Vanguard Health Systems (VHS) 8-K Vanguard Reports Third Quarter Results

EXHIBIT 99.1

Vanguard Reports Third Quarter Results

NASHVILLE, Tenn. – May 10, 2004 -- Vanguard Health Systems, Inc. (the “Company” or “Vanguard”) today announced results for the third quarter ended March 31, 2004.

Total revenues for the quarter ended March 31, 2004, were $461.7 million, an increase of $59.3 million or 14.7% from the prior year quarter.  The significant increase in revenues during the current year quarter was primarily due to improved inpatient and outpatient volumes at Vanguard’s hospitals and increased membership in its Arizona state Medicaid managed care plan, Phoenix Health Plan.  Patient service revenues and health plan premium revenues increased $36.6 million and $22.7 million, respectively, during the current year quarter.

Net income for the quarter ended March 31, 2004, was $13.8 million, an increase of $7.2 million or 109.1% from the prior year quarter. 

Adjusted EBITDA was $47.4 million for the quarter ended March 31, 2004, an increase of $14.5 million or 44.1% from the prior year quarter.  A reconciliation of Adjusted EBITDA to net income as determined in accordance with generally accepted accounting principles for the quarters ended March 31, 2003 and 2004, is included in the attached supplemental financial information.

The consolidated operating results for the quarter ended March 31, 2004, reflect a 6.0% increase in discharges and a 7.2% increase in hospital adjusted discharges compared to the prior year quarter, primarily due to the Company’s service expansion and managed care contracting initiatives. 

Total revenues for the nine months ended March 31, 2004, were $1,313.6 million, an increase of $376.0 million or 40.1% from the prior year period.  The significant increase in revenues during the current year period was primarily due to the acquisition of the Baptist Health System hospitals and related businesses in San Antonio, Texas, on January 3, 2003, combined with increased inpatient and outpatient volumes at Vanguard’s same hospital facilities and increased membership in its Phoenix Health Plan.  Patient service revenues and health plan premium revenues increased $324.3 million and $51.7 million, respectively, during the current year period.

Net income for the nine months ended March 31, 2004, was $29.9 million, an increase of $18.3 million or 157.8% from the prior year period.

Adjusted EBITDA was $121.8 million for the nine months ended March 31, 2004, an increase of $46.8 million or 62.4% from the prior year period.  A reconciliation of Adjusted EBITDA to net income as determined in accordance with generally accepted accounting principles for the nine months ended March 31, 2003 and 2004, is included in the attached supplemental information.

The consolidated operating results for the nine months ended March 31, 2004, reflect a 39.9% increase in discharges and a 38.8% increase in hospital adjusted discharges compared to the prior year period, primarily due to the acquisition of the Baptist Health System hospitals and related businesses on January 3, 2003, combined with increased inpatient and outpatient volumes at Vanguard’s same hospital facilities.  On a same hospital basis, discharges, hospital adjusted discharges and revenues per hospital adjusted discharge increased by 2.2%, 4.8% and 2.2%, respectively, during the nine months ended March 31, 2004, compared to the prior year period.

Cash flows from operating activities were $59.4 million for the nine months ended March 31, 2004, a decrease of $8.1 million from the prior year period.  The decrease in cash flows from operating activities during the current year period, was primarily a result of the timing of cash receipts of patient accounts receivable, including the effects of the buildup in accounts receivable related to the opening of West Valley Hospital in September 2003 and the reopening of the Phoenix Memorial Hospital emergency department in July 2003.

“Our quarterly results reflect the improvements we have made in both quality of care and financial performance criteria in the four markets we serve,” stated Charles N. Martin, Jr., Chairman and Chief Executive Officer.  “We continue to develop and implement community-focused strategies that will pave the way for future successes for the Company and its patients, including significant commitments to both capital and clinical infrastructures at our facilities.”

In May 2004, the Company’s board of directors approved significant new internal construction projects at six of its existing hospitals, in San Antonio, Texas and Phoenix, Arizona.  The Company estimates that it will spend up to $370.0 million over the next three to four years to complete these projects.  The Company anticipates these six projects to begin over the next 18 months at various times.  All of these projects will result in expanded capacity at each of the six hospitals.  In addition, most of the projects will facilitate an expansion of clinical service capabilities.  These expenditures will fulfill the Company’s remaining capital expenditure commitments under its asset purchase agreements with the former owners of the Baptist Health System in San Antonio and Phoenix Baptist Hospital and Arrowhead Hospital in Phoenix.

