strategic objectives and operating plans for these segments. Segment EBITDA is defined as income (loss) from continuing operations before income taxes less interest expense (net of interest income), depreciation and amortization, equity method income, stock compensation, gain or loss on disposal of assets, realized gains or losses on investments, monitoring fees and expenses, acquisition related expenses, debt extinguishment costs, impairment and restructuring charges and pension expense (credits). 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 our segments. Management believes that Segment EBITDA provides useful information about the financial performance of our segments on the same basis as that viewed by management 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 measure determined


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in accordance with GAAP and is not a substitute for net income (loss), operating cash flows or other cash flow statement data. Segment EBITDA, as presented, may not be comparable to similarly titled measures of other companies. We have included below a reconciliation of Segment EBITDA as utilized by us in reporting our segment performance to its most directly comparable GAAP financial measure, income (loss) from continuing operations before income taxes, for each respective period.
 
                                                         
                                  Nine
    Nine
 
                                  Months
    Months
 
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Ended
    Ended
 
    June 30,
    June 30,
    June 30,
    June 30,
    June 30,
    March 31,
    March 31,
 
   
2006
   
2007
   
2008
   
2009
   
2010
   
2010
   
2011
 
 
Acute Care Services:
                                                       
Income (loss) from continuing operations before income taxes
  $ 10.5     $ (152.0 )   $ (39.4 )   $ 1.3     $ (115.0 )   $ (107.4 )   $ (28.0 )
Interest, net
    106.1       129.6       126.6       112.2       116.5       85.3       118.9  
Depreciation and amortization
    94.4       112.7       125.1       124.8       135.2       98.6       128.3  
Equity method income
    (0.2 )     (0.9 )     (0.7 )     (0.8 )     (0.9 )     (0.8 )     (0.6 )
Stock compensation
    1.7       1.2       2.5       4.4       4.2       3.5       3.6  
Loss (gain) on disposal of assets
    1.5       (4.1 )     0.8       (2.3 )     1.8       0.4       0.9  
Realized losses on investments
                      0.6                   0.1  
Monitoring fees and expenses
    5.2       5.2       6.4       5.2       5.1       3.9       3.7  
Acquisition related expenses
                            3.1             11.9  
Debt extinguishment costs
    0.1                         73.5       73.2        
Impairment and restructuring charges
          123.8             6.2       43.1       43.1       6.0  
Pension credits
                                        (1.1 )
                                                         
Segment EBITDA
  $ 219.3     $ 215.5     $ 221.3     $ 251.6     $ 266.6     $ 199.8     $ 243.7  
                                                         
Health Plans:
                                                       
Income from continuing operations before income taxes
  $