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

 You should read the following discussion together with our historical financial statements and related notes included elsewhere herein and the information set forth under "Item 6 - Selected Financial Data." The discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate, please read "Item 1A - Risk Factors" included elsewhere in this Report. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements. Executive Overview As of June 30, 2010, we owned and operated 15 hospitals with a total of 4,135 licensed beds, and related outpatient service facilities complementary to the hospitals in San Antonio, Texas; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; and Massachusetts, and two surgery centers in Orange County, California. As of June 30, 2009 and 2010, we also owned three health plans as set forth in the following table.                                                                             

Membership

 Health Plan                                         Location          2009  

2010

 Phoenix Health Plan ("PHP") - managed Medicaid       Arizona          176,200        201,400 Abrazo Advantage Health Plan ("AAHP") - managed Medicare and Dual Eligible                   Arizona            2,800          2,700 MacNeal Health Providers ("MHP") - capitated outpatient and physician services                    Illinois          39,700         37,100                                                                        218,700        241,200    During fiscal 2010, our revenue growth was limited by significant challenges including less demand for elective services, some of which related to a weakened general economy, a shift from services provided to managed care enrollees to uninsured patients or those covered by lower paying Medicaid plans and increased competition primarily in San Antonio. We were successful in reducing certain costs to offset the impact of the limited revenue growth, but we are not sure these cost reduction measures will be sustainable if economic weakness persists during fiscal 2011 and beyond. Our comprehensive debt refinancing (the "Refinancing") during fiscal 2010 extended the maturities of our debt by up to five years and will be essential to the success of our long-term growth strategies. However, costs associated with the Refinancing were significant and resulted in a net loss attributable to our shareholders during the current fiscal year. Our mission is to help people in the communities we serve achieve health for life by delivering an ideal patient-centered experience in a high performance environment of integrated care. We plan to grow our business by continually improving quality of care, transforming the delivery of care to a fee per episode basis, expanding services and strengthening the financial performance of our existing operations and selectively acquiring other hospitals where we see an opportunity to improve operating performance and expand our mission. This business strategy is a framework for long-term success in an industry that is undergoing significant change, but we may continue to experience operating challenges in the short term until the general economy improves and our initiatives are fully implemented. Recent Acquisition Activity On June 10, 2010, we entered into a definitive agreement to purchase the Detroit Medical Center ("DMC"), which owns and operates eight hospitals in and around Detroit, Michigan with 1,734 licensed beds, including Children's Hospital of Michigan, Detroit Receiving Hospital, Harper University Hospital, Huron Valley-Sinai Hospital, Hutzel Women's Hospital, Rehabilitation Institute of Michigan, Sinai-Grace Hospital and DMC Surgery Hospital. Under the purchase agreement, we will acquire all of DMC's assets (other than donor restricted assets and certain other assets) and assume all of its liabilities (other than its outstanding bonds and notes and certain other liabilities) for $417.0 million in cash, which will be used to repay all of such non-assumed debt. The $417.0 million cash payment represents our full cash funding obligations to DMC in order to close the transaction, except for our assumption or payment of DMC's usual and customary transaction expenses. The assumed liabilities include a pension liability under a "frozen" defined benefit pension plan of DMC estimated at $184 million as of December 31, 2009 that we anticipate we will fund over seven years based upon actuarial assumptions and estimates, as adjusted periodically by actuaries. We will also commit to spend $500.0 million in capital expenditures in the DMC facilities during the five years subsequent to closing of the transaction, which amount relates to a specific project list agreed to between the DMC board of representatives and us. In addition, we will commit to spend $350.0 million during this five-year period relating to the routine capital needs of the DMC facilities. The acquisition is pending review and approval by the Michigan Attorney General. Assuming such approval is obtained, we expect the transaction to close during our second quarter of fiscal year 2011.                                           71 

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  In August 2010, we entered into definitive agreements to purchase certain assets and assume certain liabilities of the Arizona Heart Hospital and of the Arizona Heart Institute both located in Phoenix, Arizona. We expect these acquisitions to provide us a base upon which to expand our cardiology service offerings in the metropolitan Phoenix market. We expect both of these acquisitions to close during the second quarter of fiscal 2011. However, the Arizona Health Institute acquisition could be delayed since that entity recently made a voluntary filing with the U.S. Bankruptcy Court for the District of Arizona under Chapter 11 of the Bankruptcy Code for a reorganization of its business and the sale of its assets is now subject to the prior approval of such court. On August 1, 2010, we completed the purchase of Westlake Hospital and West Suburban Medical Center in the western suburbs of Chicago, Illinois from Resurrection Health Care. Westlake Hospital is a 225-bed acute care facility located in Melrose Park, Illinois, and West Suburban Medical Center is a 234-bed acute care facility located in Oak Park, Illinois. Both of these facilities are located less than 10 miles from our MacNeal Hospital and will enable us to achieve a market presence in the western suburban area of Chicago. As part of the purchase, we acquired substantially all of the assets (other than cash on hand) and assumed certain liabilities of these hospitals for a total cash purchase price of approximately $45.0 million. Operating Environment We believe that the operating environment for hospital operators continues to evolve, which presents both challenges and opportunities for us. In order to remain competitive in the markets we serve, we must transform our operating strategies to not only accommodate changing environmental factors but to make them operating advantages for us relative to our peers. These factors will require continued focus on quality of care initiatives. As consumers become more involved in their healthcare decisions, we believe perceived quality of care will become an even greater factor in determining where physicians choose to practice and where patients choose to receive care. The changes to the healthcare landscape that have begun or that we expect to begin in the immediate future are outlined below. Payer Mix Shifts During fiscal 2010, we provided more healthcare services to patients who were uninsured or had coverage under Medicaid or managed Medicaid programs and provided less healthcare services to patients who had managed care coverage than in previous years. Much of this shift resulted from general economic weakness in the markets we serve. As individuals lost their coverage under employer-sponsored managed care plans, many became eligible for state Medicaid or managed Medicaid programs or else became uninsured. We are uncertain how long the economic weakness will continue, but believe that conditions may not improve significantly during fiscal 2011. Health Reform Law The provisions included in the Health Reform Law include, among other things, increased access to health benefits for a significant number of uninsured individuals through the creation of health exchanges and expanded Medicaid programs; reductions in future Medicare reimbursement including market basket and disproportionate share payment decreases; development of a payment bundling pilot program and similar programs to promote accountability and coordination of care; continued efforts to tie reimbursement to quality of care including penalties for excessive readmissions and hospital-acquired conditions; and changes to premiums paid and the establishment of profit restrictions on Medicare managed care plans and exchange insurance plans. We are unable to predict how the Health Reform Law will impact our future financial position, operating results or cash flows, but we have begun the process of transforming our delivery of care to adapt to the changes from the Health Reform Law that will be transitioned during the next several years.                                           72

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  Physician Alignment Our ability to attract skilled physicians to our hospitals is critical to our success. Coordination of care and alignment of care strategies between hospitals and physicians will become more critical as reimbursement becomes more episode-based. During fiscal year 2010, we added 70 physicians to our physician network (net of physicians who left our network). We expect to continue to add physicians during fiscal 2011 but at a lesser rate than during fiscal 2010. Our fiscal 2011 recruitment goals primarily emphasize recruiting physicians specializing in family practice, internal medicine and inpatient hospital care (hospitalists) with a limited number of selected specialists. We have invested heavily in the infrastructure necessary to coordinate our physician alignment strategies and manage our physician operations. Our hospitalist employment strategy is a key element in coordination of patient-centered care. Because these initiatives require significant upfront investment and may take years to fully implement, our operating results could be negatively impacted during the short-term. Cost pressures In order to demonstrate a highly reliable environment of care, we must hire and retain nurses who share our ideals and beliefs and who have access to the training necessary to implement our clinical quality initiatives. While the national nursing shortage has abated somewhat during the past two years as a result of general economic weakness, the nursing workforce remains volatile. As a result, we expect continuing pressures on nursing salaries and benefits costs. These pressures include higher than normal base wage increases, demands for flexible working hours and other increased benefits and higher nurse to patient ratios necessary to improve quality of care. We have begun multiple initiatives to stabilize our nursing workforce including a nurse leadership professional practice model and employee engagement strategies. We have seen our nursing voluntary turnover decrease from approximately 12% during the year ended June 30, 2009 to 10% during the year ended June 30, 2010. During fiscal year 2010, we achieved the 72nd percentile for employee engagement within the Gallup Organization Employee Engagement Database. These results reflect progress towards both achieving stability in our nursing workforce and improving employee engagement since we began monitoring employee engagement during fiscal year 2008, our baseline year. Inflationary pressures and technological advancements continue to drive supplies costs higher. We have implemented multiple supply chain initiatives including consolidation of low-priced vendors, establishment of value analysis teams, stricter adherence to pharmacy formularies and coordination of care efforts with physicians to reduce physician preference items, but we are uncertain if we can sustain these reductions in future periods. Implementation of our Clinical Quality Initiatives The integral component of each of the challenge areas previously discussed is quality of care. We have implemented many of our expanded clinical quality initiatives and are in the process of implementing several others. These initiatives include monthly review of the 44 CMS quality indicators in place for federal fiscal year 2010, rapid response teams, mock Joint Commission surveys, hourly nursing rounds, our nurse leadership professional practice model, alignment of hospital management incentive compensation with quality performance indicators and the formation of Physician Advisory Councils at our hospitals to align the quality goals of our hospitals with those of the physicians who practice in our hospitals. Sources of Revenues Hospital revenues depend upon inpatient occupancy levels, the medical and ancillary services ordered by physicians and provided to patients, the volume of outpatient procedures and the charges or payment rates for such services. Reimbursement rates for inpatient services vary significantly depending on the type of payer, the type of service (e.g., acute care, intensive care or subacute) and the geographic location of the hospital. Inpatient occupancy levels fluctuate for various reasons, many of which are beyond our control. We receive payment for patient services from:   •   the federal government, primarily under the Medicare program;     •   state Medicaid programs;  

• health maintenance organizations, preferred provider organizations,

          managed Medicare providers, managed Medicaid providers and other private          insurers; and     •   individual patients                                            73 

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The following table sets forth the percentages of net patient revenues by payer for the years ended June 30, 2008, 2009 and 2010.

