We self-insure for certain insurable risks, including general and professional liabilities, workers' compensation liabilities and employee health insurance liabilities, through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary by the states in which we operate. There is a risk that amounts funded to our self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments. This liability includes an estimate of the development of reported losses and losses incurred but not reported. Provisions for changes in insurance reserves are made in the period of the related coverage. An independent actuarial analysis is prepared twice a year to assist management in determining the adequacy of the self-insurance obligations booked as liabilities in our financial statements. The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. Any adjustments resulting from such reviews are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

We evaluate the adequacy of our self-insurance reserves on a quarterly basis and perform detailed actuarial analyses semi-annually in the second and fourth quarters. The analyses use generally accepted actuarial methods in evaluating the workers' compensation reserves and general and professional liability reserves. For both the workers' compensation reserves and the general and professional liability reserves, those methods include reported and paid loss development methods, expected loss method and the reported and paid Bornhuetter-Ferguson methods. Reported loss methods focus on development of case reserves for incurred losses through claims closure. Paid loss methods focus on development of claims actually paid to date. Expected loss methods are based upon an anticipated loss per unit of measure. The Bornhuetter-Ferguson method is a combination of loss development methods and expected methods.

The foundation for most of these methods is our actual historical reported and/or paid loss data, over which we have effective internal controls. We utilize third-party administrators ("TPAs") to process claims and to provide us with the data utilized in our semi-annual actuarial analyses. The TPAs are under the oversight of our in-house risk management and legal functions. The purpose of these functions is to properly administer the claims so that the historical data is reliable for estimation purposes. Case reserves, which are approved by our legal and risk management departments, are determined based on our estimate of the ultimate settlement of individual claims. In instances where our historical data are not statistically credible, stable, or mature, we supplement our experience with skilled nursing industry benchmark reporting and payment patterns.

The use of multiple methods tends to eliminate any biases that one particular method might have. Management's judgment based upon each method's inherent limitation is applied when weighting the results of each method. The results of each of the methods are estimates of ultimate losses which include the case reserves plus an estimate for future development of these reserves based on past trends, and an estimate for losses incurred but not reported. These results are compared by accident year, and an estimated unpaid loss and allocated loss adjustment expense is determined for the open accident years based on judgment reflecting the range of estimates produced by the methods.

	Professional			Workers'
	Liability			Compensation			Total

Balance as of January 1, 2010	$	94,930		$	67,506		$	162,436
Current year provision, continuing operations		7,341			7,100			14,441
Current year provision, discontinued operations		43			54			97
Claims paid, continuing operations		(4,219	)		(4,555	)		(8,774	)
Claims paid, discontinued operations		(563	)		(633	)		(1,196	)
Amounts paid for administrative services and other		(850	)		(1,696	)		(2,546	)
Balance as of March 31, 2010	$	96,682		$	67,776		$	164,458

Current year provision, continuing operations		7,339			7,122			14,461
Current year provision, discontinued operations		43			54			97
Claims paid, continuing operations		(3,605	)		(3,906	)		(7,511	)
Claims paid, discontinued operations		(1,553	)		(690	)		(2,242	)
Amounts paid for administrative services and other		(724	)		(1,620	)		(2,344	)
Balance as of June 30, 2010	$	98,183		$	68,737		$	166,919

	For the Three Months Ended									For the Six Months Ended
	June 30, 2011									June 30, 2011
	Professional			Workers'						Professional			Workers'
	Liability			Compensation			Total			Liability			Compensation			Total

Gross balance, beginning of period	$	110,742		$	97,775		$	208,517		$	113,971		$	96,585		$	210,556
Less: anticipated insurance recoveries		(2,100	)		(28,100	)		(30,200	)		(2,100	)		(28,100	)		(30,200	)
Net balance, beginning of period	$	108,642		$	69,675		$	178,317		$	111,871		$	68,485		$	180,356

Current year provision, continuing
operations		8,767			6,500			15,267			16,133			14,396			30,529
Current year provision, discontinued
operations		90			75			165			165			146			311
Claims paid, continuing operations		(9,416	)		(4,206	)		(13,622	)		(18,944	)		(8,907	)		(27,851	)
Claims paid, discontinued operations		(241	)		(340	)		(581	)		(574	)		(672	)		(1,246	)
Amounts paid for administrative
services and other		(800	)		(1,668	)		(2,468	)		(1,609	)		(3,412	)		(5,021	)

