VANGUARD HEALTH SYSTEMS INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Online, Inc.

 This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the federal securities laws that are intended to be covered by safe harbors created thereby. Forward-looking statements are those statements that are based upon management's plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. These statements are based upon estimates and assumptions made by our management that, although believed to be reasonable, are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. When used in this Annual Report on Form 10-K, the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "forecasts," "continues," or future or conditional verbs, such as "will," "should," "could" or "may," and variations of such words or similar expressions are intended to identify forward-looking statements. See "Item 1A - Risk Factors" for further discussion. Our forward-looking statements speak only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of new information, future events or otherwise. We advise you, however, to consult any additional disclosures we make in our other filings with the Securities and Exchange Commission (the "SEC"). You are cautioned not to rely on such forward-looking statements when evaluating the information contained in this Annual Report on Form 10-K. In light of significant uncertainties inherent in the forward-looking statements included in this Annual Report on Form 10-K, you should not regard the inclusion of such information as a representation by us that the objectives and plans anticipated by the forward-looking statements will occur or be achieved or, if any of them do, what impact they will have on our financial condition, results of operations or cash flows. We recommend reading the following discussion together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and the information set forth under "Item 6 - Selected Financial Data." The discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements. Executive Overview  Our mission is to transform the delivery of health services we provide to the communities we serve by implementing innovative population health models and creating a patient-centered experience in a high performance environment of integrated care. We plan to grow our business by continually improving our quality of care, redesigning care delivery to a fee-for-value basis, expanding services to further our continuum of care, and selectively developing or acquiring other health care businesses where we see an opportunity to improve our operating performance and expand our mission. As of June 30, 2013, we owned and operated 28 hospitals with a total of 7,081 licensed beds and related outpatient service facilities complementary to the hospitals in San Antonio, Harlingen and Brownsville Texas; metropolitan Detroit, Michigan; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; and Massachusetts. As of June 30, 2013, we also owned five health plans with approximately 238,500 members. Our health plans include Chicago Health Systems ("CHS"), a contracting entity for outpatient services under multiple contracts and inpatient services for one contract provided by MacNeal Hospital and Weiss Memorial Hospital and participating physicians in the Chicago area; Phoenix Health Plan ("PHP"), a Medicaid managed health plan operating in Arizona; Abrazo Advantage Health Plan ("AAHP"), a Medicare and Medicaid dual eligible managed health plan operating in Arizona; ProCare Health Plan ("ProCare"), a Medicaid managed health plan operating in Michigan; and Valley Baptist Insurance Company ("VBIC"), which offers health maintenance organization, preferred provider organization, and self-funded products to its members in the form of large group, small group, and individual product offerings in south Texas.  During the year ended June 30, 2013, our revenues were impacted by ongoing challenges including less demand for elective services, some of which related to a weak general economy, and a shift from services provided to patients with managed care coverage to uninsured patients. Effective October 1, 2011, AHCCCS, Arizona's State Medicaid program, implemented capitation rate decreases for all state Medicaid plans and changed eligibility qualification for certain categories of members. The full year impact of these changes by AHCCCS caused a decrease in health plan revenues at PHP during the year ended June 30, 2013 compared to the prior year. We have been successful in reducing certain costs to mitigate the impact of these revenue pressures.                                          75

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Merger with Tenet Healthcare Corporation

  On June 24, 2013, we entered into an Agreement and Merger Agreement by and among us, Tenet and Merger Sub. Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, upon consummation of the merger, Merger Sub will merge with and into us (the "Merger"), with us continuing as the surviving corporation and becoming a wholly-owned subsidiary of Tenet. During the year ended June 30, 2013, we recorded $7.8 million of transaction costs related to the Merger.  Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our Common Stock will be converted into the right to receive $21.00 in cash, without interest, other than any shares of Common Stock owned by Tenet or us or any wholly-owned subsidiary thereof (which will automatically be canceled with no consideration paid therefor) and those shares of Common Stock with respect to which appraisal rights under Delaware law are properly exercised and not withdrawn. Following the effective time of the Merger, our Common Stock will cease to be traded on the NYSE, and we will no longer be a reporting company under the Exchange Act.  In connection with the execution of the Merger Agreement, Tenet entered into a Voting Agreement with certain funds affiliated with each of Blackstone and Morgan Stanley Capital Partners, as well as Charles N. Martin, Jr., our Chairman, President and Chief Executive Office, Keith B. Pitts, our Vice Chairman, Phillip W. Roe, our Executive Vice President, Chief Financial Officer and Treasurer, and James H. Spalding, our Executive Vice President, General Counsel and Secretary (collectively, the "Majority Stockholders"). Under the Voting Agreement, the Majority Stockholders agreed to execute and deliver a written consent adopting the Merger Agreement and, during the term of the Voting Agreement, but subject to certain limitations set forth therein, to vote certain of their shares of Common Stock against any action or agreement that the Majority Stockholders know or reasonably suspect is in opposition to the Merger. As a result of the execution and delivery of the Written Consent on June 24, 2013 following execution and delivery of the Merger Agreement, the required approval of our stockholders for the Merger has been obtained.  Under the Merger Agreement, consummation of the Merger remains subject to the satisfaction or waiver of certain customary closing conditions, including, among others, the absence of any order, preliminary or permanent injunction or other judgment, order or decree issued by a court or other legal restraint or prohibition that prohibits or makes illegal the consummation of the Merger; subject to certain materiality exceptions, the accuracy of the parties' respective representations and warranties and compliance with the parties' respective covenants; and the receipt of certain consents, waivers and approvals of governmental entities required to be obtained in connection with the Merger Agreement. We filed a definitive information statement with the SEC in connection with the Merger on July 26, 2013 that was first mailed to our stockholders beginning on or about August 1, 2013. The FTC granted early termination of the mandatory waiting period under the HSR Act with respect to the Merger on July 29, 2013. The Merger is expected to close early in our second quarter of fiscal 2014.  PHP Developments  On March 22, 2013, we were notified that PHP was not awarded an acute care program contract with AHCCCS for the three-year period commencing October 1, 2013. However, on April 1, 2013, PHP agreed with AHCCCS on the general terms of a capped contract for Maricopa County for the three-year period commencing October 1, 2013. Approximately 98,000 of PHP's members resided in Maricopa County as of June 30, 2013. Pursuant to the terms of PHP's agreement with AHCCCS, PHP will not file a protest of any of AHCCCS' decisions. In addition, PHP agreed that enrollment will be capped effective October 1, 2013 and the enrollment cap will not be lifted at any time during the total contract period, unless AHCCCS deems additional plan capacity necessary based upon growth in covered lives or other reasons as outlined in a letter provided by AHCCCS that clarifies certain terms of the capped contract. AHCCCS has also indicated that it intends to hold an open enrollment for PHP members in Maricopa County sometime in calendar year 2014. Credit Facility Debt and Amendment  On March 14, 2013, certain of our subsidiaries amended (the "amendment") the existing Credit Agreement, dated January 29, 2010. Pursuant to the amendment, we borrowed an additional $300.0 million in term loans and refinanced our outstanding term loans. Approximately $11.2 million of the $300.0 million in additional borrowings was used to redeem the outstanding principal and interest related to our previously outstanding 10.375% senior discount notes due 2016 (the "Senior Discount Notes") and to pay the associated fees related to the amendment. The remaining proceeds will be used to finance other general operating and investing activities.                                         76