                                              Year ended June 30,                                         2008        2009        2010                     Medicare              26.2 %      25.3 %      25.5 %                     Medicaid               7.6 %       7.9 %       7.4 %                     Managed Medicare      14.0 %      14.1 %      14.8 %                     Managed Medicaid       7.5 %       8.8 %       9.5 %                     Managed care          35.0 %      34.7 %      34.9 %                     Self pay               8.6 %       8.3 %       6.8 %                     Other                  1.1 %       0.9 %       1.1 %                      Total                100.0 %     100.0 %     100.0 %    See "Item 1 - Business - Sources of Revenues" included elsewhere in this report for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan (both for inpatient and outpatient services), managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In that section, we also discussed the unique reimbursement features of the traditional Medicare plan, including disproportionate share, outlier cases and direct graduate and indirect medical education including the annual Medicare regulatory updates published by CMS in August 2010 that impact reimbursement rates under the plan for services provided during the federal fiscal year beginning October 1, 2010. The future impact to reimbursement for certain of these payers under the Health Reform Law is also addressed. Volumes by Payer During the year ended June 30, 2010 compared to the year ended June 30, 2009, discharges increased 0.3% and total adjusted discharges increased 2.4%. The following table provides details of discharges by payer for the years ended June 30, 2008, 2009 and 2010.                                                     Year ended June 30,                                 2008                      2009                      2010      Medicare              47,040        27.7 %      45,516        27.1 %      46,385        27.5 %      Medicaid (a)          20,195        11.9 %      17,068        10.2 %      14,867         8.8 %      Managed Medicare      26,040        15.3 %      26,925        16.0 %      27,393        16.3 %      Managed Medicaid      19,893        11.7 %      23,185        13.8 %      25,717        15.3 %      Managed care          50,040        29.5 %      48,977        29.2 %      45,152        26.8 %      Self pay (a)           5,854         3.5 %       5,650         3.4 %       8,168         4.9 %      Other                    606         0.4 %         559         0.3 %         688         0.4 %       Total                169,668       100.0 %     167,880       100.0 %     168,370       100.0 %      (a)   Medicaid and       self pay       discharges       were impacted       by the change       in our       Medicaid       pending       policy in our       Illinois       hospitals       effective       April 1, 2009       and in our       other       hospitals       effective       July 1, 2009.       Absent the       impact of the       Medicaid       pending       policy       changes,       Medicaid       discharges       would have       been 17,235       and 17,584       for the years       ended       June 30, 2009       and 2010,       respectively,       while self       pay       discharges       would have       been 5,483       and 5,451 for       the years       ended       June 30, 2009       and 2010,       respectively.   Payer Reimbursement Trends In addition to the volume factors described above, patient mix, acuity factors and pricing trends affect our patient service revenues. Net patient revenue per adjusted discharge was $8,047, $8,503 and $8,408 for the years ended June 30, 2008, 2009 and 2010, respectively. The current year ratio was negatively impacted by the uninsured discount policy that we implemented in our Chicago hospitals on April 1, 2009 and in our Phoenix and San Antonio hospitals on July 1, 2009. Under this policy, we apply an uninsured discount (calculated as a standard percentage of gross charges) at the time of patient billing for those patients with no insurance coverage who do not qualify for charity care under our guidelines. We recorded $11.7 million and $215.7 million of uninsured discount revenue deductions during the years ended June 30, 2009 and 2010, respectively. Approximately $7.6 million of the $11.7 million of uninsured discounts for 2009 and $128.7 million of the $215.7 million of uninsured discounts for 2010 would have otherwise been included in net patient revenues and subjected to our allowance for doubtful accounts policy had we not implemented our uninsured discount policy at these hospitals.                                           74

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  Accounts Receivable Collection Risks Leading to Increased Bad Debts Similar to other companies in the hospital industry, we face continued pressures in collecting outstanding accounts receivable primarily due to volatility in the uninsured and underinsured populations in the markets we serve. The following table provides a summary of our accounts receivable payer class mix as of each respective period presented.    June 30, 2009                0-90 days       91-180 days       Over 180 days       Total   Medicare                           15.6 %             0.3 %               0.3 %      16.2 %   Medicaid                            6.7 %             0.9 %               1.0 %       8.6 %   Managed Medicare                   10.0 %             0.5 %               0.3 %      10.8 %   Managed Medicaid                    7.1 %             0.5 %               0.5 %       8.1 %   Managed care                       25.1 %             2.3 %               1.5 %      28.9 %   Self pay(1)                         9.7 %             8.1 %               0.8 %      18.6 %   Self pay after primary(2)           2.1 %             2.9 %               0.9 %       5.9 %   Other                               1.8 %             0.6 %               0.5 %       2.9 %    Total                              78.1 %            16.1 %               5.8 %     100.0 %       June 30, 2010                0-90 days       91-180 days       Over 180 days       Total   Medicare                           17.7 %             0.4 %               0.3 %      18.4 %   Medicaid                            5.6 %             0.6 %               0.9 %       7.1 %   Managed Medicare                   11.3 %             0.7 %               0.6 %      12.6 %   Managed Medicaid                    7.4 %             0.4 %               0.3 %       8.1 %   Managed care                       27.1 %             1.9 %               1.1 %      30.1 %   Self pay(1)                        10.2 %             3.1 %               0.7 %      14.0 %   Self pay after primary(2)           2.5 %             3.3 %               0.8 %       6.6 %   Other                               2.1 %             0.6 %               0.4 %       3.1 %    Total                              83.9 %            11.0 %               5.1 %     100.0 %      (1)   Includes       uninsured       patient       accounts       only.  (2)   Includes       patient       co-insurance       and       deductible       amounts       after       payment has       been       received       from the       primary       payer.   Our combined allowances for doubtful accounts, uninsured discounts and charity care covered 96.5% and 84.0% of combined self-pay and self-pay after primary accounts receivable as of June 30, 2009 and 2010, respectively. The period over period decrease is due to the implementation of our uninsured discount policy at our Phoenix and San Antonio hospitals effective July 1, 2009. The volume of self-pay accounts receivable remains sensitive to a combination of factors including price increases, acuity of services, higher levels of patient deductibles and co-insurance under managed care plans, economic factors and the increased difficulties of uninsured patients who do not qualify for charity care programs to pay for escalating healthcare costs. We have implemented policies and procedures designed to expedite upfront cash collections and promote repayment plans from our patients. However, we believe bad debts will remain a significant risk for us and the rest of the hospital industry in the near term.                                           75 

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  Governmental and Managed Care Payer Reimbursement Healthcare spending comprises a significant portion of total spending in the United States and has been growing at annual rates that exceed inflation, wage growth and gross national product. There is considerable pressure on governmental payers, managed Medicare/Medicaid payers and commercial managed care payers to control costs by either reducing or limiting increases in reimbursement to healthcare providers or limiting benefits to enrollees. The current economic recession has magnified these pressures. Lower than expected tax collections due to higher unemployment and depressed consumer spending have resulted in budget shortfalls for most states, including those in which we operate. Additionally, the demand for Medicaid coverage has increased due to job losses that have left many individuals without health insurance. To balance their budgets, many states, either directly or through their managed Medicaid programs, may enact healthcare spending cuts or defer cash payments to healthcare providers, since raising taxes is not a popular option during recessionary cycles. Further, the tightened credit markets have complicated the states' efforts to issue additional bonds to raise cash. During the year ended June 30, 2010, Medicaid and managed Medicaid programs accounted for approximately 17% of our net patient revenues. Managed care payers also face economic pressures during periods of economic weakness due to lower enrollment resulting from higher unemployment rates and the inability of individuals to afford private insurance coverage. These payers may respond to these challenges by reducing or limiting increases to healthcare provider reimbursement rates or reducing benefits to enrollees. During the year ended June 30, 2010, we recognized approximately 35% of our net patient revenues from managed care payers. If we do not receive increased payer reimbursement rates from governmental or managed care payers that cover the increasing cost of providing healthcare services to our patients or if governmental payers defer payments to our hospitals, our financial position, results of operations and cash flows could be materially adversely impacted. Premium Revenues We recognize premium revenues from our three health plans, PHP, AAHP and MHP. Premium revenues from these three plans increased $161.7 million or 23.8% during the year ended June 30, 2010 compared to the year ended June 30, 2009. PHP's average membership increased to approximately 195,700 for fiscal 2010 compared to approximately 150,500 for fiscal 2011. PHP's increase in revenues and membership during fiscal year 2010 resulted from the increase in individuals eligible for AHCCCS coverage and the fact that the current fiscal year period includes a full year under the new AHCCCS contract (see discussion below) compared to only nine months during the previous fiscal year. In May 2008, PHP was awarded a new contract with AHCCCS effective for the three-year period beginning October 1, 2008 and ending September 30, 2011. AHCCCS has the option to renew the new contract, in whole or in part, for two additional one-year periods commencing on October 1, 2011 and on October 1, 2012. The new contract covers the three counties covered under the previous contract (Gila, Maricopa and Pinal) plus an additional six Arizona counties (Apache, Coconino, Mohave, Navajo, Pima and Yavapai). The new contract utilizes a national episodic/diagnostic risk adjustment factor for non-reconciled enrollee risk groups, which AHCCCS applied retroactively to October 1, 2008, that was not part of PHP's previous AHCCCS contract. In response to the State of Arizona's budget crisis and continued concerns about economic indicators during its 2010 fiscal year, AHCCCS made certain changes to its current contract with PHP that negatively impact PHP's current and future revenues. AHCCCS could take further actions in the near term that could materially adversely impact our operating results and cash flows including reimbursement rate cuts, enrollment reductions, capitation payment deferrals, covered services reductions or limitations or other steps to reduce program expenditures including cancelling PHP's contract. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing these financial statements, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses included in the financial statements. Management bases its estimates on historical experience and other available information, the results of which form the basis of the estimates and assumptions. We consider the following accounting policies to be critical because they involve highly subjective and complex assumptions and assessments, are subject to a great degree of fluctuation period over period and are the most critical to our operating performance.                                           76

