Commitments and Contingencies

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies

(8)  Commitments and Contingencies

(a)  Lease Commitments

We lease real estate and equipment under cancelable and noncancelable agreements. Most of our operating leases have original terms from seven to twelve years and contain at least one renewal option (which could extend the terms of the leases by five to ten years), escalation clauses (primarily related to inflation) and provisions for payments by us of real estate taxes, insurance and maintenance costs. Leases with a fixed escalation are accounted for on a straight-line basis. Future minimum operating lease payments as of December 31, 2011 under real estate leases are as follows (in thousands):

2012	$	149,483
2013		146,707
2014		120,445
2015		121,536
2016		120,513
Thereafter		526,906
Total minimum lease payments	$	1,185,590

Center rent expense for continuing operations totaled $148.3 million, $84.4 million, and $72.4 million for the years ended December 31, 2011, 2010, and 2009, respectively.

(b)  Purchase Commitments

We have an agreement establishing Healthcare Services Group, Inc. ("HCSG") as the primary housekeeping and laundry vendor through October 31, 2013 for most of the healthcare centers that we operate.  The agreement provides that HCSG will perform housekeeping and laundry services for our centers, in addition to providing related supplies and laundry chemicals.  The agreement may be terminated by either party with or without cause upon ninety days prior written notice.

We have an agreement establishing Medline Industries, Inc. ("Medline") as the primary medical supply vendor through December 31, 2014 for all of the healthcare centers that we operate.  The agreement provides that the long-term care division of the Inpatient Services segment shall purchase at least 90% of its medical supply products from Medline.

We have an agreement establishing SYSCO Corporation ("SYSCO") as our primary foodservice supply vendor through June 30, 2015 for all of our healthcare centers.  The agreement provides that the long-term care division of the Inpatient Services segment shall purchase at least 80% of its foodservice supply products from SYSCO.

We have an agreement establishing Omnicare Pharmacy Services as our primary pharmacy services vendor for pharmaceutical supplies and services through July 15, 2013 for substantially all of the healthcare centers that we currently operate.

(c)  Insurance

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 therefrom 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 loss 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. These functions ensure that the claims are properly administered 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 and/or ultimate loss exposure of individual claims. In cases where our historical data are not statistically credible, stable, or mature, we supplement our experience with nursing home 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 limitations 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 are determined for the open accident years based on judgment reflecting the range of estimates produced by the methods.

Regarding our estimates for workers' compensation reserves, there were no large or unusual settlements during the 2011 or 2010 period.  As of December 31, 2011, the discounting of the policy periods resulted in a reduction to our reserves of $14.1 million.

There were no significant adverse developments to our general and professional liabilities reserves during 2011. During 2010, we determined that the previous estimates for general and professional liabilities reserves for matters related to years prior to 2010 were understated by $13.1 million due to adverse developments with respect to a number of claims that arose in prior periods. Accordingly, we recorded a charge in the fourth quarter of 2010 to increase our general and professional liabilities reserves. Professional liability claims have a reporting tail that exceeds one year.  A significant component of our reserves is estimates for incidents that have been incurred but not reported.

Activity in our insurance reserves as of and for the years ended December 31, 2011, 2010 and 2009 is as follows (in thousands):

	Professional Liability			Workers' Compensation			Total
Balance as of January 1, 2009	$	87,282		$	66,588		$	153,870
Current year provision, continuing operations		27,152			28,368			55,520
Current year provision, discontinued operations		1,512			644			2,156
Prior year reserve adjustments, continuing operations		6,500			1,720			8,220
Prior year reserve adjustments, discontinued operations		890			230			1,120
Claims paid, continuing operations		(20,394	)		(20,165	)		(40,559	)
Claims paid, discontinued operations		(3,699	)		(2,530	)		(6,229	)
Amounts paid for administrative services and other		(4,313	)		(7,349	)		(11,662	)
Balance as of December 31, 2009	$	94,930		$	67,506		$	162,436
Current year provision, continuing operations		29,620			28,086			57,706
Current year provision, discontinued operations		10			21			31
Prior year reserve adjustments, continuing operations		13,100			-			13,100
Claims paid, continuing operations		(19,636	)		(18,948	)		(38,584	)
Claims paid, discontinued operations		(3,422	)		(2,059	)		(5,481	)
Amounts paid for administrative services and other		(2,731	)		(6,121	)		(8,852	)
Balance as of December 31, 2010	$	111,871		$	68,485		$	180,356