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   Operating Environment We believe that the operating environment for hospital operators continues to evolve, which presents both challenges and opportunities for us. These factors will require focus on the expansion of ambulatory and population health services, the quality of care we provide, and reducing our costs in response to governmental regulation and changes in our payer mix as further described below. Expansion of ambulatory and population health services  As we attempt to remain flexible and competitive in a dynamic health care environment, we have added focus and resources to our ambulatory care endeavors. As of June 30, 2013, we employed approximately 700 non-resident physicians and will continue to recruit primary care and specialty physicians and physician groups to the communities that we serve as market-specific needs warrant. We have invested heavily in the infrastructure necessary to coordinate our physician alignment strategies and manage our physician operations. During the first quarter of the year ended June 30, 2013, we entered into a joint venture arrangement with a national physician practice management company to manage the administration of these practices to enable us to focus on quality and physician alignment initiatives necessary for the transition to fee-for-value reimbursement. We have also established Physician Leadership Councils, comprised of physicians focused on driving clinical and operational performance, at most of our hospitals to align the quality goals of our hospitals with those of the physicians who practice in our hospitals. We believe our hospitalist employment strategy is a key element of our focus on patient-centered care. These initiatives require significant upfront investment and may take years to fully implement.  We also continue to pursue the expansion of certain strategic health risk products, through either acquisition or partnership opportunities, to leverage the skill sets we have within our existing health plans. Further, in our existing markets, we are pursuing the acquisition or development of ambulatory care facilities, such as ambulatory surgery centers, home health agencies, cancer centers and imaging centers, in an attempt to create a more comprehensive network of health care services. Management believes that the added focus on ambulatory care, together with the addition of new risk-based initiatives, will enable us to take advantage of future opportunities in a fee-for-value era. Implementation of our Clinical Quality Initiatives  Quality of care will have a greater impact on governmental reimbursement in the future. We have implemented many clinical quality initiatives and are in the process of implementing several others. These initiatives include monthly review of reportable CMS quality indicators, rapid response teams, continued focus on work flow efficiency and process improvement, establishing clinical standards of care across key system service lines, improving transition of care to reduce hospital readmissions and aligning hospital management incentive compensation with quality performance indicators. Governmental Regulation  Health Reform Law. The Health Reform Law provides for, among other things, increased access to health benefits for a significant number of uninsured individuals through the creation of Exchanges and expanded state Medicaid programs; reductions in future Medicare reimbursement, including market basket and disproportionate share payments; 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 plans. The Health Reform Law is also under considerable scrutiny from Congress, and the states are moving at different speeds to implement portions of the Health Reform Law left to their discretion.  Budget Control Act. On August 2, 2011, Congress enacted the Budget Control Act of 2011. This law, among other things, established a two-step process to reduce federal spending and the deficit. In the first phase, the law imposed caps that reduced discretionary (non-entitlement) spending by more than $900 billion over ten years, beginning in FFY 2012. Under the second phase, if spending and deficit amounts reach certain thresholds, an enforcement mechanism called "sequestration" is triggered under which a total of $1.2 trillion in automatic, across-the-board spending reductions must be implemented over ten years beginning in 2013. The spending reductions are to be split evenly between defense and non-defense spending, although certain programs (including Medicaid and the CHIP program) are exempt from these automatic spending reductions, and Medicare expenditures cannot be reduced by more than two percent. For FFY 2013, the triggers were reached, and after being temporarily delayed by Congress, sequestration went into effect on April 1, 2013. Consequently, Medicare payments to hospitals and for other services were reduced two percent. Each year for the next nine years that the deficit thresholds are                                         77

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   reached, similar across-the-board spending reductions could be implemented, and Medicare payments would be similarly reduced. Some private health insurance plans where payments are linked or related to Medicare payment amounts may seek to implement similar payment solutions.  Accountable Care Organizations. The Health Reform Law requires the establishment of MSSPs that promote accountability and coordination of care through the creation of ACOs. MSSP ACOs receive payment from Medicare on a fee-for-service basis and may receive additional "shared savings" payments based on a decrease in annual fee-for-service payments to the ACO. CMS estimates that between 50 and 270 organizations will enter into MSSP ACO agreements with an estimated aggregate median impact of $1.31 billion in bonus payments to ACOs for calendar years 2012-2015. In addition to the MSSP ACO model, CMS developed the "Pioneer ACO" model. The Pioneer ACO model generally requires compliance with the MSSP ACO program rules in the final regulations, but differs from the finalized MSSP ACO model in several ways, including, but not limited to, higher levels of sharing and the assumption of risk of repayments of CMS for shared losses, opportunity for population-based payments, requirements for outcomes-based payment contracting with other payers and a higher number of assigned beneficiaries.  We were approved to become a Pioneer ACO effective January 1, 2012 in our Michigan market. We have also been awarded MSSP ACOs, effective July 1, 2012, in Illinois and Texas and two additional MSSP ACOs, effective January 1, 2013, in Massachusetts and Arizona. While most of these ACOs are still in their infancies, we did achieve shared savings in our Michigan Pioneer ACO for the 2012 calendar year.  Medicare and Medicaid EHR Incentive Payments. The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid electronic health record ("EHR") incentive payments that began in calendar 2011 for eligible hospitals and professionals that adopt and meaningfully use certified EHR technology. Our pre-tax income was positively impacted by combined Medicare and Medicaid EHR incentives of $10.1 million, $28.2 million and $38.0 million for the years ended June 30, 2011, 2012 and 2013. We believe that the operational benefits of EHR technology, including improved clinical outcomes and increased operating efficiencies, will contribute to our long-term ability to grow our business. We incur both capital expenditures and operating expenses in connection with the implementation of our various EHR initiatives. The amount and timing of these expenditures do not directly correlate with the timing of our cash receipts or recognition of the EHR incentives as other income. Payer Mix Shifts  During the year ended June 30, 2013 compared to the prior year, we provided more health care services to patients who were uninsured and provided fewer health care services to patients who had insurance coverage. Much of this shift resulted from general economic weakness in the markets we serve and Medicaid eligibility reductions in Arizona. We are uncertain how long the economic weakness will continue, but believe that conditions will not improve significantly during the remainder of calendar year 2013. During the current year, we have also experienced a shift from services provided to Medicare and Medicaid patients to those with managed Medicare and managed Medicaid coverage. These managed payers typically provide reimbursement at lower rates and with slower payment terms than traditional Medicare and Medicaid programs and often require more of our time to document medical necessity and level of care for billed services.                                         78

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   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.   See "Item 1. Business-Sources of Revenues" included elsewhere in this Annual Report on Form 10-K for a description of the types of payments we receive for services provided to patients enrolled in the traditional Medicare plan (both for inpatient and outpatient services), managed Medicare plans, Medicaid plans, managed Medicaid plans and managed care plans. In that section, we also discuss the unique reimbursement features of the traditional Medicare plan, including disproportionate share, outlier cases and direct graduate and indirect medical education, including the annual Medicare regulatory updates published by CMS in August 2013 that impact reimbursement rates under the plan for services provided during the FFY beginning October 1, 2013 and the impact of the Health Reform Law on these reimbursements. Volumes by Payer During the year ended June 30, 2013 compared to the year ended June 30, 2012, discharges decreased 0.8% while adjusted discharges increased 0.7%. On a same store basis, discharges and adjusted discharges decreased 2.6% and 1.2%, respectively. The following table provides details of consolidated discharges by payer for each of the years ended June 30, 2011, 2012 and 2013.                                      Year ended June 30,                         2011                 2012                 2013

Medicare          64,320     28.7 %    83,242     29.2 %    81,442     28.8 % Medicaid          23,783     10.6      32,602     11.4      26,522      9.4 Managed Medicare  31,984     14.3      35,600     12.5      36,859     13.0 Managed Medicaid  36,670     16.4      48,235     16.9      51,893     18.4 Managed care      53,527     23.9      64,844     22.8      63,082     22.3 Uninsured         12,459      5.6      19,077      6.7      21,194      7.5 Other              1,050      0.5       1,426      0.5       1,615      0.6 Total            223,793    100.0 %   285,026    100.0 %   282,607    100.0 %   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 on a same store basis was $7,950, $9,640 and $9,656 for the years ended June 30, 2011, 2012 and 2013, respectively. The 2012 amount was positively impacted by reimbursement updates for the rural floor provision of the Balanced Budget Act of 1997 and revised Supplemental Security Income ratios, which combined resulted in additional revenues of $49.7 million during 2012. Growth in this ratio continues to be limited by the payer mix shifts we have experienced in recent years as previously discussed. Health care 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                                         79

