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Vanguard Health rebounds on Medicaid contract

NASHVILLE, Tenn. (AP) -- Shares of hospital operator Vanguard Health Systems took back some ground Wednesday after the company said it had secured a three-year contract to manage Medicaid patients in Arizona. It had said last month that Arizona wasn't renewing a bigger Medicaid contract.

THE SPARK: Vanguard, which owns hospitals and also manages health care benefits through subsidies including Phoenix Health Plan, announced late Tuesday that the contract covers patients in Maricopa county, which includes Phoenix. Medicaid is the state-run health plan for low-income Americans.

THE BIG PICTURE: The company had said late last month that its Phoenix Health Plan had lost its contract with the Arizona Medicaid system. Tuesday's announcement will help the company retain approximately 98,300 members, or about half of the 186,000 Medicaid beneficiaries covered under its previous contract.

In announcing the new agreement, Vanguard said it would not file a protest with Arizona over losing the previous Medicaid contract.

THE ANALYSIS: Susquehanna Financial Group analyst Chris Rigg said in a note the company is "making the best out of a bad situation." He still lowered his fiscal year 2014 earnings estimate to $1.12 from $1.25.

Analysts polled by FactSet expect profit of 90 cents per share for the year ending in June 2014.

Cantor Fitzgerald analyst Joseph France noted that Vanguard's hospital business accounts for about 90 percent of its earnings, and that managed care has not been a strong growth area for the company.

"Vanguard's Arizona HMO has actually been a disappointing performer over the past year as the state reduced benefits and raised eligibility requirements," France said in a note to investors.

SHARE ACTION: Shares of Vanguard Health Systems Inc. rose $1.25, or 8.6 percent, to $15.81 in afternoon trading Tuesday. The Nashville, Tenn.-based company's stock had fallen 12 percent after announcing the loss of the previous contract and before Tuesday's announcement. The stock reached a 52-week high of $17.74 the week before the March announcement of the lost contract.