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  Revenues and Revenue Deductions We recognize patient service revenues during the period the healthcare services are provided based upon estimated amounts due from payers. We record contractual adjustments to our gross charges to reflect expected reimbursement negotiated with or prescribed by third party payers. We estimate contractual adjustments and allowances based upon payment terms set forth in managed care health plan contracts and by federal and state regulations. For the majority of our patient service revenues, we apply contractual adjustments to patient accounts at the time of billing using specific payer contract terms entered into the accounts receivable systems, but in some cases we record an estimated allowance until payment is received. If our estimated contractual adjustments as a percentage of gross revenues were 1% higher for all insured accounts, our net revenues would have been reduced by approximately $79.0 million and $81.0 million for the years ended June 30, 2009 and 2010, respectively. We derive most of our patient service revenues from healthcare services provided to patients with Medicare (including managed Medicare plans) or managed care insurance coverage. Services provided to Medicare patients are generally reimbursed at prospectively determined rates per diagnosis, while services provided to managed care patients are generally reimbursed based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. Medicaid reimbursements vary by state. Other than Medicare, no individual payer represents more than 10% of our patient service revenues. Medicare regulations and many of our managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities. To obtain reimbursement for certain services under the Medicare program, we must submit annual cost reports and record estimates of amounts owed to or receivable from Medicare. These cost reports include complex calculations and estimates related to indirect medical education, disproportionate share payments, reimbursable Medicare bad debts and other items that are often subject to interpretation that could result in payments that differ from recorded estimates. We estimate amounts owed to or receivable from the Medicare program using the best information available and our interpretation of the applicable Medicare regulations. We include differences between original estimates and subsequent revisions to those estimates (including final cost report settlements) in our consolidated statements of operations in the period in which the revisions are made. Net adjustments for final third party settlements increased patient service revenues and income from continuing operations before income taxes by $7.9 million, $8.0 million and $6.6 million during the years ended June 30, 2008, 2009 and 2010, respectively. Additionally, updated regulations and contract negotiations with payers occur frequently, which necessitates continual review of revenue estimation processes by management. We believe that future adjustments to our current third party settlement estimates will not materially impact our results of operations, cash flows or financial position. Effective for service dates on or after April 1, 2009, as a result of a state mandate, we implemented a new uninsured discount policy for those patients receiving services in our Illinois hospitals who had no insurance coverage and who did not otherwise qualify for charity care under our guidelines. Under this policy, we apply an uninsured discount (calculated as a standard percentage of gross charges) at the time of patient billing and include this discount as a reduction to patient service revenues. We implemented this same policy for our Phoenix and San Antonio hospitals effective for service dates on or after July 1, 2009. These discounts were approximately $11.7 million and $215.7 million for the years ended June 30, 2009 and 2010, respectively. We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federal poverty guidelines set forth by the Department of Health and Human Services). We deduct charity care accounts from revenues when we determine that the account meets our charity care guidelines. We also provide discounts from billed charges and alternative payment structures for uninsured patients who do not qualify for charity care but meet certain other minimum income guidelines, primarily those uninsured patients with incomes between 200% and 500% of the federal poverty guidelines. During the past three fiscal years, a significant percentage of our charity care deductions represented services provided to undocumented aliens under the Section 1011 border funding reimbursement program. Border funding qualification ended in Texas during fiscal year 2009, ended in Illinois during fiscal year 2010, and we expect that qualification will end sometime during our fiscal 2011 in Arizona when funds appropriated to those states have been exhausted. The following table provides a breakdown of our charity care deductions during the years ending June 30, 2008, 2009 and 2010, respectively (in millions).                                                              Year ended June 30,                                                     2008           2009           2010 Total charity care deductions                     $    86.1      $    91.8      $    87.7 Border funding charity care deductions, net of payments received                                 $    29.6      $    34.9      $    29.8 Payments received for border funding accounts     $     3.8      $     4.6      $     3.5                                            77 

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  We record revenues related to the Illinois Provider Tax Assessment ("PTA") program when the receipt of payment from the state entity is assured. For the Texas Upper Payment Limit ("UPL") program we recognize revenues that offset the expenses associated with the provision of charity care when the services are provided. We recognize federal match revenues under the Texas UPL program when payments are assured. We earned premium revenues of $450.2 million, $678.0 million and $839.7 million during the years ended June 30, 2008, 2009, 2010, respectively, from our health plans. Our health plans, PHP, AAHP and MHP, have agreements with AHCCCS, CMS and various health maintenance organizations ("HMOs"), respectively, to contract to provide medical services to subscribing participants. Under these agreements, our health plans receive monthly payments based on the number of HMO participants in MHP or the number and coverage type of members in PHP and AAHP. Our health plans recognize the payments as revenues in the month in which members are entitled to healthcare services with the exception of AAHP Medicare Part D reinsurance premiums and low income subsidy cost sharing premiums that are recorded as a liability to fund future healthcare costs or else repaid to CMS. Allowance for Doubtful Accounts and Provision for Doubtful Accounts Our ability to collect the self-pay portions of our receivables is critical to our operating performance and cash flows. Our allowance for doubtful accounts was approximately 30.6% and 21.8% of accounts receivable, net of contractual discounts, as of June 30, 2009 and 2010, respectively. The primary collection risk relates to uninsured patient accounts and patient accounts for which primary insurance has paid but patient deductibles or co-insurance portions remain outstanding. We estimate our allowance for doubtful accounts using a standard policy that reserves all accounts aged greater than 365 days subsequent to discharge date plus percentages of uninsured accounts and self-pay after primary accounts less than 365 days old. We test our allowance for doubtful accounts policy quarterly using a hindsight calculation that utilizes write-off data for all payer classes during the previous twelve-month period to estimate the allowance for doubtful accounts at a point in time. We also supplement our analysis by comparing cash collections to net patient revenues and monitoring self-pay utilization. We adjust the standard percentages in our allowance for doubtful accounts reserve policy as necessary given changes in trends from these analyses. We most recently adjusted this reserve policy when we implemented our uninsured discount policy in Phoenix, San Antonio and Illinois. If our uninsured accounts receivable as of June 30, 2009 and 2010 were 1% higher, our provision for doubtful accounts would have increased by $1.0 million and $0.7 million, respectively. Significant changes in payer mix, business office operations, general economic conditions and healthcare coverage provided by federal or state governments or private insurers may have a significant impact on our estimates and significantly affect our liquidity, results of operations and cash flows. Prior to the implementation of our new uninsured discount policy, we classified accounts pending Medicaid approval as Medicaid accounts in our accounts receivable aging report and recorded a contractual allowance for these accounts equal to the average Medicaid reimbursement rate for that specific state until qualification was confirmed at which time the account was netted in the aging. In the event an account did not successfully qualify for Medicaid coverage and did not meet our charity guidelines, the previously recorded Medicaid contractual adjustment remained a revenue deduction (similar to a self-pay discount), and the remaining net account balance was reclassified to uninsured status and subjected to our allowance for doubtful accounts policy. If accounts did not qualify for Medicaid coverage but did qualify as charity care, the contractual adjustments were reversed and the gross account balances was recorded as charity deductions.                                           78

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  Upon the implementation of our new uninsured discount policy, all uninsured accounts (including those pending Medicaid qualification) that do not qualify for charity care receive the standard uninsured discount. The balance of these accounts are subject to our allowance for doubtful accounts policy. For those accounts that subsequently qualify for Medicaid coverage, the uninsured discount is reversed and the account is reclassified to Medicaid accounts receivable with the appropriate contractual discount applied. Thus, the contractual allowance for Medicaid pending accounts is no longer necessary for those accounts subject to the uninsured discount policy. The following table provides the value of accounts pending Medicaid qualification, the balance successfully qualified for Medicaid coverage, the balance not qualified and transferred to uninsured status, the balance not qualified and transferred to charity and the percentage successfully qualified for Medicaid coverage during the respective fiscal years (dollars in millions).                                                             Year ended June 30,                                                             2009           2010