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   limiting increases in reimbursement to health care providers or limiting benefits to enrollees. The current weakness in the United States economy magnifies these pressures. The demand for Medicaid coverage has increased during the past two years due to job losses that have left many individuals without health insurance. Medicaid remains the highest individual program cost for most states, including those in which we operate. To balance their budgets, many states, either directly or through their Medicaid or managed Medicaid programs, have enacted and may enact further health care spending cuts or defer cash payments to health care providers to avoid raising taxes during periods of economic weakness. Medicaid rate cuts in Arizona, Texas, and Illinois during the past two years have negatively impacted our revenues. We receive a significant amount of funding under governmental supplemental reimbursement programs, including various state UPL and provider tax assessment programs. We recognized $385.7 million of revenues and $115.8 million of expenses related to state UPL and provider tax assessment programs during the year ended June 30, 2013 compared to revenues of $323.2 million and expenses of $86.7 million during 2012. 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 health care provider reimbursement rates or reducing benefits to enrollees. In recent years, both the Medicare program and several large managed care companies have changed our reimbursement to link some of their payments, especially their annual increases in payments, to our performance with respect to certain quality of care measures. We expect this trend to "pay-for-performance" to increase in the future. 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, 2012               0-90 days     91-180 days     Over 180 days     Total Medicare                        16.5 %         1.5 %             1.2 %      19.2 % Medicaid                         5.7           1.9               1.8         9.4 Managed Medicare                 6.7           0.6               0.5         7.8 Managed Medicaid                11.2           1.4               1.0        13.6 Managed care                    19.8           2.5               3.0        25.3 Uninsured(1)                    11.1           4.9               2.5        18.5 Self-pay after primary(2)        1.1           1.8               0.9         3.8 Other                            1.3           0.5               0.6         2.4 Total                           73.4 %        15.1 %            11.5 %     100.0 %   June 30, 2013               0-90 days     91-180 days     Over 180 days     Total Medicare                        14.6 %         1.2 %             1.9 %      17.7 % Medicaid                         3.8           0.8               1.5         6.1 Managed Medicare                 7.8           0.9               1.0         9.7 Managed Medicaid                 9.2           1.4               2.2        12.8 Managed care                    19.4           2.5               3.3        25.2 Uninsured(1)                    13.1           4.9               2.1        20.1 Self-pay after primary(2)        1.4           2.0               2.1         5.5 Other                            1.5           0.6               0.8         2.9 Total                           70.8 %        14.3 %            14.9 %     100.0 %   _____________________ (1)  Includes uninsured patient accounts and those pending Medicaid eligibility      verification only.                                           80

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(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 103.6% and 102.9% of combined uninsured and self-pay after primary accounts receivable as of June 30, 2012 and 2013, respectively. The volume of uninsured and self-pay after primary 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 health care costs. We have implemented policies and procedures designed to expedite upfront cash collections and promote repayment plans for 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. Premium Revenues We recognize premium revenues from our five health plans, PHP, AAHP, CHS, ProCare and VBIC. Premium revenues from these plans decreased $20.3 million, or 2.7%, during the year ended June 30, 2013 compared to the year ended June 30, 2012. PHP's average membership decreased to approximately 187,100 for the year ended June 30, 2013 compared to approximately 198,900 for the year ended June 30, 2012. PHP's decrease in revenues primarily resulted from enacted rate reductions, changes made by AHCCCS effective October 1, 2011 to limit health plan profitability for the remaining enrollee groups not previously subject to settlement, and more stringent Medicaid eligibility standards. Premium revenues are recognized net of amounts recorded for minimum loss ratio ("MLR") rebates payable, as prescribed under the Health Reform Law. MLR rebates are calculated in accordance with regulations issued by HHS. Most of our health plans are managed Medicaid or managed Medicare health plans, which are currently not subject to these MLR rebate requirements. Our premium revenues were reduced by approximately $2.0 million and $0.6 million for MLR rebates during the year ended June 30, 2012 and 2013, respectively. Our MLR rebate liability was approximately $3.9 million and $0.6 million as of June 30, 2012 and 2013, respectively.  Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing these financial statements, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses included in the financial statements. Management bases its estimates on historical experience and other available information, the results of which form the basis of the estimates and assumptions. We consider the following accounting policies to be critical because they involve highly subjective and complex assumptions and assessments, are subject to a great degree of fluctuation period over period and are the most critical to our operating performance: • Revenues, Revenue Deductions and Uncompensated Care;   

• Insurance Reserves;

• Health Plan Claims Reserves;

• Income Taxes; and

• Long-Lived Assets and Goodwill.

   Revenues, Revenue Deductions and Uncompensated Care We recognize patient service revenues during the period the health care 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 was 1% higher for all insured accounts, our patient service revenues would have been reduced by approximately $163.7 million and $172.9 million for the years ended June 30, 2012 and                                         81

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   2013, respectively. We derive most of our patient service revenues from health care 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 represented 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 health care 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 $7.3 million, $6.7 million and $2.5 million during the years ended June 30, 2011, 2012 and 2013, 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. 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 HHS). We deduct charity care accounts from revenues when we determine that the account meets our charity care guidelines. We also generally 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 year ended June 30, 2011, 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 the year ended June 30, 2009, ended in Illinois during the year ended June 30, 2010, and ended in Arizona during the year ended June 30, 2013.  In the ordinary course of business, we provide services to patients who are financially unable to pay for hospital care. We include charity care as a revenue deduction measured by the value of our services, based on standard charges, to patients who qualify under our charity care policy and do not otherwise qualify for reimbursement under a governmental program. The estimated cost incurred by us to provide these services to patients who are unable to pay was approximately $30.2 million, $59.7 million and $55.6 million for the years ended June 30, 2011, 2012 and 2013, respectively. The estimated cost of charity care services was determined using a ratio of cost to gross charges determined from our most recently filed Medicare cost reports and applying that ratio to the gross charges associated with providing charity care for the period. We record revenues related to the Provider Tax Assessment programs, such as those in Illinois, Michigan and Phoenix, Arizona, when the receipt of payment from the state or city governmental entity is assured. For the Texas 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. 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 34.3% and 39.1% of accounts receivable, net of contractual discounts, as of June 30, 2012 and 2013, 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 (including those pending Medicaid qualifications) and self-pay after insurance 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 12-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 percentages in our allowance for doubtful accounts                                         82

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   reserve policy as necessary given changes in trends from these analyses or pricing changes. If our uninsured accounts receivable as of June 30, 2012 and 2013 was 1% higher, our provision for doubtful accounts would have increased by $2.6 million and $2.5 million, respectively. Significant changes in payer mix, business office operations, general economic conditions and health care 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. Many of our hospitals have an uninsured discount policy whereby uninsured accounts (including those pending Medicaid qualification) that do not qualify for charity care receive the standard uninsured discount. The balance of these accounts is 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. Medicaid pending accounts receivable was $103.4 million and $108.2 million as of June 30, 2012 and 2013, respectively. 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.  Recovery Audit Program  The Recovery Audit Program relies on private RACs to examine Medicaid and Medicare claims filed by health care providers to detect overpayments not identified through existing claims review mechanisms. RACs utilize a post-payment targeted review process employing data analysis techniques in order to identify those claims most likely to contain overpayments, such as incorrectly coded services, incorrect payment amounts, non-covered services and duplicate payments.  CMS has given RACs the authority to look back at claims up to three years from the date the claim was paid.  Claims identified as overpayments are subject to an appeals process.  RACs are paid a contingency fee based on the overpayments they identify and collect.  We maintain a reserve for estimates of potential claims repayments from RAC audits based upon actual claims already audited but for which repayment has not yet occurred and claims for which we have received an audit notice but the audit process is not complete. During the quarter ended September 30, 2012, we reduced our RAC reserve estimate for the Michigan market by $14.5 million ($8.9 million net of taxes or $0.11 per diluted share) as a result of further analysis related to each component of the estimate during the period. The $14.5 million reduction in our RAC reserve estimate increased patient service revenues on the accompanying consolidated statements of operations during the year ended June 30, 2013.  