The Company is in the process of refinancing its existing credit facility with a new $500-$550 million senior secured credit facility.  The new credit facility will consist of a $300.0 million, seven-year initial term loan and a $200-$250 million, five-year revolving credit facility.  As of March 31, 2004, $201.6 million was outstanding under the Company’s existing credit facility.  The Company expects that the new credit facility will provide for improved interest rates, increased capital expenditure capacities and more flexible debt covenants, among other benefits, compared to the existing credit facility.  The Company expects to use the proceeds from the refinancing to repay the amounts outstanding under the existing credit facility, to pay transaction costs and prepayment penalties associated with the refinancing and for other general corporate purposes, including funding for the construction projects mentioned above.  The Company expects the transaction to close by the end of May 2004, subject to documentation and closing conditions.

The Company will host a conference call for investors at 11:00 am EDT on May 11, 2004.  All interested investors are invited to access a live audio broadcast of the call, via webcast.  The live webcast can be accessed on the home page of the Company’s Web site at www.vanguardhealth.com by clicking on Third Quarter Webcast.  If you are unable to participate during the live webcast, the call will be available on a replay basis on the Company’s Web site www.vanguardhealth.com.  To access the replay, click on Third Quarter Webcast on the Company’s home page or later on the Latest News link on the Investor Relations page of www.vanguardhealth.com.

At March 31, 2004, Vanguard Health Systems, Inc. owned and operated 16 acute care hospitals and complementary facilities and services in Chicago, Illinois; Phoenix, Arizona; Orange County, California and San Antonio, Texas.  The Company’s strategy is to develop locally branded, comprehensive health care delivery networks in urban markets.  Vanguard will pursue acquisitions where there are opportunities to partner with leading delivery systems in new urban markets.  Upon acquiring a facility or network of facilities, Vanguard implements strategic and operational improvement initiatives including expanding services, strengthening relationships with physicians and managed care

organizations, recruiting new physicians and upgrading information systems and other capital equipment.  These strategies improve quality and network coverage in a cost effective and accessible manner for the communities we serve.

This press release contains forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby.  These forward-looking statements include all statements that are not historical statements of fact and those statements regarding the Company’s intent, belief or expectations.  Do not rely on any forward-looking statements as such statements are subject to numerous factors, risks and uncertainties that could cause the Company’s actual outcomes, results, performance or achievements to be materially different from those projected.  These factors, risks and uncertainties include, among others, the Company’s high degree of leverage; the Company’s ability to incur substantially more debt; operating and financial restrictions in the Company’s debt agreements; the Company’s ability to successfully implement its business strategies; the Company’s ability to successfully integrate its recent and any future acquisitions; the highly competitive nature of the health care business; governmental regulation of the industry including Medicare and Medicaid reimbursement levels; changes in Federal, state or local regulation affecting the health care industry; the possible enactment of Federal or state health care reform; the ability to attract and retain qualified management and personnel, including physicians and nurses; claims and legal actions relating to professional liabilities or other matters; changes in accounting practices; changes in general economic conditions; the Company’s exposure to the increased amounts of and collection risks associated with uninsured accounts and the co-pay and deductible portions of insured accounts; the impact of changes to the Company’s charity care and self-pay discounting policies; the ability to enter into managed care provider and other payer arrangements on acceptable terms; the efforts of insurers, managed care payers, employers and others to contain health care costs;  the availability and terms of capital to fund the expansion of the Company’s business; the timeliness of reimbursement payments received under government programs; the potential adverse impact of known and unknown government investigations; and those factors, risks and uncertainties detailed in the Company’s filings from time to time with the Securities and Exchange Commission, including, among others, the Company’s annual reports on Form 10-K and its quarterly reports on Form 10-Q.

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

VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidated Income Statements (Unaudited)
(In millions)

	Three months ended March 31,
			2003					2004
Patient service revenues	$	348.4			86.6	%	$	385.0		83.4	%
Premium revenues		54.0			13.4			76.7		16.6
Total revenues		402.4			100.0			461.7		100.0
Costs and Expenses:
Salaries and benefits		175.3			43.5			190.2		41.2
Supplies		66.3			16.5			73.7		15.9
Medical claims expense		40.5			10.1			55.8		12.1
Provision for doubtful accounts		24.2			6.0			29.4		6.4
Insurance		8.5			2.1			9.5		2.1
Other expenses		53.7			13.4			54.6		11.8
Depreciation and amortization		12.9			3.2			15.7		3.4
Interest, net		10.4			2.6			11.1		2.4
Total costs and expenses		391.8			97.4			440.0		95.3
Income before income taxes		10.6			2.6			21.7		4.7
Income tax expense		4.0			1.0			7.9		1.7
Net income		6.6			1.6			13.8		3.0
Preferred dividends		(0.9		)	(0.2	)		(1.0	)	(0.2	)
Net income attributable to common stockholders	$	5.7			1.4	%	$	12.8		2.8	%

VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidated Income Statements (Unaudited)
(In millions)

