The cipher works as follows. The alphabet is comprised of 26 letters and a space (considered as the 27th letter).
Instead of enciphering single characters, it enciphers bigrams. For this purpose, it performs kinda coordinate transform, where a bigram is encoded by the combination of the coordinate of the centre letter and the radius. The centre letter is the letter situated (in the alphabet) in between the two letters of the bigram. The radius is the distance, in the alphabet, from the centre to the letters of the bigram.
For example, consider the bigram AE. E is 4 letters far from A, so the centre letter would be C. C is two letters far from A or E, so the radius is 2. Thus AE is enciphered into C2.
Consider another example, like AF. F is 5 letters far from A, so the centre would be in between C and D. But we must point it to a letter. By convention, in the case when the distance is odd, the centre is pointed to the "upper" letter, C in this case, and the radius (2,5) is rounded downwards, which would be 2 in this case. You see, AF yields C2, like in the first example. To distinguish between AE and AF when deciphering C2, we need to use a marker which would tell us whether the distance was even or odd when enciphering the bigram. I use the exclamation mark in the cases when the distance is odd. Hence AE would be enciphered as C2, and AF as C2!.
For cases like YE, to calculate the distance just count towards space (the 27th letter), and then continue from A. The distance between Y and E is thus 7.
Bigrams cnsisting of two similar letters are enciphered with this single letter, like SS -> S.
You see, the cipher maps bigrams to bi-, tri- or, in rare cases, 4-grams.
Now let's try to cope with high h1. Since absolute values of entropy are alphabet dependent, we could suppose that the rise of h1 was, at least partly, due to the increased alphabet of the ciphertext. So let's reduce it by just encoding digits into letters, like this:
0 = A, 1 = B, 2 = C, etc.
I guess this will make the text undecipherable, because the sync will be lost at the "single letter bigram" positions in the plain text, but anyway for a quick check we'll get
Code:
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This also allows us to reduce the length, which is now 6020, or just 26% over the original plain text length.
The value of h1 decreased indeed, but not dramatically - to 4.33. But the value of h2 is now larger than even the plaintext: 3.30. And h1-h2 is now miserable 1.
So the trick with the alphabet did not pass. Why? I suppose that it is because in the original version of the cipher, the resulting n-grams are mainly comprised from two different sets of characters, like this: letter-digit. This essentially lowers h2, because a letter would almost never follow a letter, and a digit follows a digit not that often (only when radius is 10 or more). The same idea holds for my previous cipher, where constructs involve using designations of rows and columns of a table - basically, the same paradigm, two sets not mingled with each other.
So I guess that's what might be happening in the VMS. What is encoded is not single letters but bigrams, and they are encoded in some table manner, thus making h2 "anomalously" low, and h1-h2 high.