Premium Revenues

  We receive premiums from private payers and state and federal agencies for members that are assigned to, or have selected, us to provide health care services under applicable contracts. The premiums we receive for each member vary according to the specific contract and are generally determined at the beginning of each contract period. The premiums are subject to adjustment throughout the terms of the respective contracts, although such adjustments are typically made at the commencement of each contract renewal period. We earned premium revenues of $869.4 million, $757.4 million and $737.1 million during the years ended June 30, 2011, 2012 and 2013, respectively, from our health plans. Our health plans have agreements with government agencies, including AHCCCS and CMS, and various health maintenance organizations or employers to contract to provide medical services to subscribing participants. Under these agreements, our health plans receive monthly payments based on the number and coverage type of members. Our health plans recognize the payments as revenues in the month in which members are entitled to health care 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 health care costs or else repaid to CMS.                                         83

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   Insurance Reserves We have self-insured medical plans that cover all of our employees. Claims are accrued under the self-insured plans 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 at various levels through our captive insurance subsidiary and/or other of our subsidiaries). Effective with the acquisition of DMC on January 1, 2011, we also provide professional and general liability coverage to certain non-employed physicians in Michigan through another of our captive insurance subsidiaries. Similarly, we self-insure our workers compensation claims ranging from $0.6 million to $1.25 million per claim and purchase excess insurance coverage for claims exceeding the self-insured limits.  Our professional and general liability reserve as of June 30, 2013 was $337.7 million and was comprised of (1) estimated indemnity payments and related loss adjustment expenses related to reported events ("case reserves"); (2) estimated indemnity payments related to incurred but not reported events ("IBNR"); and (3) estimated unallocated loss adjustment expenses representing an estimate of the administrative costs necessary to resolve outstanding claims, all on an undiscounted basis. Our accounting policy is to include estimates of case reserves, IBNR and unallocated loss adjustment expenses in our professional and general liability reserve. The IBNR portion of the reserve includes an estimate of losses expected to be covered by our excess insurance policies of approximately $32.2 million at June 30, 2013. We also had a receivable of approximately $32.2 million at June 30, 2013 for the expected reimbursement of these estimated excess coverage losses from third party insurance companies, reflected in other assets on our consolidated balance sheet. We enter into excess or reinsurance policies with insurance carriers whose financial strength ratings are "A-" or greater, as issued by A. M. Best Company, a credit rating organization that specializes in the insurance industry. We believe any recorded excess receivables from such insurance carriers would be collectible at such time that a reported event reached an excess layer.  Management uses information from our risk management incident reporting system, which contains claim-specific information obtained from our risk managers and external attorneys who review the claims, to estimate the appropriate case reserves based upon case-specific facts and circumstances. Case reserves are reduced as claim payments are made and are increased or decreased as management's estimates regarding the expected amounts of future losses are revised based upon new information received about the incidents or developments in the cases. Once case reserves are finalized for a particular assessment period, incurred and paid loss information is stratified by coverage layers, accident years, reported years and the states in which our hospitals operate. Due to the significant variation in types of medical situations underlying the claims, the geographic jurisdiction of the claims and other claim-specific circumstances, we do not stratify claims data into any further homogenous groups. Our historical loss information, which includes actual claims payments and estimated remaining case reserves for all claims since the our inception in 1997, is utilized to help develop IBNR estimates on a semi-annual basis along with industry data.  We consistently apply our processes for obtaining and analyzing loss data for our hospitals. We quickly integrate these same processes with respect to any hospitals we acquire. We estimate the average time between the claim incurred date and the claim settlement date to be approximately four to five years, but claims may be settled more or less quickly than this average based upon the claim-specific circumstances and the jurisdiction of the case. Many reported events or claims included in our loss history never result in a payment by us and are closed much more quickly than this average. We generally pay settled claims less than 30 days after a settlement is reached, which results in our settled claims liability being less than 1% of our total professional and general liability reserve.  We use an actuary to assist us in the IBNR estimation process, and the actuary's conclusions serve as the basis for our periodic IBNR assessments. Our actuary applies multiple actuarial methods to our loss data to develop the best estimate of IBNR. These actuarial methods consider a combination of our actual historical losses and projected industry-based losses in differing weights for each policy period, estimates of unreported claims and adverse development for reported claims and the frequency, severity and lag-time to resolve claims. The IBNR analysis also considers actual and projected hospital statistical and census data, the number and risk-based ratings for covered physicians, retention levels for each policy period, tort reform legislation within each state in which we operate and other factors.                                          84

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   The development of professional and general liability reserve estimates includes multiple judgments and assumptions, including the significant amount of time between the occurrence giving rise to the claim and the ultimate resolution of the claim (the tail period), the severity of individual claims based upon circumstances specific to each claim, determinations of the appropriate weighting of Company-specific and industry data, projections of adverse developments on reported claims, and differences between actual and expected judicial outcomes. While we believe our rigorous and consistent risk management processes and industry knowledge, our extensive historical claims experience and actuarial reports enable us to reliably estimate our professional and general liability reserves, events may occur that could materially change our current estimates. 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, 2010, 2011, 2012 and 2013 and claims loss and claims payment information during the years ended June 30, 2011, 2012 and 2013 (in millions).                                                            Professional                                                                and                                             Employee         General          Workers                                            Health (1)       Liability       Compensation Reserve balance: June 30, 2010                             $      14.1$       91.8$      15.7 June 30, 2011                             $      30.6$      326.8$      32.1 June 30, 2012                             $      28.9$      340.2$      34.3 June 30, 2013                             $      22.6$      337.7$      30.3 Acquired balances and other: Year ended June 30, 2011                  $      14.2$      227.9$      17.0 Year ended June 30, 2012                  $       2.1     $          -     $         - Year ended June 30, 2013                  $         -     $        2.4     $         - Current year provision for claims losses: Year ended June 30, 2011                  $     169.3$       52.1$      11.0 Year ended June 30, 2012                  $     244.5$       81.1$      12.1 Year ended June 30, 2013                  $     219.7$       72.9$      12.1 Adjustments to prior year claims losses: Year ended June 30, 2011                  $      (3.0 )$       (5.4 )$      (4.3 ) Year ended June 30, 2012                  $      (3.8 )$        0.5$      (0.3 ) Year ended June 30, 2013                  $      (0.3 )$      (12.8 )$      (6.3 ) Claims paid related to current year: Year ended June 30, 2011                  $     144.8$        0.2$       2.1 Year ended June 30, 2012                  $     217.1$        0.1$       2.0 Year ended June 30, 2013                  $     200.1$        0.4$       2.7 Claims paid related to prior year: Year ended June 30, 2011                  $      19.2$       39.4$       5.2 Year ended June 30, 2012                  $      27.4$       68.1$       7.6 Year ended June 30, 2013                  $      25.6$       64.6$       7.1   _____________________

(1) The payment and claims activity is presented on a gross basis and does not

       reflect the elimination for services provided to our employees by our        hospitals and our other health care facilities.   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 GAAP, would increase the estimated reserve. The following table illustrates the sensitivity of the reserve estimates at 75% and 90% confidence levels (in millions).                                         85

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  Table of Contents                               Professional and         Workers                            General Liability      Compensation

Reserve at June 30, 2012 As reported               $             340.2    $         34.3 With 75% confidence level $             379.8    $         40.4 With 90% confidence level $             420.3    $         46.1 Reserve at June 30, 2013 As reported               $             337.7    $         30.3 With 75% confidence level $             376.7    $         35.8 With 90% confidence level $             416.6    $         41.0   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 five days, our employee health IBNR estimate would change by approximately $2.5 million. Health Plan Claims Reserves During the years ended June 30, 2011, 2012 and 2013, health plan claims expense was $686.3 million, $578.9 million and $577.4 million, respectively, primarily representing medical claims of PHP. We estimate 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, 2011, 2012 and 2013 and health plan claims and payment information during the years ended June 30, 2011, 2012 and 2013 (in millions).                                                             Year ended June 30,                                                     2011           2012           2013 Health plan reserves and settlements, beginning of year                                         $    149.8$    114.9$      74.8 Acquired health plan reserves                            -            4.6   

1.0

Current year provision for health plan claims 699.0 593.4

579.0

 Current year adjustments to prior year health plan claims                                          (12.7 )        (14.5 )          (1.7 ) Program settlement, capitation and other activity                                             (32.5 )       (110.8 )        (105.7 ) Claims paid related to current year                 (608.2 )       (432.9 )        (401.5 ) Claims paid related to prior years                   (80.5 )        (79.9 )         (73.3 ) Health plan reserves and settlements, end of year                                            $    114.9$     74.8