     Medicaid pending accounts receivable                $     15.8       $

23.5

     Medicaid pending successfully qualified             $     23.5       $

44.3

Medicaid pending not qualified (uninsured) $ 29.6 $

63.5

     Medicaid pending not qualified (charity)            $      8.0       $

17.1

     Medicaid pending qualification success percentage           39 %      

36 %

   Because we require patient verification of coverage at the time of admission, reclassifications of Medicare or managed care accounts to self-pay, other than patient coinsurance or deductible amounts, occur infrequently and are not material to our financial statements. Additionally, the impact of these classification changes is further limited by our ability to identify any necessary classification changes prior to patient discharge or soon thereafter. Due to information system limitations, we are unable to quantify patient deductible and co-insurance receivables that are included in the primary payer classification in the accounts receivable aging report at any given point in time. When classification changes occur, the account balance remains aged from the patient discharge date. Insurance Reserves We have a self-insured medical plan for all of our employees. Claims are accrued under the self-insured plan as the incidents that gave rise to them occur. Unpaid claims accruals are based on the estimated ultimate cost of settlement, including claim settlement expenses, in accordance with an average lag time and historical experience. Due to the nature of our operating environment, we are subject to professional and general liability and workers compensation claims and related lawsuits in the ordinary course of business. We maintain professional and general liability insurance with unrelated commercial insurance carriers to provide for losses up to $65.0 million in excess of our self-insured retention (such self-insured retention maintained through our captive insurance subsidiary and/or other of our subsidiaries) of $10.0 million through June 30, 2010 but increased to $15.0 million for the Illinois hospitals subsequent to June 30, 2010. Through the period ended June 30, 2010, we insured our excess professional and general liability coverage under a retrospectively rated policy, and premiums under this policy were recorded at the minimum premium. We self-insure our workers compensation claims up to $1.0 million per claim and purchase excess insurance coverage for claims exceeding $1.0 million.                                           79

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  The following tables summarize our employee health, professional and general liability and workers compensation reserve balances (including the current portions of such reserves) as of June 30, 2009 and 2010 and claims loss and claims payment information during the years ended June 30, 2008, 2009 and 2010.                                                                     Professional                                                    Employee        and General           Workers                                                     Health          Liability         Compensation Reserve balance: June 30, 2007                                     $      1.2      $         64.6      $        18.5 June 30, 2008                                     $      1.5      $         74.3      $        18.8 June 30, 2009                                     $     13.4      $         92.9      $        18.2 June 30, 2010                                     $     14.1      $         91.8      $        15.7  Current year provision for claims losses: Year ended June 30, 2008                          $      7.3      $         22.4      $         7.6 Year ended June 30, 2009                          $     93.2      $         22.2      $         7.8 Year ended June 30, 2010                          $    115.8      $         26.4      $         7.4  Adjustments to prior year claims losses: Year ended June 30, 2008                          $        -      $         (0.6 )    $        (2.3 ) Year ended June 30, 2009                          $     (0.6 )    $         13.4      $        (3.8 ) Year ended June 30, 2010                          $     (1.5 )    $          8.4      $        (5.1 )  Claims paid related to current year: Year ended June 30, 2008                          $      5.8      $          0.1      $         1.0 Year ended June 30, 2009                          $     79.8      $          0.3      $         1.6 Year ended June 30, 2010                          $    101.7      $          1.1      $         1.1  Claims paid related to prior year: Year ended June 30, 2008                          $      1.2      $         12.0      $         4.0 Year ended June 30, 2009                          $      0.9      $         16.7      $         3.0 Year ended June 30, 2010                          $     11.9      $         34.8      $         3.7   In developing our estimates of our reserves for employee health, professional and general liability and workers compensation claims, we utilize actuarial and certain case-specific information. Each reserve is comprised of estimated indemnity and expense payments related to: (1) reported events ("case reserves") and (2) incurred but not reported ("IBNR") events as of the end of the period. Management uses information from its human resource and risk managers and its best judgment to estimate case reserves. Actuarial IBNR estimates are dependent on multiple variables including our risk exposures, our self-insurance limits, geographic locations in which we operate, the severity of our historical losses compared to industry averages and the reporting pattern of our historical losses compared to industry averages, among others. Most of these variables require judgment, and changes in these variables could result in significant period over period fluctuations in our estimates. We discount our workers compensation reserve using actuarial estimates of projected cash payments in future periods (approximately 5.0% for each of the past three fiscal years). We do not discount our professional and general liability reserve. We adjust these reserves from time to time as we receive updated information. In April 2009, a jury awarded damages to the plaintiff in a professional liability case against one of our hospitals in the amount of approximately $14.9 million, which exceeded our captive subsidiary's $10.0 million self insured limit. Based upon this verdict, we increased our professional and general liability reserve by the excess of the verdict amount over our previously established case reserve estimate and recorded a reinsurance receivable for that portion exceeding $10.0 million. We settled this claim and paid the settlement amount in March 2010. We received cash payment for the reinsurance receivable in June 2010.                                           80

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  Our best estimate of professional and general liability and workers compensation IBNR utilizes statistical confidence levels that are below 75%. Using a higher statistical confidence level, while not permitted under United States generally accepted accounting principles, would increase the estimated reserve. The following table illustrates the sensitivity of the reserve estimates at 75% and 90% confidence levels (in millions).                                          Professional and         Workers                                        General Liability      Compensation            Reserve at June 30, 2009            As reported                 $             92.9     $        18.2            With 75% confidence level   $            104.9     $        21.2            With 90% confidence level   $            116.9     $        23.8             Reserve at June 30, 2010            As reported                 $             91.8     $        15.7            With 75% confidence level   $            105.7     $        19.4            With 90% confidence level   $            119.7     $        22.8   Our best estimate of employee health claims IBNR relies primarily upon payment lag data. If our estimate of the number of unpaid days of employee health claims expense changed by 5 days, our employee health IBNR estimate would change by approximately $1.6 million. Health Plan Claims Reserves During the years ended June 30, 2008, 2009 and 2010, health plan claims expense was $328.2 million, $525.6 million and $665.8 million, respectively, primarily representing medical claims of PHP. Vanguard estimates PHP's reserve for medical claims using historical claims experience (including cost per member and payment lag time) and other actuarial data including number of members and certain member demographic information. The following table provides the health plan reserve balances as of June 30, 2009 and 2010 and health plan claims and payment information during the years ended June 30, 2008, 2009 and 2010, respectively (in millions).                                                              Year ended June 30,                                                     2008           2009           2010 Health plan reserves and settlements, beginning of year                                 $    61.4      $    51.1      $   117.6 Current year provision for health plan claims         329.7          525.5  

670.7

 Current year adjustments to prior year health plan claims                                            (1.5 )          0.1           (4.9 ) Program settlement, capitation and other activity                                              (24.2 )         19.3  

31.0

 Claims paid related to current year                  (268.4 )       (424.6 )       (571.7 ) Claims paid related to prior years                    (45.9 )        (53.8 

) (92.9 )

  Health plan reserves and settlements, end of year                                              $    51.1      $   117.6      $   149.8    The increases in reserves, claims losses and claims payments from 2008 to 2009 and from 2009 to 2010 were primarily due to the significant increase in PHP members during the periods as a result of the new AHCCCS contract that went into effect on October 1, 2008, the increased number of individuals eligible for participation in the AHCCCS program during each year and an additional PHP risk group subject to a settlement reconciliation during 2010. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from its estimates given changes in the healthcare cost structure or adverse experience. During the years ended June 30, 2008, 2009 and 2010, approximately $31.2 million, $34.0 million and $42.8 million, respectively, of accrued and paid claims for services provided to our health plan members by our hospitals and our other healthcare facilities were eliminated in consolidation. Our operating results and cash flows could be materially affected by increased or decreased utilization of our healthcare facilities by members in our health plans. Income Taxes We believe that our income tax provisions are accurate and supportable, but certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. To reflect the possibility that all of our tax positions may not be sustained, we maintain tax reserves that are subject to adjustment as updated information becomes available or as circumstances change. We record the impact of tax reserve changes to our income tax provision in the period in which the additional information, including the progress of tax audits, is obtained.                                           81

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  We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The factors used in this determination include the following:   •   Cumulative losses in recent years     •   Income/losses expected in future years  

• Availability, or lack thereof, of taxable income in prior carryback

periods that would limit realization of tax benefits

• Carryforward period associated with the deferred tax assets and liabilities

• Prudent and feasible tax planning strategies

   In addition, financial forecasts used in determining the need for or amount of federal and state valuation allowances are subject to changes in underlying assumptions and fluctuations in market conditions that could significantly alter our recoverability analysis and thus have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Effective July 1, 2007, we adopted the relevant guidance for accounting for uncertainty in income taxes. The following table provides a detailed rollforward of our net liability for uncertain tax positions for the years ended June 30, 2008, 2009 and 2010 (in millions).        Balance at June 30, 2007                                       $  4.9       Additions based on tax positions reltaed to the current year        -       Additions for tax positions of prior years                        0.4       Reductions for tax positions of prior years                         -       Settlements                                                         -        Balance at June 30, 2008                                       $  5.3       Additions based on tax positions reltaed to the current year        -       Additions for tax positions of prior years                          -       Reductions for tax positions of prior years                      (0.3 )       Settlements                                                         -        Balance at June 30, 2009                                       $  5.0       Additions based on tax positions reltaed to the current year      0.8       Additions for tax positions of prior years                        6.1       Reductions for tax positions of prior years                         -       Settlements                                                         -        Balance at June 30, 2010                                       $ 11.9    The provisions set forth in accounting for uncertain tax positions allow for the classification election of interest on an underpayment of income taxes, when the tax law requires interest to be paid, and penalties, when a tax position does not meet the minimum statutory threshold to avoid payment of penalties, in income taxes, interest expense or another appropriate expense classification based on the accounting policy election of the entity. We elected to continue our historical practice of classifying interest and penalties as a component of income tax expense. Of the $11.9 million total unrecognized tax benefits, $0.6 million of the balance as of June 30, 2010 would impact the effective tax rate if recognized.                                           82 