	Nine months ended March 31,
			2003					2004
Patient service revenues	$	775.7			82.7	%	$	1,100.0		83.7	%
Premium revenues		161.9			17.3			213.6		16.3
Total revenues		937.6			100.0			1,313.6		100.0
Costs and Expenses:
Salaries and benefits		402.3			42.9			549.2		41.8
Supplies		137.7			14.7			207.5		15.8
Medical claims expense		118.9			12.7			156.7		11.9
Provision for doubtful accounts		51.8			5.5			89.7		6.8
Insurance		21.1			2.3			28.3		2.2
Other expenses		129.9			13.8			154.8		11.8
Depreciation and amortization		32.0			3.4			46.7		3.5
Interest, net		24.9			2.7			32.4		2.5
Total costs and expenses		918.6			98.0			1,265.3		96.3
Income before income taxes		19.0			2.0			48.3		3.7
Income tax expense		7.4			0.8			18.4		1.4
Net income		11.6			1.2			29.9		2.3
Preferred dividends		(1.9		)	(0.2	)		(2.9	)	(0.2	)
Net income attributable to common stockholders	$	9.7			1.0	%	$	27.0		2.1	%

VANGUARD HEALTH SYSTEMS, INC.
Supplemental Financial Information (Unaudited)
Reconciliation of Adjusted EBITDA to Net Income
(In millions)

		Three months ended March 31,						Nine months ended March 31,
		2003			2004			2003			2004
Net income	$	6.6		$	13.8		$	11.6		$	29.9
Interest, net		10.4			11.1			24.9			32.4
Income tax expense		4.0			7.9			7.4			18.4
Depreciation and amortization		12.9			15.7			32.0			46.7
Minority interests		(0.1	)		(0.4	)		0.4			(2.3	)
Equity method income		(1.0	)		(0.8	)		(1.2	)		(2.6	)
Non-cash stock compensation		–			0.1			–			0.1
Loss (gain) on sale of assets		0.1			–			(0.1	)		(0.8	)
Adjusted EBITDA (a)	$	32.9		$	47.4		$	75.0		$	121.8

(a) Adjusted EBITDA is defined as income before interest expense (net of interest income), income taxes, depreciation and amortization, minority interests, equity method income, non-cash stock compensation, gain or loss on the sale of assets and debt extinguishment costs.  Adjusted EBITDA is not intended as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States.  Due to varying methods of calculation, Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies.

VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(In millions)

	June 30, 2003			(Unaudited) March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	27.2		$	27.6
Accounts receivable, net of allowance for uncollectible accounts of approximately $45.5 and $61.0 at June 30, 2003 and March 31, 2004, respectively		213.9			239.1
Supplies		32.1			34.0
Prepaid expenses and other current assets		25.0			31.8
Total current assets		298.2			332.5
Property, plant and equipment, net		777.2			820.7
Goodwill		100.2			105.6
Intangible assets, net		38.6			36.3
Other assets		12.7			13.0
Total assets	$	1,226.9		$	1,308.1
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	91.7		$	90.6
Accrued health claims		33.5			39.3
Other accrued expenses and current liabilities		127.6			100.5
Current maturities of long-term debt		8.3			5.3
Total current liabilities		261.1			235.7
Other liabilities		62.6			88.8
Long-term debt, less current maturities		471.1			520.9
Payable-In-Kind Preferred Stock		57.0			59.9
Stockholders’ equity:
Common Stock		–			–
Additional paid-in capital		352.5			349.7
Accumulated other comprehensive loss		(0.6	)		–
Retained earnings		23.2			53.1
Total liabilities and stockholders’ equity	$	1,226.9		$	1,308.1

VANGUARD HEALTH SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)

	Nine months ended March 31,
	2003			2004
Operating activities:
Net income	$	11.6		$	29.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		32.0			46.7
Provision for doubtful accounts		51.8			89.7
Amortization of loans costs		1.1			1.4
Gain on sale of assets		(0.1	)		(0.8	)
Non-cash stock compensation		–			0.1
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(48.6	)		(115.0	)
Supplies		(1.2	)		(1.9	)
Prepaid expenses and other current assets		16.2			(8.2	)
Accounts payable		0.9			(1.2	)
Accrued expenses and other current liabilities		(25.1	)		(4.6	)
Other liabilities		28.9			23.3
Net cash provided by operating activities		67.5			59.4
Investing activities:
Acquisitions including working capital settlement payments		(297.0	)		(12.3	)
Capital expenditures		(50.1	)		(102.1	)
Proceeds from asset dispositions		1.6			6.2
Other		0.3			(0.7	)
Net cash used in investing activities		(345.2	)		(108.9	)
Financing activities:
Proceeds from long-term debt		167.6			177.5
Payments of long-term debt and capital leases		(3.4	)		(130.6	)
Payments of loan costs		(2.3	)		–
Proceeds from syndication of joint venture interests		0.2			3.0
Proceeds from common stock and PIK preferred stock issuances		80.0			–
Exercise of stock options		–			0.1
Payment to retire common stock		–			(0.1	)
Proceeds from termination of swap agreement		5.5			–
Net cash provided by financing activities		247.6			49.9
Net increase (decrease) in cash and cash equivalents		(30.1	)		0.4
Cash and cash equivalents, beginning of period		55.4			27.2
Cash and cash equivalents, end of period	$	25.3		$	27.6
Net cash paid for interest	$	28.0		$	41.1
Net cash paid (received) for income taxes	$	(0.1	)	$	1.6