$ 72.6

   The decrease in health plan claim reserves primarily relate to decreases in PHP members as a result of AHCCCS eligibility restrictions put in place beginning October 1, 2011. Health plan claims expense is recognized in the period in which services are provided and includes an estimate of costs incurred but not yet paid. Accrued health plans claims and settlements on our consolidated balance sheet includes (1) an estimate of claims incurred but not yet received or adjudicated and claims adjudicated but not yet paid; (2) estimated unallocated loss adjustment expenses representing an estimate of the administrative costs necessary to resolve outstanding claims; and (3) certain amounts receivable from or payable to AHCCCS or CMS for the settlement of actual claims incurred compared to interim payments received related to member groups for which profitability or the risk of loss is limited. Accrued health plan claims and settlements do not include a reserve for adverse deviation. As of June 30, 2012, net settlements payable to AHCCCS or CMS was $2.4 million. As of June 30, 2013, net settlements receivable from AHCCCS or CMS was $11.0 million. We estimate accrued health claims by analyzing claims payment information from a claims triangle model that compares the incurred date for claims to the payment date for those claims. We then calculate per member per month health plan claims costs based upon claims payments for historical periods divided by the number of members during that period. Completion factors are then applied to this estimate to determine the total accrual estimate. We assess the appropriateness of this methodology by comparing our estimates to those of an independent external actuary and also by reviewing ultimate claims payments for certain prior year periods and analyzing utilization trends to determine if adjustments need to be made to the                                         86

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   estimation methodology. Any change in the amount of incurred claims related to prior years included in the health plan claims reserve does not directly correspond to a change in our statement of operations due to the reconciliation and settlement provisions included in certain reconciled member groups. 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 health care cost structure or adverse experience. During the years ended June 30, 2011, 2012 and 2013, approximately $41.3 million, $42.4 million and $40.1 million, respectively, of accrued and paid claims for services provided to our health plan members by our hospitals and our other health care facilities were eliminated in consolidation. Our operating results and cash flows could be materially affected by increased or decreased utilization of our health care 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. 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; and  

• 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 each of the years ended June 30, 2011, 2012 and 2013 (in millions).                                         87

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   Balance at June 30, 2010$ 11.9

Additions based on tax positions related to the current year 0.9 Additions for tax positions of prior years

                      0.7 Reductions for tax positions of prior years                    (0.3 ) Settlements                                                       - Balance at June 30, 2011                                       13.2 

Additions based on tax positions related to the current year 6.1 Additions for tax positions of prior years

                      3.5 Reductions for tax positions of prior years                   (13.1 ) Settlements                                                       - Balance at June 30, 2012                                        9.7 

Additions based on tax positions related to the current year - Additions for tax positions of prior years

                      0.9 Reductions for tax positions of prior years                   (10.3 ) Settlements                                                       - Balance at June 30, 2013$  0.3   The provisions set forth in accounting for uncertain tax positions allow for the classification 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. As of June 30, 2013, $0.3 million total unrecognized tax benefits would impact the effective tax rate if recognized.  

Long-Lived Assets and Goodwill

  Goodwill and indefinite-lived intangible assets are evaluated annually for impairment during our fourth fiscal quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The first step of the two-step process involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting unit using a discounted cash flow ("DCF") analysis. The cash flows are projected based on a year-by-year assessment that considers historical results, estimated market conditions, internal projections, and relevant publicly available statistics. The cash flows projected are then used as the basis for projecting cash flows for the remaining years in our model. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The significant judgments are typically based upon Level 3 inputs, generally defined as unobservable inputs representing our own assumptions. The cash flows employed in the DCF analysis are based on our most recent budgets and business plans and, when applicable, various growth rates are assumed for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. The discount rate is mainly based on judgment of the specific risk inherent within the reporting unit. The variables within the discount rate, many of which are outside of our control, provide our best estimate of all assumptions applied within the model.  If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that reporting unit, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid). If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the reporting unit's goodwill, an impairment loss is recognized in an amount equal to that excess.  Our annual impairment analysis did not result in any impairments of our goodwill for the year ended June 30, 2013. The fair value of each of our reporting units exceeded carrying value by approximately 40%, except for the Arizona hospitals reporting unit which exceeded its carrying value by approximately 15%. In order to address the uncertainties in the DCF                                         88

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   assumptions we performed sensitivity analyses and noted that given a reasonable range of key variables, the DCF estimates still exceeded the carrying value for our reporting units. Additionally, for the health plan reporting unit, the revenues we derive from PHP could significantly decrease if the cap placed on PHP's new contract with AHCCCS in Maricopa County is not lifted. If AHCCCS does not lift the cap, then our revenues and profitability would be negatively impacted by the reduction in membership. However, given the expected growth in our other health plans along with our efforts to expand PHP membership, the calculated fair value of the health plan reporting unit exceeded the carrying value by more than 100%.  In order for the estimated fair values to decrease below the carrying values for all of our reporting units, we would need to experience a significant decrease in future profitability projections coupled with a significant increase in the weighted average cost of capital, both of which we believe is unlikely to occur during the year ended June 30, 2014. However, as noted in Item 1A. Risk Factors, potential events that could negatively affect our key assumptions include, among others, a continuation of current challenging economic conditions, uncertainty with the Health Reform Law and PHP's contract with AHCCCS. These changes could create additional pricing, volume and reimbursement pressures that are not within our control.                                          89

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   Selected Operating Statistics The following table sets forth certain operating statistics on a consolidated and same store basis for each of the periods presented. We have excluded two hospitals that were acquired during the year ended June 30, 2012 from the same store statistics for the years ended June 30, 2012 and 2013.                                                         Year ended June 30,                                                2011            2012         

2013

 CONSOLIDATED: (a) Number of hospitals at end of period                26              28      

28

 Number of licensed beds at end of period         6,201           7,064           7,081 Discharges                                     223,793         285,026         282,607 Adjusted discharges                            404,178         518,118         521,752 Average length of stay                            4.37            4.40            4.48 Patient days                                   977,879       1,254,121       1,267,183 Adjusted patient days                        1,766,085       2,279,732       2,339,488 Net patient revenue per adjusted discharge $     8,860$     9,637$     9,632 Inpatient surgeries                             49,813          67,258          66,231 Outpatient surgeries                            98,875         127,402         125,232 Observation cases                               48,215          71,858          76,580 Emergency room visits                          924,848       1,220,357       1,250,800 Health plan member lives                       245,100         234,500         238,500 Health plan claims expense percentage             78.9 %          76.4 %          78.3 %                                                   Year ended June 30,                                                2012           2013 SAME STORE: (a) Number of hospitals at end of period               26             26 

Number of licensed beds at end of period 6,198 6,215 Total revenues (in millions)

$  5,590.7$  5,544.1 Net patient service revenues (in millions) $  5,019.2$  5,022.2 Discharges                                    261,276        254,597 Adjusted discharges                           484,619        478,666 Average length of stay                           4.36           4.45 Patient days                                1,139,338      1,132,244 Adjusted patient days                       2,113,264      2,128,725 Net patient revenue per adjusted discharge $    9,640$    9,656 Inpatient surgeries                            60,215         58,124 Outpatient surgeries                          118,851        114,835 Observation cases                              65,640         69,073 Emergency room visits                       1,150,393      1,158,607 Health plan member lives                      224,200        226,200 Health plan claims expense percentage            76.6 %         78.4 %   

_____________________

(a) See "Item 6. Selected Financial Data" for defined terms.