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  Long-Lived Assets and Goodwill Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. In May 2009, we recorded a $6.2 million ($3.8 million net of taxes) impairment charge to write-down the value of a building that we currently lease to other healthcare service providers to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Given the relatively few number of hospitals we own and the significant amounts of long-lived assets attributable to those hospitals, an impairment of the long-lived assets for even a single hospital could materially adversely impact our operating results or financial position. Goodwill also represents a significant portion of our total assets. We review goodwill for impairment annually during our fourth fiscal quarter or more frequently if certain impairment indicators arise. We review goodwill at the reporting level unit, which is one level below an operating segment. We compare the carrying value of the net assets of each reporting unit to the net present value of estimated discounted future cash flows of the reporting unit. If the carrying value exceeds the net present value of estimated discounted future cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position or results of operations. During the past three years, our two Illinois hospitals have experienced deteriorating economic factors that have negatively impacted their results of operations and cash flows. While various initiatives mitigated the impact of these economic factors during fiscal years 2008 and 2009, the operating results of the Illinois hospitals did not improve to the level anticipated during the first half of fiscal 2010. After having the opportunity to evaluate the operating results of the Illinois hospitals for the first six months of fiscal year 2010 and to reassess the market trends and economic factors, we concluded that it was unlikely that previously projected cash flows for these hospitals would be achieved. 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 this reporting unit was impaired. The $43.1 million ($31.8 million, net of taxes) non-cash impairment loss is included in our consolidated statement of operations for the year ended June 30, 2010.                                           83 

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  Selected Operating Statistics The following table sets forth certain operating statistics for each of the periods presented.                                                               Year ended June 30,                                                       2008          2009          2010 Unaudited Operating Data - continuing operations: Number of hospitals, end of period                         15            15            15 Number of licensed beds, end of period                  4,181         4,135 

4,135

 Discharges (a)                                        169,668       167,880 

168,370

 Adjusted discharges-hospitals (b)                     270,076       274,767 

280,437

 Adjusted discharges (c)                               283,250       288,807 

295,702

Net revenue per adjusted discharge-hospitals (d) $ 8,110 $ 8,623

     $   8,516 Net revenue per adjusted discharge (e)              $   8,047     $   8,503     $   8,408 Patient days (f)                                      734,838       709,952       701,265 Average length of stay (g)                               4.33          4.23          4.17 Inpatient surgeries (h)                                37,538        37,970        37,320 Outpatient surgeries (i)                               73,339        76,378        75,969 Emergency room visits (j)                             588,246       605,729       626,237 Occupancy rate (k)                                         48 %          47 %          46 % Member lives (l)                                      149,600       218,700       241,200 Health plan claims expense percentage (m)                72.9 %        77.5 %        79.3 %     (a)   Discharges represent       the total number of       patients discharged       (in the facility for       a period in excess       of 23 hours) from       our hospitals and is       used by management       and certain       investors as a       general measure of       inpatient volumes.  (b)   Adjusted       discharges-hospitals       is used by       management and       certain investors as       a general measure of       combined hospital       inpatient and       hospital outpatient       volumes. Adjusted       discharges-hospitals       is computed by       multiplying       discharges by the       sum of gross       hospital inpatient       revenues and gross       hospital outpatient       revenues and then       dividing the result       by gross hospital       inpatient revenues.  (c)   Adjusted discharges       is used by       management and       certain investors as       a general measure of       consolidated       inpatient and       outpatient volumes.       Adjusted discharges       is computed by       multiplying       discharges by the       sum of gross       inpatient revenues       and gross outpatient       revenues and then       dividing the result       by gross inpatient       revenues.  (d)   Net revenue per       adjusted       discharge-hospitals       is calculated by       dividing net       hospital patient       revenues by adjusted       discharge-hospitals       and measures the       average net payment       expected to be       received for a       patient's stay in       the hospital.  (e)   Net revenue per       adjusted discharge       is calculated by       dividing net patient       revenues by adjusted       discharges and       measures the average       net payment expected       to be received for       an episode of       service provided to       a patient.  (f)   Patient days       represent the number       of days (calculated       as overnight stays)       our beds were       occupied by patients       during the periods.  (g)   Average length of       stay represents the       average number of       days an admitted       patient stays in our       hospitals.  (h)   Inpatient surgeries       represent the number       of surgeries       performed in our       hospitals where       overnight stays are       necessary.  (i)   Outpatient surgeries       represent the number       of surgeries       performed at       hospitals or       ambulatory surgery       centers on an       outpatient basis       (patient overnight       stay not necessary).  (j)   Emergency room       visits represent the       number of patient       visits to a hospital       emergency room where       treatment is       received, regardless       of whether an       overnight stay is       subsequently       required.  (k)   Occupancy rate       represents the       percentage of       hospital licensed       beds occupied by       patients. Occupancy       rate provides a       measure of the       utilization of       inpatient beds.  (l)   Member lives       represent the total       number of members in       PHP, AAHP and MHP as       of the end of the       respective period.  (m)   Health plan claims       expense percentage       is calculated by       dividing health plan       claims expense by       premium revenues.                                            84 

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  Results of Operations The following table presents summaries of our operating results for the years ended June 30, 2008, 2009 and 2010.                                                          Year ended June 30,                                    2008                         2009                         2010                                                        (Dollars in millions) Patient service revenues                  $ 2,325.4         83.8 %     $ 2,507.4         78.7 %     $ 2,537.2         75.1 % Premium revenues              450.2         16.2 %         678.0         21.3 %         839.7         24.9 %  Total revenues              2,775.6        100.0 %       3,185.4        100.0 %       3,376.9        100.0 %  Costs and expenses: Salaries and benefits (includes stock of $2.5, $4.4 and 4.2, respectively)               1,146.2         41.3 %       1,233.8         38.7 %       1,296.2         38.4 % Health plan claims expense                       328.2         11.8 %         525.6         16.5 %         665.8         19.7 % Supplies                      433.7         15.6 %         455.5         14.3 %         456.1         13.5 % Provision for doubtful accounts                      205.5          7.4 %         210.3          6.6 %         152.5          4.5 % Other operating expenses                      398.5         14.4 %         461.9         14.5 %         483.9         14.3 % Depreciation and amortization                  129.3          4.7 %         128.9          4.1 %         139.6          4.1 % Interest, net                 122.1          4.4 %         111.6          3.5 %         115.5          3.4 % Debt extinguishment costs                             -          0.0 %             -          0.0 %          73.5          2.2 % Impairment loss                   -          0.0 %           6.2          0.2 %          43.1          1.3 % Other                           6.5          0.2 %           2.7          0.1 %           9.1          0.3 %  Income (loss) from continuing operations before income taxes             5.6          0.2 %          48.9          1.5 %         (58.4 )       (1.7 )% Income tax benefit (expense)                      (2.2 )       (0.1 )%        (16.8 )       (0.5 )%         13.8          0.4 %  Income (loss) from continuing operations           3.4          0.1 %          32.1          1.0 %         (44.6 )       (1.2 )% Loss from discontinued operations net of taxes                          (1.1 )       (0.0 )%         (0.3 )       (0.0 )%         (1.7 )       (0.1 )%  Net income (loss)               2.3          0.1 %          31.8          1.0 %         (46.3 )       (1.4 )% Less: Net income attributable to non-controlling interests                      (3.0 )       (0.1 )%         (3.2 )       (0.1 )%         (2.9 )       (0.1 )%  Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders              $    (0.7 )        0.1 %     $    28.6          1.0 %     $   (49.2 )       (1.4 )%                                             85 

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  Year ended June 30, 2010 compared to Year ended June 30, 2009 Revenues. Total revenues increased 6.0% during the year ended June 30, 2010 compared to the prior year. Patient service revenues increased $29.8 million or 1.2% during the current year. This small increase relative to the prior year was primarily due to the implementation of our uninsured discount policy in our Illinois hospitals effective April 1, 2009 and in our Phoenix and San Antonio hospitals effective July 1, 2009 combined with the concurrent change to our Medicaid pending policy previously discussed. During the current year, we recognized $215.7 million of uninsured discount revenue deductions, $128.7 million of which would have otherwise been included in revenues and subjected to our allowance for doubtful accounts policy had the uninsured discount policy not been implemented at these hospitals. Health plan premium revenues increased $161.7 million during the current year as a result of increased PHP enrollment. Average enrollment at PHP was 195,671 during the year ended June 30, 2010, an increase of 30.0% compared to the prior year. More challenging economic conditions in Arizona since the prior year resulted in more individuals becoming eligible for AHCCCS coverage. Enrollment in our other two health plans decreased by 6.4% as of June 30, 2010 compared to June 30, 2009. Discharges, adjusted discharges and emergency room visits increased 0.3%, 2.4% and 3.4%, respectively, during the year ended June 30, 2010 compared to the prior year, while total surgeries decreased by 0.9% during the current year. General economic weakness in the United States economy continues to impact demand for elective surgical procedures. Two new competitor hospitals in San Antonio opened in March 2009 and July 2009, which negatively impacted volumes in certain of our San Antonio hospitals during the current year. We continue to face volume and pricing pressures as a result of continuing economic weakness in the communities our hospitals serve, state efforts to reduce Medicaid program expenditures and intense competition for limited physician and nursing resources, among other factors. We expect the average population growth in the markets we serve to remain generally high in the long-term. As these populations increase and grow older, we believe that our clinical quality initiatives will improve our competitive position in those markets. However, these growth opportunities may not overcome the current industry and market challenges in the short-term. We continue to implement multiple initiatives to transform our company's operations to prepare for the future changes we expect to occur in the healthcare industry. This transformation process is built upon providing ideal experiences for our patients and their families through clinical excellence, aligning nursing and physician interests to provide coordination of care and improving healthcare delivery efficiencies to provide quality outcomes without overutilization of resources. The success of these initiatives will determine our ability to increase revenues from our existing operations and to increase revenues through acquisitions of other hospitals. Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $3,435.3 million or 101.7% of total revenues during the current year, compared to 98.5% during the prior year. The current year measure was negatively impacted by the goodwill impairment loss related to our Illinois hospitals recognized in December 2009 and by debt extinguishment costs incurred to complete our Refinancing finalized in January 2010 as further discussed in "Liquidity and Capital Resources" and presented elsewhere in this report. Many year over year comparisons of individual cost and expense items as a percentage of total revenues, particularly for health plan claims expense and the provision for doubtful accounts, were impacted by the significant growth in health plan premium revenues and the uninsured discount and Medicaid pending policy changes previously discussed. Salaries and benefits, health plan claims, supplies and provision for doubtful accounts represent the most significant of our normal costs and expenses and those typically subject to the greatest level of fluctuation year over year. 