	Professional			Workers'
	Liability			Compensation			Total
Gross balance, January 1, 2011	$	113,971		$	96,585		$	210,556
Less: anticipated insurance recoveries		(2,100	)		(28,100	)		(30,200	)
Net balance, January 1, 2011	$	111,871		$	68,485		$	180,356
Current year provision, continuing operations		34,056			26,971			61,027
Current year provision, discontinued operations		346			297			643
Prior year reserve adjustment, continuing operations		6,600			(6,600	)		-
Claims paid, continuing operations		(30,945	)		(17,001	)		(47,946	)
Claims paid, discontinued operations		(740	)		(1,321	)		(2,061	)
Amounts paid for administrative services and other		(2,721	)		(5,519	)		(8,240	)
Net balance, December 31, 2011	$	118,467		$	65,312		$	183,779
Plus: anticipated insurance recoveries		2,390			21,930			24,320
Gross balance, December 31, 2011	$	120,857		$	87,242		$	208,099

A summary of the assets and liabilities related to insurance risks at December 31 is as indicated below (in thousands):

		2011					|		2010
		Professional		Workers'			|		Professional		Workers'
		Liability		Compensation		Total	|		Liability		Compensation		Total
Assets:							|
Restricted cash (1)							|
Current	$	6,254	$	9,332	$	15,586	|	$	3,659	$	10,864	$	14,523
Non-current		-		-		-	|		-		-		-
	$	6,254	$	9,332	$	15,586		$	3,659	$	10,864	$	14,523
Anticipated insurance recoveries (2)							|
Current	$	524	$	2,730	$	3,254	|	$	-	$	-	$	-
Non-current		1,866		19,200		21,066	|		-		-		-
	$	2,390	$	21,930	$	24,320			-		-		-
Total Assets	$	8,644	$	31,262	$	39,906	|	$	3,659	$	10,864	$	14,523
							|
Liabilities (3)(4):							|
Self-insurance							|
liabilities							|
Current	$	28,758	$	22,074	$	50,832	|	$	25,942	$	21,009	$	46,951
Non-current		92,099		65,168		157,267	|		85,929		47,476		133,405
Total Liabilities	$	120,857	$	87,242	$	208,099	|	$	111,871	$	68,485	$	180,356

(1)	Total restricted cash includes cash collateral deposits posted and other cash deposits held by third parties.  Total restricted cash excluded $473 and $1,156 at December 31, 2011 and 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 December 31, 2011 consolidated balance sheet.  See the Recent Accounting Pronouncements discussed in Note 1- "Nature of Business" for additional information.
(3)	Total self-insurance liabilities presented above exclude $6,978 and $5,142 at December 31, 2011 and 2010, respectively, related to our health insurance liabilities.
(4)	Total self-insurance liabilities are collateralized, in addition to the restricted cash, by letters of credit of $55,335 and $59,066 for workers' compensation as of December 31, 2011 and 2010, respectively.

(d)  Construction Commitments

As of December 31, 2011, we had construction commitments under various contracts of approximately $8.5 million. These items consisted primarily of contractual commitments to improve existing centers.

(e)  Labor Relations

As of December 31, 2011, SunBridge operated 36 centers with union employees. Approximately 2,800 of our employees (9.8% of all of our employees) who worked in healthcare centers in Alabama, California, Connecticut, Georgia, Massachusetts, Montana, New Jersey, Ohio, Rhode Island, Washington and West Virginia were covered by collective bargaining contracts. Collective bargaining agreements covering approximately 1,100 of these employees (3.8% of all our employees) either are currently in renegotiations or will shortly be in renegotiations due to the expiration of the collective bargaining agreements.