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   Results of Operations The following table presents summaries of our operating results for each of the years ended June 30, 2011, 2012 and 2013.                                                              Year ended June 30,                                           2011                      2012                      2013                                                             (Dollars in millions) Patient service revenues, net    $ 3,712.3       81.0  %   $ 5,191.6       87.3  %   $ 5,262.3       87.7  % Premium revenues                     869.4       19.0          757.4       12.7          737.1       12.3 Total revenues                     4,581.7      100.0        5,949.0      100.0        5,999.4      100.0 Costs and expenses: Salaries and benefits (includes stock compensation of $4.8, $9.2 and $6.4, respectively)            2,020.4       44.1        2,746.9       46.2        2,740.6       45.7 Health plan claims expense           686.3       15.0          578.9        9.7          577.4        9.6 Supplies                             669.9       14.6          911.6       15.3          917.0       15.3 Other operating expenses             798.8       17.4        1,173.3       19.7        1,253.3       20.9 Medicare and Medicaid EHR incentives                           (10.1 )     (0.2 )        (28.2 )     (0.5 )        (38.0 )     (0.6 ) Depreciation and amortization        193.8        4.2          258.3        4.3          257.1        4.3 Interest, net                        171.2        3.7          182.8        3.1          197.0        3.3 Monitoring fees and expenses          31.3        0.7              -          -              -          - Acquisition related expenses          12.5        0.3           14.0        0.2            8.1        0.1 Impairment and restructuring charges                                6.0        0.1           (0.1 )        -            5.2        0.1 Debt extinguishment costs                -          -           38.9        0.7            2.1          - Loss (gain) on disposal of assets                                (0.2 )        -            0.6          -          (13.3 )     (0.2 ) Other                                 (4.3 )     (0.1 )         (6.6 )     (0.1 )        (16.9 )     (0.3 ) Income from continuing operations before income taxes         6.1        0.1           78.6        1.3          109.8        1.8 Income tax expense                    (8.6 )     (0.2 )        (22.2 )     (0.4 )        (40.8 )     (0.7 ) Income (loss) from continuing operations                            (2.5 )     (0.1 )         56.4        0.9           69.0        1.2 Income (loss) from discontinued operations net of taxes               (5.9 )     (0.1 )         (0.5 )        -            0.1          - Net income (loss)                     (8.4 )     (0.2 )         55.9        0.9           69.1        1.2 

Net loss (income) attributable to non-controlling interests (3.6 ) (0.1 ) 1.4 0.1

           (7.2 )      0.1 Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders                     $   (12.0 )     (0.3 )%   $    57.3        1.0  %   $    61.9        1.0  %                                            91

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Year ended June 30, 2013 compared to Year ended June 30, 2012

Acute care services on a consolidated basis. Net patient service revenues increased $70.7 million, or 1.4%, during the current year compared to the prior year.

  Our percentage of uncompensated care (defined as the sum of uninsured discounts, charity care adjustments and the provision for doubtful accounts) as a percentage of net patient revenues (prior to these uncompensated care deductions) increased to 21.3% during the current year compared to 19.0% during the prior year. This increase primarily resulted from an increase in self-pay discharges as a percentage of total discharges during the current year and price increases implemented since the prior year.  Discharges decreased 0.8%, while adjusted discharges and emergency room visits increased 0.7% and 2.5%, respectively, during the current year compared to the prior year. Inpatient and outpatient surgeries decreased 1.5% and 1.7%, respectively, during the current year compared to the prior year.  Acute care services on a same store basis. Net patient service revenues increased $3.0 million, or 0.1%, during the current year compared to the prior year. We define same store as those facilities that we owned for the entirety of both 12-month comparative periods. We excluded two hospitals and related health care facilities from our same store analysis.  Our percentage of uncompensated care as a percentage of net patient revenues, as previously defined, increased to 20.0% during the current year compared to 18.0% during the prior year. This increase primarily resulted from an increase in same store self-pay discharges as a percentage of total discharges during the current year and price increases implemented since the prior year.  Discharges and adjusted discharges decreased 2.6% and 1.2%, respectively, while emergency room visits increased 0.7% during the current year compared to the prior year. Inpatient and outpatient surgeries decreased 3.5% and 3.4%, respectively, during the current year compared to the prior year. General economic weakness in the markets we serve continues to impact demand for elective surgical procedures.  

Health plan premium revenue. Health plan premium revenues decreased $20.3 million, or 2.7%, during the current year compared to the prior year. PHP's average membership decreased by 6.0% during the current year compared to the prior year.

Membership in our health plans as of June 30, 2012 and 2013 was as follows:

                                                                   Membership Health Plans                                        Location     2012       2013 PHP - managed Medicaid                              Arizona    188,200    186,800 AAHP - managed Medicare and Dual Eligible           Arizona      3,400      

6,300

CHS - capitated outpatient and physician services Illinois 32,600 30,700 VBIC - health maintenance organization

              Texas       10,300     12,300 ProCare - managed Medicaid                          Michigan       n/a      2,400                                                                234,500    238,500   Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $5,889.6 million, or 98.2% of total revenues, during the current year compared to $5,870.4 million, or 98.7% of total revenues, during the prior year. Salaries and benefits, health plan claims and supplies 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 45.7% during the current year compared to 46.2% for

the prior year primarily due to our ongoing efforts to increase

operational effectiveness and efficiency by monitoring our staffing

levels. On a same store basis, salaries and benefits as a percentage of

total revenues was 46.0% during the current year compared to 46.4% for the

prior year. For the acute care services operating segment, salaries and

benefits as a percentage of patient service revenues was 50.9% during the

current year compared to 51.6% during the prior year. As of June 30, 2013,

we had approximately 39,500 full-time and part-time employees compared to

approximately 40,900 as of June 30, 2012. On a same store basis, including

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   regional employees, the number of full-time and part-time employees decreased approximately 3.6% compared to the prior year. •      Health plan claims. Health plan claims expense as a percentage of premium        revenues was 78.3% during the current year compared to 76.4% during the        prior year. As enrollment increases, this ratio becomes increasingly        sensitive to the mix of members, including covered groups based upon age        and gender and county of residence. The increase during the current year

related primarily to PHP provider rate increases for certain services,

most of which were implemented effective April 1, 2013, and changes in

actuarial assumptions related to the acuity of certain member groups.

Regulators also implemented limits on profitability for certain member

groups during the prior contract year, the impact of which was fully

recognized during the current year. Revenues and expenses between the

health plans and our hospitals and related outpatient service providers of

approximately $40.1 million, or 6.5% of gross health plan claims expense,

       were eliminated in consolidation during the current year compared to $42.4        million, or 6.8% of gross health plan claims expense, during the prior        year.  

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

       was 17.3% during the current year compared to 17.4% during the prior year.        This ratio was positively impacted by the continued reduction in same        store surgeries between the current and prior years. We expect that our

transition to a single group purchasing organization effective January 1,

2013 will reduce supplies costs in future periods. However, supplies costs

       may be pressured in future periods due to our growth strategies that        include expansion of higher acuity services and due to inflationary        pressures.   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 20.9% during the current year compared to 19.7% during the prior year primarily as a result of an increase in medical specialist fees associated with payments under Bexar County, Texas UPL and community benefit programs and an increase in management fees associated with our outsourced physician services management program that began in July 2012. These increases were partially offset by positive development of malpractice losses experienced during the current year. Other. Depreciation and amortization decreased by $1.2 million, or 0.5%, year over year as a result of timing of when certain of our capital improvement and expansion initiatives were placed into service. Net interest increased by $14.2 million, or 7.8%, year over year as a result of the issuance of the additional 7.75% Senior Notes in March 2012 and additional term loan borrowings in March 2013. We incurred $8.1 million of acquisition-related expenses during the current year and $14.0 million of acquisition-related expenses during the prior year. Approximately $7.8 million of the current year costs relate to the Tenet Merger. During the current year, we recognized a net gain of $13.3 million on asset dispositions substantially all of which related to our sale of a portion of our laboratory business in Chicago in June 2013 compared to a net loss on asset dispositions of $0.6 million during the prior year. During the current year, we also incurred $5.2 million in severance costs related to a restructuring in the Michigan market. Medicare and Medicaid EHR incentives. During the current year, we recognized $38.0 million of Medicare and Medicaid EHR incentives compared to $28.2 million during the prior year. Income taxes. Our effective tax rate was approximately 37.1% during the current year. Our effective income tax rate was approximately 28.2% during the prior year. The prior year rate was lower due to a combination of changes to state tax laws in Michigan and adjustments to state deferred tax asset valuation allowances on loss carryforwards in other states during the fourth quarter of fiscal 2012 combined with a reduction in the reserve for uncertain tax positions related to success-based transaction costs during the third quarter of fiscal 2012. Net income attributable to Vanguard Health Systems, Inc. stockholders. Net income attributable to Vanguard Health Systems, Inc. stockholders was $61.9 million ($0.75 per diluted share) during the year ended June 30, 2013 compared to $57.3 million ($0.71 per diluted share) during the year ended June 30, 2012.                                         93

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Year ended June 30, 2012 compared to Year ended June 30, 2011

Acute care services on a consolidated basis. Net patient service revenues increased $1,479.3 million, or 39.8%, during the year ended June 30, 2012 compared to 2011. The significant increase in net patient service revenues is primarily the result of acquisitions, including DMC on January 1, 2011 and Valley Baptist on September 1, 2011, in addition to updates to Medicare reimbursement estimates related to rural floor settlement and SSI ratio updates.