• Salaries and benefits. Salaries and benefits as a percentage of total

revenues was not significantly different during the current year compared

to the prior year. This ratio continued to be positively impacted by the

significant increase in premium revenues, which utilize a much lower

percentage of salaries and benefits than acute care services, during the

current year compared to the prior year. For the acute care services

operating segment, salaries and benefits as a percentage of patient

         service revenues was 48.9% during the current year compared to 47.3%          during the prior year. This increase was negatively impacted by the          adoption of our uninsured discount and Medicaid pending policies, as

previously discussed. We continue to employ more physicians to support the

communities our hospitals serve and have made significant investments in

clinical quality initiatives that will require additional human resources

         in the short-term. As of June 30, 2010, we had approximately 20,100          full-time and part-time employees compared to approximately 19,200 as of          June 30, 2009. We have been successful in limiting contract labor          utilization as a result of our investments in clinical quality and nurse          leadership initiatives. Our contract labor expense as a percentage of

patient service revenues continued its downward trend to 1.2% for the year

         ended June 30, 2010 compared to 2.6% for the prior year.                                            86 

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• Health plan claims. Health plan claims expense as a percentage of premium

revenues increased to 79.3% during the current year compared to 77.5%

during the prior year. As enrollment increases, this ratio becomes

especially sensitive to the mix of members, including covered groups based

upon age and gender and county of residence. AHCCCS also implemented

         limits on profitability for certain member groups during the current          contract year, which negatively impacted this ratio. In addition, the

increased PHP revenues diluted the impact of the third party administrator

revenues at MHP that have no corresponding health plan claims expense.

Revenues and expenses between the health plans and our hospitals and

related outpatient service providers of approximately $42.8 million, or

6.0% of gross health plan claims expense, were eliminated in consolidation

during the current year.

• Supplies. Supplies as a percentage of acute care services segment revenues

decreased to 17.7% during the current year compared to 17.9% during the

         prior year. This ratio would have reflected a greater improvement during          the current year absent the impact to patient service revenues of the

changes to our uninsured discount and Medicaid pending policies previously

discussed. We continued our focus on supply chain efficiencies including

reduction in physician commodity variation and improved pharmacy formulary

management during the current year. Our ability to reduce this ratio in

future years may be limited because our growth strategies include

expansion of higher acuity services and due to inflationary pressures on

medical supplies and pharmaceuticals.

• Provision for doubtful accounts. The provision for doubtful accounts as a

percentage of patient service revenues decreased to 6.0% during the

current year from 8.4% during the prior year. Most of this decrease

related to the uninsured discount policy and Medicaid pending policy

changes previously discussed. The net impact of these policy changes

resulted in the recognition of a significant amount of uninsured revenue

deductions that would have otherwise been reflected in the provision for

doubtful accounts absent these changes. On a combined basis, the provision

for doubtful accounts, charity care deductions and uninsured discounts as

a percentage of acute care services segment revenues (prior to these

revenue deductions) was 11.9%, 11.9% and 15.8% for the for the years ended

June 30, 2008, 2009 and 2010, respectively. The uninsured discount and

Medicaid pending policy changes resulted in an approximate 330 basis point

         increase in this ratio during the current year. The remainder of the          increase related to price increases implemented during the current year.   Other operating expenses. Other operating expenses include, among others, purchased services, insurance, non-income taxes, rents and leases, repairs and maintenance and utilities. Other operating expenses as a percentage of total revenues decreased to 14.3% during the current year compared to 14.5% during the prior year. The improvement would have been greater absent the adoption of our uninsured discount and Medicaid pending policies, as previously discussed. In addition, the decrease was also the result of $11.9 million of additional insurance expense recognized during the prior year related to a significant professional liability verdict against one of our hospitals. We initially appealed this verdict, but during the current year we settled this case and paid the settlement amount. Other. Depreciation and amortization increased by $10.7 million year over year as a result of our capital improvement and expansion initiatives. Net interest increased slightly year over year. We recorded a goodwill impairment loss of $43.1 million ($31.8 million, net of taxes) related to our Illinois hospitals during the current year based upon an interim impairment test completed in December 2009. In connection with the Refinancing, we recorded debt extinguishment costs of $73.5 million ($45.6 million, net of taxes) during the current year. Income taxes. Our effective tax rate was approximately 23.6% during the year ended June 30, 2010 compared to 34.4% during the prior year. The effective rate was lower during the current year due to the fact that a considerable portion of the goodwill impairment loss related to our Illinois hospitals reporting unit, as previously discussed, was non-deductible for tax purposes. Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders. Net loss attributable to Vanguard stockholders was $49.2 million during the year ended June 30, 2010 compared to net income attributable to Vanguard Health Systems, Inc. stockholders of $28.6 million during the prior year. This change resulted primarily from the goodwill impairment loss and the debt extinguishment costs recognized during the current year.                                           87

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  Year ended June 30, 2009 compared to Year ended June 30, 2008 Revenues. Total revenues increased $409.8 million or 14.8% during the year ended June 30, 2009 compared to the prior year primarily due to a significant increase in health plan premium revenues as a result of increased PHP enrollment. Average enrollment at PHP was 150,468 during the year ended June 30, 2009, an increase of 48.3% compared to the prior year. The new AHCCCS contract that went into effect on October 1, 2008 included six new counties that PHP had not previously served. The new contract was in effect for nine months of the year ended June 30, 2009. Patient service revenues increased 7.8% year over year primarily as a result of a 5.7% increase in patient revenues per adjusted discharge and a 1.9% increase in adjusted discharges. Total outpatient volumes increased year over year, including a 3.0% and 4.1% increase in emergency room visits and outpatient surgeries, respectively. Our volumes by payer remained relatively consistent during both years. However, our combined Medicaid and managed Medicaid net revenues as a percentage of total net revenues increased to 16.7% during 2009 compared to 15.1% during the prior year, primarily as a result of the increase in Texas UPL and Illinois PTA revenues. The acuity level of our patients also increased year over year. However, during the year ended June 30, 2009, we continued to generate most of our admissions from emergency room visits and experienced lower elective admissions. Costs and Expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $3,136.5 million or 98.5% of total revenues during the year ended June 30, 2009, compared to 99.8% during the prior year. Salaries and benefits, supplies, health plan claims and provision for doubtful accounts represent the most significant of our normal costs and expenses and those typically subject to the greatest level of fluctuation year over year. 

• Salaries and benefits. Salaries and benefits as a percentage of total

revenues decreased to 38.7% during the year ended June 30, 2009 from 41.3%

during the prior year. This ratio was positively impacted by the

significant increase in premium revenues, which utilize a much lower rate

of salaries and benefits than acute care services, during the year ended

June 30, 2009 compared to the prior year and by the increase in Texas UPL

and Illinois PTA revenues during the year ended June 30, 2009 compared to

the prior year. Salaries and benefits as a percentage of acute care

segment revenues were 47.3% during the year ended June 30, 2009 compared

to 47.9% during the prior year, which improvement was primarily

attributable to the Texas UPL and Illinois PTA revenues growth during the

year ended June 30, 2009.

These ratios were adversely impacted during the year ended June 30, 2009

         by our investments in physician services and quality initiatives. We          employed more physicians to support the communities our hospitals serve          during 2009 and added significant corporate resources to manage and

oversee the physician growth. Implementation of our quality initiatives

also resulted in additional labor costs associated with training staff to

utilize new clinical quality systems and additional hospital and corporate

resources to monitor and manage quality indicators. As of June 30, 2009,

we had approximately 19,200 full-time and part-time employees compared to

18,500 as of June 30, 2008. Our contract labor expense as a percentage of

         patient service revenues decreased to 2.6% for the year ended June 30,          2009 compared to 3.5% for the prior year. 