VANGUARD HEALTH SYSTEMS, INC.
Selected Operating Statistics (Unaudited)

		Three months ended March 31,
		2003			2004		% Change
Actual:
Number of hospitals at end of period		15			16
Licensed beds at end of period		3,666			3,784
Discharges		35,751			37,887		6.0		%
Adjusted discharges-hospitals		51,100			54,767		7.2		%
Average length of stay		4.33			4.25		(1.8	)	%
Patient days		154,857			161,127		4.0		%
Adjusted patient days-hospitals		218,975			229,475		4.8		%
Patient revenue per adjusted discharge-hospitals	$	6,477		$	6,646		2.6		%
Outpatient surgeries		14,367			15,317		6.6		%
Emergency room visits		118,738			128,052		7.8		%
Gross revenue payer mix:
Medicare		33.0	%		32.1	%
Medicaid		8.4	%		8.5	%
Managed care		52.1	%		53.1	%
Commercial		2.0	%		2.0	%
Self pay		4.5	%		4.3	%
Total		100.0	%		100.0	%
Same hospital:
Number of hospitals (a)		15			16
Total revenues (in millions)	$	402.4		$	461.7		14.7		%
Patient service revenues (in millions)	$	348.4		$	385.0		10.5		%
Discharges		35,751			37,887		6.0		%
Adjusted discharges-hospitals		51,100			54,767		7.2		%
Average length of stay		4.33			4.25		(1.8	)	%
Patient days		154,857			161,127		4.0		%
Adjusted patient days-hospitals		218,975			229,475		4.8		%
Patient revenue per adjusted discharge-hospitals	$	6,477		$	6,646		2.6		%
Outpatient surgeries		14,367			15,317		6.6		%
Emergency room visits		118,738			128,052		7.8		%

(a) For the three months ended March 31, 2004, our recently opened West Valley Hospital is included for the
purpose of calculating same hospital results.

VANGUARD HEALTH SYSTEMS, INC.
Selected Operating Statistics (Unaudited)

		Nine months ended March 31,
		2003			2004		% Change
Actual:
Number of hospitals at end of period		15			16
Licensed beds at end of period		3,666			3,784
Discharges		78,932			110,449		39.9	%
Adjusted discharges-hospitals		115,890			160,848		38.8	%
Average length of stay		4.14			4.21		1.7	%
Patient days		326,515			464,699		42.3	%
Adjusted patient days-hospitals		474,947			667,047		40.4	%
Patient revenue per adjusted discharge-hospitals	$	6,285		$	6,436		2.4	%
Outpatient surgeries		34,406			44,747		30.1	%
Emergency room visits		275,922			383,753		39.1	%
Gross revenue payer mix:
Medicare		29.9	%		31.0	%
Medicaid		8.4	%		8.4	%
Managed care		54.8	%		53.9	%
Commercial		2.4	%		2.0	%
Self pay		4.5	%		4.7	%
Total		100.0	%		100.0	%
Same hospital:
Number of hospitals (a)		10			11
Total revenues (in millions)	$	820.2		$	919.8		12.1	%
Patient service revenues (in millions)	$	658.2		$	706.2		7.3	%
Discharges		65,524			66,942		2.2	%
Adjusted discharges-hospitals		97,995			102,744		4.8	%
Average length of stay		4.03			4.05		0.5	%
Patient days		263,796			271,397		2.9	%
Adjusted patient days-hospitals		392,152			411,990		5.1	%
Patient revenue per adjusted discharge-hospitals	$	6,280		$	6,416		2.2	%
Outpatient surgeries		30,339			32,334		6.6	%
Emergency room visits		238,029			265,492		11.5	%
Pro forma: (b)
Number of hospitals (a)		15			16
Total revenues (in millions)	$	1,172.4		$	1,313.6		12.0	%
Discharges		104,461			110,449		5.7	%
Patient days		442,237			464,699		5.1	%

(a) For the nine months ended March 31, 2004, our recently opened West Valley Hospital is included for the
purpose of calculating same hospital and pro forma results.

(b) The pro forma results reflect the Company’s consolidated results as if the Baptist Health System assets were
owned during the entire periods presented.

Contact: Vanguard Health Systems, Inc.
                Aaron Broad, Director Investor Relations
                (615) 665-6131