Net balance, end of period	$	107,042		$	70,036		$	177,078		$	107,042		$	70,036		$	177,078
Plus: anticipated insurance recoveries		2,273			26,150			28,423			2,273			26,150			28,423
Gross balance, end of period	$	109,315		$	96,186		$	205,501		$	109,315		$	96,186		$	205,501

The anticipated insurance recoveries relate primarily to our workers' compensation programs associated with policy years 1996 through 2001 where the claim losses have exceeded the policies' aggregate retention limits. Obligations above these retention limits are covered by our excess insurance carriers, which all have carrier ratings of at least "A," "XIV" or better.

	June 30, 2011							December 31, 2010
	Professional		Workers'				\|	Professional		Workers'
	Liability		Compensation		Total		\|	Liability		Compensation		Total
Assets:							\|
Restricted cash (1)							\|
Current	$	6,017	$	10,389	$	16,406	\|	$	3,659	$	10,864	$	14,523
Non-current		-		-		-	\|		-		-		-
	$	6,017	$	10,389	$	16,406	\|	$	3,659	$	10,864	$	14,523
							\|
Anticipated insurance recoveries (2)							\|
Current	$	573	$	3,750	$	4,323	\|	$	-	$	-	$	-
Non-current		1,700		22,400		24,100	\|		-		-		-
	$	2,273	$	26,150	$	28,423	\|	$	-	$	-	$	-
							\|
Total Assets	$	8,290	$	36,539	$	44,829	\|	$	3,659	$	10,864	$	14,523


Liabilities (3)(4):							\|
Self-insurance liabilities							\|
Current	$	29,689	$	24,554	$	54,243	\|	$	25,942	$	21,009	$	46,951
Non-current		79,626		71,632		151,258	\|		85,929		47,476		133,405
Total Liabilities	$	109,315	$	96,186	$	205,501	\|	$	111,871	$	68,485	$	180,356

(1)		Total restricted cash includes cash collateral deposits and other cash held by third parties. Total restricted cash above excludes $1,201 and $1,156 at June 30, 2011 and December 31, 2010, respectively, held for bank collateral, various mortgages, bond payments and capital expenditures on HUD insured buildings.

(2)		Anticipated insurance recovery assets are presented as Other Assets (both current and long-term) in our consolidated balance sheet.

(3)		Total self-insurance liabilities above exclude $6,390 and $5,142 at June 30, 2011 and December 31, 2010, respectively, related to our employee health insurance liabilities.

(4)		Total self-insurance liabilities for workers' compensation claims are collateralized, in addition to the restricted cash, by letters of credit of $58,077 as of June 30, 2011 and $59,066 as of December 31, 2010.

We are a party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of our business, including claims that our services have resulted in injury or death to the residents of our centers and claims relating to employment and commercial matters. Although we intend to vigorously defend ourselves in these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on our results of operations, financial condition and cash flows.

We operate in industries that are extensively regulated. As such, in the ordinary course of business, we are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, the industries in which we operate are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is found to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief; and reimbursement authorities could also seek the suspension or exclusion of the provider or individual from participation in their program. We believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations or cash flows.

In September 2010, a lawsuit was filed by a former employee of a subsidiary of our medical staffing company, alleging violation of various wage and hour provisions of the California Labor Code. We deny all of the allegations in the employee's complaint. The lawsuit, which was filed as a purported class action on behalf of the former employee and all those similarly situated, has been settled. The terms of the settlement are confidential pending court approval. We believe our reserves are adequate for this matter.

In November 2010, a jury verdict was rendered in a Kentucky state court against us for $2.75 million in compensatory damages and $40 million in punitive damages. On February 25, 2011, the trial court judge reduced the punitive damage award to $24.75 million. The case involves claims for professional negligence resulting in wrongful death. We disagree with the jury's verdict and believe that it is not supported by the facts of the case or applicable law. We have appealed this judgment to the Kentucky Court of Appeals. We believe our reserves are adequate for this matter.

From time to time, fiscal intermediaries and Medicaid agencies examine cost reports filed by predecessor operators of our skilled nursing centers. If, as a result of any such examination, it is concluded that overpayments to a predecessor operator were made, we, as the current operator of such centers, may be held financially responsible for such overpayments. At this time, we are unable to predict the outcome of any existing or future examinations.