• Health plan claims. Health plan claims expense as a percentage of premium

revenues increased to 77.5% during 2009 compared to 72.9% during the prior

year. The new PHP contract resulted in a significant change in the mix of

our AHCCCS members with a significant increase in members in geographic

areas not previously served by PHP. As a result of the bid process for

these new areas, the rates paid to providers in those six new counties and

capitated payment rates received from AHCCCS for those counties were not

necessarily the same as those applicable to the three counties previously

served by PHP. Also, the additional PHP revenues diluted the impact of the

third party administrator revenues at MHP that have no corresponding

health plan claims expense. During fiscal 2009, we accrued for the

estimated amount payable to AHCCCS for the risk adjustment factor payment

methodology that was retroactively applied to October 1, 2008, which also

caused the health plan claims expense as a percentage of premium revenues

to increase during the year ended June 30, 2009.

Health plan claims expense represents the amounts paid by the health plans

for healthcare services provided to their members, including an estimate

of incurred but not yet reported claims that is determined based upon lag

data and other actuarial assumptions. Revenues and expenses between the

health plans and our hospitals and related outpatient service providers of

approximately $34.0 million, or 6.1% of gross health plan claims expense,

         were eliminated in consolidation during the year ended June 30, 2009.                                            88 

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• Supplies. Supplies as a percentage of acute care services segment revenues

decreased to 17.9% during the year ended June 30, 2009 compared to 18.4%

during the prior year. The increase in Texas UPL and Illinois PTA revenues

during 2009 accounted for approximately half of this improvement. Although

the acuity of our services provided increased during 2009 compared to the

prior year, we were successful in limiting the ratio of supplies to

patient service revenues by further implementing certain supply chain

initiatives such as increased use of our group purchasing contract and

pharmacy formulary management.

• Provision for doubtful accounts. The provision for doubtful accounts as a

percentage of patient service revenues decreased to 8.4% during the year

ended June 30, 2009 from 8.8% during the prior year. On a combined basis,

the provision for doubtful accounts, charity care deductions and uninsured

discounts as a percentage of acute care services segment revenues (prior

to these revenue deductions) was 11.9% for both the years ended June 30,

2008 and 2009.

   Other operating expenses. Other operating expenses include, among others, purchased services, insurance, non-income taxes, rents and leases, repairs and maintenance and utilities. Other operating expenses as a percentage of total revenues increased to 14.5% during the year ended June 30, 2009 compared to 14.4% during the prior year. Other operating expenses as a percentage of patient service revenues increased to 18.4% during the year ended June 30, 2009 compared to 17.1% during the prior year. In April 2009, a jury awarded damages to the plaintiff in a professional liability case against one of our hospitals. Based upon this verdict, we recognized additional insurance expense of $11.9 million during the year ended June 30, 2009. Also, non-income taxes increased by $23.9 million during the year ended June 30, 2009 primarily as a result of $13.4 million of Illinois PTA program cash receipts that were subsequently paid to the state in the form of a provider tax and higher premiums taxes related to the significant enrollment growth at PHP. Other. Depreciation and amortization was flat year over year. Net interest decreased by $10.5 million during the year ended June 30, 2009 primarily due to lower interest rates on the variable portion of our term debt. We incurred an impairment loss of $6.2 million ($3.8 million, net of taxes) during the year ended June 30, 2009 resulting from the write-down of a non-hospital building to fair value. Income taxes. Our effective tax rate decreased to approximately 34.4% during the year ended June 30, 2009 compared to 39.3% during the prior year. Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders. Net income attributable to Vanguard Health Systems, Inc. stockholders was $28.6 million during the year ended June 30, 2009 compared to net loss attributable to Vanguard Health Systems, Inc. stockholders of $0.7 million during the prior year. Liquidity and Capital Resources Operating Activities As of June 30, 2010 we had working capital of $105.0 million, including cash and cash equivalents of $257.6 million. Working capital at June 30, 2009 was $251.6 million. Cash provided by operating activities increased $2.1 million during the year ended June 30, 2010 compared to the prior year. Current year operating cash flows were negatively impacted by AHCCCS' deferral of the June 2010 capitation and supplemental payments to PHP of approximately $62.0 million until July 2010. Current year operating cash flows were positively impacted by the timing of payments of accounts payable during the current year compared to the prior year. Net days revenue in accounts receivable decreased 4 days to approximately 41 days at June 30, 2010 compared to approximately 45 days at June 30, 2009. Investing Activities Cash used in investing activities increased from $133.6 million during the year ended June 30, 2009 to $156.5 million during the year ended June 30, 2010, primarily as a result of a $23.9 million increase in capital expenditures from $132.0 million during the prior year to $155.9 million during the current year. A portion of this increase relates to expenditures made for our replacement hospital in San Antonio, as previously mentioned.                                           89

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  Financing Activities Cash flows used in financing activities increased by $196.4 million during the year ended June 30, 2010 compared to the year ended June 30, 2009 primarily due to the $300.6 million share repurchase less the $100.3 million net debt proceeds from the refinancing transactions (debt borrowings less debt repayments and the payment of related fees and expenses) during the current year. As of June 30, 2010, we had outstanding $1,752.0 million in aggregate indebtedness. The "Refinancing" section below provides additional information related to our liquidity. The Refinancing In late January 2010, we completed a comprehensive refinancing plan (the "Refinancing"). As a result of the Refinancing, our liquidity requirements remain significant due to debt service requirements. Under the Refinancing, we entered into an $815.0 million senior secured term loan (the "2010 term loan facility") and a $260.0 million revolving credit facility (the "2010 revolving facility" and together with the 2010 term loan facility, the "2010 credit facilities"). The 2010 term loan facility matures in January 2016 and bears interest at a per annum rate equal to, at our option, LIBOR (subject to a floor of 1.50%) plus 3.50% or a base rate plus 2.50%. Upon the occurrence of certain events, we may request an incremental term loan facility to be added to the 2010 term loan facility to issue additional term loans in such amount as we determine, subject to the receipt of commitments by existing lenders or other financial institutions for such amount of term loans and the satisfaction of certain other conditions. The 2010 revolving facility matures in January 2015, and 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 commitments by existing lenders or other financial institutions for such increased revolving facility and the satisfaction of other conditions. Borrowings under the 2010 revolving facility bear interest at a per annum rate equal to, at our option, LIBOR plus 3.50% or a base rate plus 2.50%, both of which are subject to a 0.25% decrease dependent upon our consolidated leverage ratio. We may utilize the 2010 revolving facility to issue up to $100.0 million of letters of credit ($28.4 million of which are currently outstanding as of August 15, 2010). Under the Refinancing, we also issued $950.0 million aggregate amount at maturity ($936.3 million cash proceeds) of 8.0% senior unsecured notes due February 2018 in a private placement offering (the "8.0% Notes"). The 8.0% Notes are redeemable, in whole or in part, at any time on or after February 1, 2014 at specified redemption prices. On or after February 1, 2014, we may redeem all or part of the 8.0% Notes at various redemption prices given the date of redemption as set forth in the indenture governing the 8.0% Notes. In addition, we may redeem up to 35% of the 8.0% Notes prior to February 1, 2013 with the net cash proceeds from certain equity offerings at a price equal to 108% of their principal amount, plus accrued and unpaid interest. We may also redeem some or all of the 8.0% Notes before February 1, 2014 at a redemption price equal to 100% of the principal amount thereof, plus a "make-whole" premium and accrued and unpaid interest. The proceeds from the 2010 credit facilities, the issuance of the 8.0% Notes and available cash were used to repay the $764.2 million principal and interest outstanding related to our 2005 term loan facility; to fund $597.0 million and $232.5 million of cash tender offers and consent solicitations and accrued interest for those holders of the 9.0% Notes and 11.25% Notes, respectively, who accepted the tender offers; to pay $26.9 million to redeem those 9.0% Notes and 11.25% Notes not previously tendered including such principal, interest and call premiums; to pay fees expenses related to the Refinancing of approximately $93.6 million; to purchase 446 shares held by certain former employees for $0.6 million; and to fund a $300.0 million distribution to repurchase a portion of the shares owned by the remaining stockholders. Subsequent to the $300.0 million share repurchase, we completed a 1.4778 for one split that effectively returned the share ownership for each stockholder that participated in the distribution to the same level as that in effect immediately prior to the distribution. On July 14, 2010, we issued an additional $225.0 million aggregate principal amount of 8.0% Notes (the "Add-on Notes"), which are guaranteed on a senior unsecured basis by Vanguard, Vanguard Health Holding Company I, LLC and certain restricted subsidiaries of VHS Holdco II. The additional notes were issued under the Indenture governing the 8.0% Notes that we issued on January 29, 2010 as part of the Refinancing. The Add-on Notes were issued at an offering price of 96.25% plus accrued interest, if any, from January 29, 2010. The proceeds from the Add-on Notes are intended to be used to finance, in part, our acquisition of substantially all the assets of DMC and to pay fees and expenses incurred in connection with the foregoing. Should the DMC acquisition not be approved by the Michigan Attorney General, we will use these proceeds for general corporate purposes, including other acquisitions.                                           90