Our percentage of uncompensated care (defined as the sum of uninsured discounts, charity care adjustments and the provision for doubtful accounts) as a percentage of net patient revenues (prior to these uncompensated care deductions) was 19.0% during the year ended June 30, 2012 compared to 16.4% during 2011.

  Discharges, adjusted discharges and emergency room visits increased 27.4%, 28.2% and 32.0%, respectively, during the year ended June 30, 2012 compared to 2011. Inpatient and outpatient surgeries increased 35.0% and 28.9%, respectively, during the year ended June 30, 2012 compared to 2011. Health plan premium revenue. Health plan premium revenues decreased $112.0 million, or 12.9%, during the year ended June 30, 2012 compared to 2011. PHP's average membership decreased by 2.4% during the year ended June 30, 2012 compared to 2011. Additionally, revenues were lower during the current year as a result of two 5% reimbursement rate reductions implemented by AHCCCS in April 2011 and November 2011 (retroactive to October 1, 2011), and limitations to health plan profitability for member groups not previously subject to settlement. Costs and expenses. Total costs and expenses from continuing operations, exclusive of income taxes, were $5,870.4 million, or 98.7% of total revenues during the year ended June 30, 2012, compared to $4,575.6 million, or 99.9% of total revenues, during 2011. Many year over year comparisons of individual cost and expense items as a percentage of total revenues, with the exception of health plan related premium revenues and claims expense, were significantly impacted by the acquisitions during the year ended June 30, 2011, as previously discussed. Salaries and benefits, health plan claims and supplies 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 46.2% during the year ended June 30, 2012 compared to 44.1%

for 2011. The increase during the year ended June 30, 2012 was primarily

due to the decrease in health plan premium revenues for which salaries and

benefits are not as significant as for the acute care services. As of June

30, 2012, we had approximately 40,900 full-time and part-time employees

compared to approximately 38,600 as of June 30, 2011.

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

revenues was 76.4% during the year ended June 30, 2012 compared to 78.9%

during the prior year. Revenues and expenses between the health plans and

our hospitals and related outpatient service providers of approximately

$42.4 million, or 6.8% of gross health plan claims expense, were

eliminated in consolidation during the year ended June 30, 2012 compared

to $41.3 million, or 5.7% of gross health plan claims expense, during

2011.

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

decreased to 17.4% during the year ended June 30, 2012 compared to 17.8%

during 2011.

   Other operating expenses. Other operating expenses as a percentage of total revenues increased to 19.7% during the year ended June 30, 2012 compared to 17.4% during 2011 primarily as a result of increased purchased services related to acquisitions during the years ended June 30, 2011 and 2012. Other. Depreciation and amortization increased by $64.5 million, or 33.3%, year over year as a result of our capital improvement and expansion initiatives and the DMC and Valley Baptist acquisitions. Net interest increased by $11.6 million, or 6.8%, year over year as a result of the issuance of the additional 7.75% Senior Notes in March 2012 and the full year impact of our note offerings in January 2011 and July 2011. We incurred $14.0 million of acquisition-related expenses during the year ended June 30, 2012 compared to $12.5 million of acquisition-related expenses during 2011. We also incurred $5.1 million of restructuring charges during 2011 related to the elimination of approximately 40 positions for the realignment of certain corporate services. The 2011 results were negatively impacted by $31.3 million in monitoring fees and expenses that include the termination of a transaction and monitoring agreement with our equity sponsors.                                         94

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   Income taxes. Our effective tax rate was approximately 28.2% during the year ended June 30, 2012 compared to 141.0% during 2011. The effective rate was higher during 2011 due to the non-deductibility of certain components of monitoring fees and expenses and an increase in the valuation allowance associated with state net operating loss carryforwards. Net income (loss) attributable to Vanguard Health Systems, Inc. stockholders. Net income attributable to Vanguard Health Systems, Inc. stockholders was $57.3 million ($0.71 per diluted share) during the year ended June 30, 2012 compared to a net loss of $12.0 million ($0.26 loss per share) during the year ended June 30, 2011. The year over year change was positively impacted by the $22.3 million of updates to SSI and Rural Floor reimbursement estimates recognized during the third quarter of fiscal 2012.  Liquidity and Capital Resources Operating Activities As of June 30, 2013 we had working capital of $644.2 million, including cash and cash equivalents of $624.0 million, compared to $594.3 million, including cash and cash equivalents of $455.5 million, as of June 30, 2012. Cash flows from operating activities were $300.8 million during the year ended June 30, 2013 compared to $113.6 million during the year ended June 30, 2012. Net operating assets and liabilities, excluding the impact of acquisitions, negatively impacted operating cash flows by $64.8 million during the year ended June 30, 2013 compared to a negative impact of $292.8 million during year ended June 30, 2012. Cash flows from operations during the year ended June 30, 2013 were impacted by the following payments, receipts and other working capital changes: •       interest and income tax payments of $206.3 million during the year ended 

June 30, 2013, which was $39.4 million higher than these payments during

the prior year;

• employer contributions of $32.3 million to the DMC defined benefit

pension plan during the year ended June 30, 2013, which was $6.9 million

        higher than these contributions during the prior year;   •       improved cash collections on our patient accounts receivable as

demonstrated by the reduction in net days in accounts receivable from 50

days at June 30, 2012 to 46 days at June 30, 2013;

• the timing of payments on accounts payable and certain accrued expenses,

        including incentive compensation based upon achieving our financial         performance goals for the year ended June 30, 2013;   •       the receipt of certain settlement receivables from the federal         government, net of payments made to third parties utilizing most of these         proceeds; and  

• the timing of certain governmental supplemental payments.

   Investing Activities Cash flows used in investing activities decreased from $513.2 million during the year ended June 30, 2012 to $406.1 million during the year ended June 30, 2013, primarily as a result of less cash paid for acquisitions. Capital expenditures increased 43.4% to $420.5 million during the year ended June 30, 2013 compared to the prior year due to increased spending related to the DMC specified project commitments, the construction of a new hospital in New Braunfels, Texas, and other expansion projects. Financing Activities Cash flows provided by financing activities increased by $355.3 million during the year ended June 30, 2013 compared to the prior year. During the year ended June 30, 2012, we redeemed approximately $450.0 million of the Senior Discount Notes using proceeds from our initial public offering, including the exercise of the underwriters' over-allotment option. During the year ended June 30, 2012, we recorded debt extinguishment costs of $38.9 million, $25.3 million net of taxes, representing tender premiums and other costs to redeem the Senior Discount Notes and the write-off of net deferred loan costs associated with the redeemed Senior Discount Notes. On March 14, 2013, we amended (the "Amendment") our Credit Agreement, dated January 29, 2010, and borrowed an additional $300.0 million in term loans with a reduced interest rate for the entire term loan facility. Approximately $11.2 million of the $300.0 million in additional proceeds as a result of the Amendment were used to                                         95

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   redeem the remaining outstanding Senior Discount Notes and to pay the associated fees related to the Amendment. The remaining proceeds will be used to finance other general operating and investing activities. As of June 30, 2013, our outstanding debt was $2,996.2 million, and we had $327.2 million of remaining borrowing capacity under our revolving credit facility, net of letters of credit outstanding. Debt Covenants Our senior secured credit agreement contains 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 and the 7.750% Senior Notes); pay certain 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 health care joint venture; engage in certain transactions with affiliates; amend certain material agreements governing our indebtedness, including the 8.0% Notes and the 7.750% Senior Notes; change the business conducted by our subsidiaries; enter into certain hedging agreements; and make capital expenditures above specified levels. In addition, the senior secured credit agreement includes a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio. The following table sets forth the interest coverage and leverage covenant tests as of June 30, 2013.                                           Debt                                      Covenant Ratio     Actual Ratio Interest coverage ratio requirement         2.10 x           3.14 x Total leverage ratio limit                  5.50 x           3.63 x   Factors outside our control may make it difficult for us to comply with these covenants during future periods. These factors include, among others, a prolonged economic recession, a higher number of uninsured or underinsured patients and decreased governmental or managed care payer reimbursement, 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 senior secured credit agreement or the necessity of lender waivers with more onerous terms, including adverse pricing or repayment provisions or more restrictive covenants. A default under our senior secured credit agreement would also result in a default under the indenture governing our 8.0% Notes and the indenture governing the 7.750% Senior Notes. Capital Resources Our commitments to fund multiple construction projects and the routine expenditures necessary to operate our hospitals is significant. Under the terms of the DMC acquisition agreement, we committed to spend $500.0 million for specified capital projects and $350.0 million for routine capital projects for a five-year period subsequent to the acquisition. This commitment includes a requirement to spend at least $80.0 million on specified expansion projects during each calendar year as part of the $500.0 million total commitment for specified capital projects. As of June 30, 2013, we had spent $31.5 million toward calendar year 2013 specified capital projects commitment. From the date of acquisition through June 30, 2013, we had spent $321.0 million of the total $850.0 million DMC capital commitment, including $191.5 million related to the specific project list. As of June 30, 2013, we estimate our remaining commitments, excluding those for DMC, to complete all capital projects in process to be approximately $70.4 million. As part of the Valley Baptist acquisition, we issued a redeemable non-controlling interest to the seller that enables the seller to require us to redeem all or a portion of its 49% equity interest in the partnership on the third or fifth anniversary of the acquisition date at a stated redemption value. If the seller exercises this put option, we may purchase the non-controlling interest with cash or by issuing stock. It is our intent to settle in cash, if the put option is exercised. These potential cash outflows could limit our ability to fund our other operating needs, including acquisitions or other growth opportunities. We had $624.0 million of cash and cash equivalents as of June 30, 2013. We rely on available cash, cash flows generated by operations and available borrowing capacity under our revolving credit facility to fund our operations and capital expenditures. We believe that 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, deposits and investments are not federally-insured and could be at risk in the event of a collapse of those financial institutions.                                         96

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   As of June 30, 2013, we held $59.1 million in total available-for-sale investments in securities held by our wholly-owned captive insurance subsidiary. We may not be able to utilize these investments to fund our operating or capital expenditure funding needs due to statutory limitations placed on this captive insurance subsidiary. Liquidity Outlook We expect that cash on hand, the capacity under our revolving credit facility, and cash generated from our operations will be sufficient to fund our operating and capital needs during the next 12 months and into the foreseeable future. However, if our projections are proved wrong, we cannot be certain that cash on hand, cash flows from operations and the capacity under our revolving credit facility will be sufficient to fund our operating and capital needs and debt service requirements during the long-term. We intend to continue to pursue acquisitions, partnership arrangements and service expansion or de novo development opportunities, either in existing markets or new markets, that fit our growth strategies. These opportunities may require significant additional investment. We also have significant capital commitments remaining under our DMC purchase agreement to be funded during the next few years. To finance these growth opportunities and our capital commitments or for other general corporate needs, we may increase borrowings under our term loan facility, issue additional senior or subordinated notes, use available cash on hand, utilize amounts available under our revolving credit facility or seek additional financing, including debt or equity. As market conditions warrant, we and our major equity holders, including Blackstone and its affiliates, may from time to time repurchase debt securities issued by us, in privately negotiated or open market transactions, by tender offer or otherwise. Our future operating performance, ability to service existing debt or opportunities to obtain additional financing on favorable terms may be limited by economic or other market conditions or business factors, many of which are beyond our control.                                           97

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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, 2013.                                                   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)               $   218.6$  1,489.8$  1,482.9$    865.5$ 4,056.8 Operating leases (2)                  47.5           69.1           41.1           40.2         197.9 Purchase obligations (2)             119.5              -              -              -         119.5 Defined benefit pension plan funding (3)                            1.1            5.0              -              -           6.1 Health plan claims and settlements payable (4)               72.6              -              -              -          72.6 Estimated self-insurance liabilities (5)                       97.6          138.1           80.5           74.4         390.6 Construction and capital improvements (6)                     273.7          275.7           50.0              -         599.4 Subtotal                         $   830.6$  1,977.7$  1,654.5

$ 980.1$ 5,442.9

  Other Commitments: Guarantees of surety bonds (7)   $    55.5     $        -     $        -     $        -     $    55.5 Letters of credit (8)                 21.7           16.1              -              -          37.8 Physician commitments (9)              5.7              -              -              -           5.7 Estimated liability for uncertain tax positions (10)           0.3              -              -              -           0.3 Valley Baptist redeemable non-controlling interest (11)            -           61.8              -              -          61.8 Subtotal                         $    83.2$     77.9     $        -     $        -     $   161.1  Total obligations and commitments                      $   913.8$  2,055.6$  1,654.5$    980.1$ 5,604.0   _____________________

(1) Includes both principal and interest payments. The interest portion of our

       debt outstanding at June 30, 2013 assumes an average interest rate of        8.0%.  

(2) These obligations are not reflected in our consolidated balance sheets.

(3) This obligation represents our estimated minimum required funding for the

DMC Pension Plan trust in our 2014 and 2015 fiscal years. Because the

future cash outflows are uncertain and subject to change, the timing and

amounts of payments to the trust beyond 12 months are not included as of

June 30, 2013. For additional information about the DMC Pension Plan and

expected future benefit payments from the trust, see Note 8 to our

Consolidated Financial Statements included in Item 8 of this Annual Report

on Form 10-K.

(4) Represents health claims incurred by members of PHP, AAHP, CHS, ProCare

       and VBIC, including both reported claims and estimates for 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 are separately stated on our        consolidated balance sheets.   (5)    Includes the current and long-term portions of our professional and

general liability, workers compensation and employee health reserves.

(6) Represents our estimate of amounts we are committed to fund in future

periods pursuant to executed agreements to complete projects included as

property, plant and equipment on our consolidated balance sheets. The

construction and capital improvements obligations include the following

       capital commitments under the executed DMC purchase                                           98

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agreement (as previously discussed) as of June 30, 2013: $204.0 million committed within one year; $275.0 million committed within two to three years; and $50.0 million committed in the fourth year and beyond. (7) Represents primarily performance bonds we have purchased related to health

claims liabilities of PHP and other requirements for our Michigan Pioneer

       ACO.   (8)    Includes amounts outstanding as of July 2013 primarily for letters of

credit with the third party administrator of our self-insured workers

compensation program.

(9) 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.

(10) Represents expected future tax liabilities recognized in our consolidated

balance sheets determined under the guidance of accounting for income

taxes.

(11) Represents the redeemable non-controlling interests for Valley Baptist as

reflected on our consolidated balance sheet.

    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 our liquidity. We had standby letters of credit outstanding of $37.8 million as of June 30, 2013, which primarily relate to security for the payment of claims as required by various insurance programs. In connection with the closing of the DMC transaction, we placed into escrow for the benefit of DMC a contingent unsecured subordinated promissory note payable to the legacy DMC entity in the original principal amount of $500.0 million to collateralize our $500.0 million specified project capital commitment. The principal amount of the promissory note is reduced automatically as we expend capital or escrow cash related to this capital commitment. Through June 30, 2013, the principal amount of this promissory note had been reduced by $191.5 million.  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. These factors combined with normal inflation related to wages, costs of supplies and other operating expenses may result in decreased margins in future periods.                                          99

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