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  Debt Covenants Our 2010 credit facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to sell assets; incur additional indebtedness or issue preferred stock; repay other indebtedness (including the 8.0% Notes); pay dividends and distributions or repurchase our capital stock; create liens on assets; make investments, loans or advances; make certain acquisitions; engage in mergers or consolidations; create a healthcare joint venture; engage in certain transactions with affiliates; amend certain material agreements governing our indebtedness, including the 8.0% Notes; change the business conducted by our subsidiaries; enter into certain hedging agreements; and make capital expenditures above specified levels. In addition, the 2010 credit facilities include a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. The following table sets forth the leverage and interest coverage covenant tests as of June 30, 2010.                                                        Debt           Actual                                                  Covenant Ratio       Ratio           Interest coverage ratio requirement          2.00x           3.15x           Total leverage ratio limit                   6.25x           4.39x   Factors outside our control may make it difficult for us to comply with these covenants during future periods. These factors include a prolonged economic recession, a higher number of uninsured or underinsured patients and decreased governmental or managed care payer reimbursement, among others, any or all of which could negatively impact our results of operations and cash flows and cause us to violate one or more of these covenants. Violation of one or more of the covenants could result in an immediate call of the outstanding principal amount under our 2010 term loan facility or the necessity of lender waivers with more onerous terms including adverse pricing or repayment provisions or more restrictive covenants. A default under our 2010 credit facilities would also result in a default under the Indenture governing our 8.0% Notes. Credit Ratings The table below summarizes our credit ratings as of the date of this filing.                                           Standard & Poor's   Moody's                Corporate credit rating           B             B2                8.0% Notes                       B-             B3                2010 credit facilities           BB-            Ba2   Our credit ratings are subject to periodic reviews by the ratings agencies. If our results of operations deteriorate either as a result of weakness in the U.S. economy or the economies of the markets we serve or other factors, any or all of our corporate ratings may be downgraded. A credit rating downgrade could further impede our ability to refinance all or a portion of our outstanding debt or obtain additional debt. Capital Resources We anticipate spending a total of $200.0 million to $225.0 million in capital expenditures during fiscal 2011. We expect that cash on hand, cash generated from our operations and cash expected to be available to us under our 2010 credit facilities will be sufficient to meet our working capital needs, debt service requirements and planned capital expenditure programs during the next twelve months and into the foreseeable future. However, we cannot assure you that our operations will generate sufficient cash or that additional future borrowings under our senior credit facilities will be available to enable us to meet these requirements, especially given the current volatility in the credit markets and general economic weakness. We had $257.6 million of cash and cash equivalents as of June 30, 2010. We rely on available cash, cash flows generated by operations and available borrowing capacity under our 2010 revolving facility to fund our operations and capital expenditures. We invest our cash in accounts in high-quality financial institutions. We continually explore various options to increase the return on our invested cash while preserving our principal cash balances. However, the significant majority of our cash and cash equivalents are not federally-insured and could be at risk in the event of a collapse of those financial institutions.                                           91 

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  As of June 30, 2010, we held $19.8 million in total available for sale investments in auction rate securities ("ARS") backed by student loans, which are included in long-term investments in auction rate securities on our consolidated balance sheet due to inactivity in the primary ARS market during the past year. The par value of the ARS was $24.5 million as of June 30, 2010. We also intend to continue to pursue acquisitions or partnering arrangements, either in existing markets or new markets, which fit our growth strategies. To finance such transactions, we expect to increase borrowings under our 2010 term loan facility and may draw upon cash on hand, utilize amounts available under our 2010 revolving facility or seek additional equity funding. We continually assess our capital needs and may seek additional financing, including debt or equity, as considered necessary to fund potential acquisitions, fund capital projects or for other corporate purposes. However, we may be unable to raise additional equity proceeds from Blackstone or other investors should we need to obtain cash for any of these purposes. Our future operating performance, ability to service our debt and ability to draw upon other sources of capital will be subject to future economic conditions and other business factors, many of which are beyond our control. Recent pending and completed acquisitions include the following: 

• Pending acquisition of DMC - On June 10, 2010, we entered into a

definitive agreement to purchase DMC, which owns and operates eight

hospitals in and around Detroit, Michigan with 1,734 licensed beds for an

         expected cash purchase price of approximately $417.0 million, as          previously discussed.  

• Completed acquisition of Westlake Hospital and West Suburban Medical

Center - On August 1, 2010, we acquired two acute care hospitals and

associated outpatient facilities in Illinois from Resurrection Health

Care. Located in the western suburbs of Chicago, the hospitals are 234-bed

West Suburban Medical Center in Oak Park, Illinois and 225-bed Westlake

         Hospital in Melrose Park, Illinois for a cash purchase price of          approximately $45.0 million.  

• Pending acquisition of Arizona Heart Institute and Arizona Heart Hospital

- On August 2, 2010, we signed a definitive agreement to acquire Arizona

Heart Institute (AHI), a leading provider of cardiovascular care. The

purchase of the AHI by Vanguard will occur through a section 363 sale, as

part of a Chapter 11 reorganization plan since AHI filed in early

August 2010 under the federal bankruptcy laws for a Chapter 11

reorganization of its business. A section 363 sale, so named because of

the section of the Bankruptcy Code dealing with the procedure, allows the

         sale of all, or substantially all, of the filing company's assets to the          purchaser free and clear of any liens or encumbrances. The sale is subject

to the approval of the court. On August 6, 2010, we signed a definitive

agreement to acquire Arizona Heart Hospital also located in Phoenix,

         Arizona.                                            92 

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  Obligations and Commitments The following table reflects a summary of obligations and commitments outstanding, including both the principal and interest portions of long-term debt, with payment dates as of June 30, 2010.                                                Payments due by period                              Within          During           During           After                              1 year         Years 2-3        Years 4-5        5 Years         Total                                                           (In millions) Contractual Cash Obligations: Long-term debt (1)          $   111.1      $     296.3      $     293.6      $ 2,041.7      $ 2,742.7 Operating leases (2)             30.1             47.4             33.4           30.7          141.6 Purchase obligations (2)         20.9                -                -              -           20.9 Health plan claims and settlements payable (3)         149.8                -                -              -          149.8 Estimated self-insurance liabilities (4)                  38.1             35.3             23.0           25.2          121.6  Subtotal                    $   350.0      $     379.0      $     350.0      $ 2,097.6      $ 3,176.6                                  Within          During           During           After                              1 year         Years 2-3        Years 4-5        5 Years         Total                                                           (In millions) Other Commitments: Construction and capital improvements (5)            $    75.1      $       0.3      $         -      $       -      $    75.4 Guarantees of surety bonds (6)                        50.0                -                -              -           50.0 Letters of credit (7)               -                -             30.2              -           30.2 Physician commitments (8)                               3.4                -                -              -            3.4 Estimated liability for uncertain tax positions (9)                              11.9                -                -              -           11.9  Subtotal                    $   140.4      $       0.3      $      30.2      $       -      $   170.9  Total obligations and commitments                 $   490.4      $     379.3      $     380.2      $ 2,097.6      $ 3,347.5      (1)   Includes both       principal and       interest       payments. The       interest       portion of our       debt       outstanding at       June 30, 2010       assumes an       average       interest rate       of 8.0%. The       long-term debt       obligations,       adjusted to       reflect the       principal and       interest       related to the       $225.0 million       Add-on Notes       (as previously       discussed)       would be       increased by       the following       as of June 30,       2010:       $18.0 million       due within one       year;       $36.0 million       due within two       to three       years;       $36.0 million       due within       four to five       years and       $279.0 million       due after five       years.  (2)   These       obligations       are not       reflected in       our       consolidated       balance       sheets.  (3)   Represents       health claims       incurred by       members of       PHP, AAHP and       MHP, including       incurred but       not reported       claims, and       net amounts       payable for       program       settlements to       AHCCCS and CMS       for certain       programs for       which       profitability       is limited.       Accrued health       plan claims       and       settlements is       separately       stated on our       consolidated       balance       sheets.  (4)   Includes the       current and       long-term       portions of       our       professional       and general       liability,       workers'       compensation       and employee       health       reserves.  (5)   Represents our       estimate of       amounts we are       committed to       fund in future       periods       through       executed       agreements to       complete       projects       included as       construction       in progress on       our       consolidated       balance       sheets. The       construction       and capital       improvements       obligations,       adjusted to       reflect       capital       commitments       under the       executed DMC       Purchase       Agreement (as       previously       discussed)       would be       increased by       the following       as of June 30,       2010: $150.0       million       committed       within one       year;       $300.0 million       committed       within two to       three years       and       $400.0 million       committed       within four to       five years.  (6)   Represents       performance       bonds we have       purchased       related to       health claims       liabilities of       PHP.  (7)   Amounts relate       primarily to       instances in       which we have       letters of       credit       outstanding       with the third       party       administrator       of our       self-insured       workers'       compensation       program. The       outstanding       balance was       reduced to       $28.3 million       subsequent to       June 30, 2010.  (8)   Includes       physician       guarantee       liabilities       recognized in       our       consolidated       balance sheets       under the       guidance of       accounting for       guarantees and       liabilities       for other       fixed expenses       under       physician       relocation       agreements not       yet paid.  (9)   Represents       expected       future tax       liabilities       recognized in       our       consolidated       balance sheets       determined       under the       guidance of       accounting for       income taxes.                                            93 

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  Guarantees and Off Balance Sheet Arrangements We are currently a party to a certain rent shortfall agreement with a certain unconsolidated entity. We also enter into physician income guarantees and service agreement guarantees and other guarantee arrangements, including parent-subsidiary guarantees, in the ordinary course of business. We have not engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to materially affect liquidity. Effects of Inflation and Changing Prices Various federal, state and local laws have been enacted that, in certain cases, limit our ability to increase prices. Revenues for acute hospital services rendered to Medicare patients are established under the federal government's prospective payment system. We believe that hospital industry operating margins have been, and may continue to be, under significant pressure because of changes in payer mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In addition, as a result of increasing regulatory and competitive pressures, our ability to maintain operating margins through price increases to non-Medicare patients is limited.                                           94 

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