OPERATIONAL ASSESSMENT

Transcription

1 OPERATIONAL ASSESSMENT XXX SNF CENTER Dee DeWitt xxx Operational Analysis 1

2 EXECUTIVE SUMMARY... 3 xxx Operational Strategies... 4 Due Diligence Overview... 5 Transaction Risks... 7 Exhibit 1: Financial Overview Exhibit 2: Revenue Growth Opportunities Exhibit 3: xxx Operational Efficiencies Exhibit 4: Therapy Analysis Exhibit 5: Clinical Program Overview Exhibit 6: Survey Results Exhibit 7: Quality Indicator Reports Exhibit 8: Physical Plant Analysis Exhibit 9: Property Plant Assessment Exhibit 10: Vendor Purchasing Analysis Exhibit 11: Human Resources Analysis Exhibit 12: Facility Leadership Assessment Exhibit 13: Medicaid CMI Table Exhibit 14: Quadrant Marketing Analysis xxx Operational Analysis 2

3 EXECUTIVE SUMMARY In October 2010, a team of senior xxx ( xxx ) stakeholders conducted a due diligence assessment of the xxx Senior Center ( xxx") in Louisville, Kentucky. The xxx team has projected strong financial pro forma growth related to the operational assessment of the xxx facility. The following table reflects the financial assumptions for years one through three over the base data provided by the facility. xxx Base Year 1 Year 2 Year 3 Revenue $5,554,866 $6,406,318 $6,684,644 $7,010,535 EBITDA ($1,192,633) $57,817 $382,956 $593,641 EBITDA Margin (21.5%) 0.9% 5.7% 8.5% EBITDAR ($1,192,633) $1,015,117 $1,340,256 $1,579,660 EBITDAR Margin (21.5%) 15.8% 20.0% 22.5% The xxx facility consists of a 71-bed skilled nursing facility, a 10-bed assisted living facility, and a 16-bed personal care facility, located on a acre property in the xxx neighborhood of Louisville, Kentucky. The purpose of the assessment was to revisit operational efficiencies available based on the facility s current business metrics, in addition to gathering relative information for the evaluation of a conversion to the xxx operating model. The xxx team set the following objectives for the assessment: Measure the impact of converting xxx business metrics to xxx s operating model using key operational standards developed by xxx. Evaluate the needs of the staff and management and to assess the impact of a xxx cultural integration. Identify operational inefficiencies and to provide a strategic plan for addressing these issues upon acquisition of the xxx operations. xxx believes that the xxx property will fit well within the regional clustering of facilities within the current Kentucky portfolio under management. In the process of xxx Operational Analysis 3

4 assessing the immediate market and associated needs the due diligence team identified opportunities to establish the xxx facility as the premier facility in the immediate Louisville market based on location and physical plant condition. Additionally, the addition of the xxx facility to the xxx Louisville portfolio will create a market presence represented by the clinical programming associated with the Diabetes Center of Excellence program at the Meadows East facility, the traditional long term care programming at the Meadows South facility, and the high end quality mix (Medicare and Managed Care) focus for the xxx facility. xxx Operational Strategies The xxx team reviewed multiple operational programs at the xxx facility and the following list outlines what are considered the most important factors influential to the organizations opportunities to generate new equity : 1. Improving Medicare quality census mix (Refer to Exhibit 2: Revenue Growth Opportunities); 2. Transition to an in-house Therapy department (Refer to Exhibit 4: Therapy Analysis); 3. Improving the Medicare Part B / Decline in Function therapy program (Refer to Exhibit 4: Therapy Analysis); 4. Improving the nursing resources / labor management (Refer to Exhibit 5: Clinical Program Overview); 5. Improving the Medicare Part A Average Length of Stay (Refer to Exhibit 2: Revenue Growth Opportunities); 6. Improving the facility s Medicaid Case-Mix Index ( CMI ) (Refer to Exhibit 12: Medicaid CMI Overview); 7. Capture xxx purchasing economies of scale and vendor partnerships pricing advantages (Refer to Exhibit 9: Vendor Purchasing Analysis). The xxx due diligence team spent a great deal of time gaining understanding of the current operations and projected operations in relationship to operational enhancements related to this potential acquisition as a single facility transaction. Equally important, we interfaced this analysis to xxx aggregately after full integration to better understand the full impact on our organization current operating capabilities. xxx Operational Analysis 4

5 Due Diligence Overview xxx has one of the strongest Due Diligence Programs in the long term care sector because it was designed to include tactical sampling, financial testing, identification of quality improvement initiatives, strategic analysis, and extensive team focused site visits. The goal of the xxx due diligence team is to accurately value the incremental equity that xxx s operating systems and business models can create if fully applied and integrated. Due to xx s proven ability to turnaround facilities, the company s due diligence testing methods demonstrate a very reliable understanding of an acquisition s ending economies. xxx believes the model being utilized to assess the xxx facility is most accurate in forecasting potential equity restoration. Due diligence procedures include, but are not limited to the following: Senior leadership facility site visits to perform operational audits; Clinical site visits for regulatory and compliance overview; Therapy operational and financial review; Department head assessment and career planning; Individual market studies including competitive analysis; Case mix reviews; Market and facility wage review; Health policy reviews of state and federal legislation; Material externalities in each marketplace; Vendor pricing comparison; Individual physical plant assessment; Clinical intake capability analysis; Bed planning / model sampling; Individual program review; Medicare RUG Refinement impact analysis; Medicaid rate forecasting analysis; xxx Data Point operational recast; Valuation based upon Four Courts current operations; Valuation based upon Signature operating benchmarks; Valuation based upon Signature s current Kentucky performance. In its due diligence efforts, xxx s team performed a very detailed, comprehensive review of the xxx current operating systems, clinical programs, resource allocations, culture, etc. in an attempt to better understand and value their management philosophy and facility operations. The following summaries provide a brief operational review of the facility, highlighting the primary findings of the xxx due diligence team. If acquired, this review will serve as a foundation for xxx s Senior Team to work with the Facility Advisory xxx Operational Analysis 5

6 Board and the Facility Management Team to create a customized strategic business plan. xxx presents seven focus points for improving operations at xxx: 1. Improve quality mix by focusing on improving the referral conversion rate and sourcing, improving clinical programming, increased training for nursing on resident skilling criteria, improving the Therapy/Nursing partnership, and the establishing a cohesive bed planning model that will identify the various licensed bed scenarios that facilitate the forecasted quality mix improvement. Financial Impact = $544, Build an in-house Therapy department and improving efficiencies by implementing an in-house therapy solution at the xxx. This conversion will ensure a properly staffed department capable of providing the volume of care necessary for the resident needs which will lower the therapy costs while improving program efficiencies. This program will also focus on the imbalance between Part A and Part B programs. Financial Impact = $64, Improve the Decline in Function program by improving staffing levels, using a rehab tech to increase Part A efficiencies while providing more time for Part B residents and providing additional training for the nursing staff related to resident decline screening programs. Financial Impact = $59, Reduce nursing wages as a percent of revenue by working to eliminate nursing agency utilization, increasing nursing stability rates, improving culture and using the xxx Acuity Based Staffing model that matches nursing resources to resident needs. Financial Impact = $775, Increase the Medicare ALOS by ensuring the residents get the appropriate levels of care needed and that supporting documentation is provided based on care needs and provision. The immediate focus should be on ensuring that Therapy and Nursing are synchronized, that the DON understands the needs and works closely with Therapy and MDS. Financial Impact = $319, Improve the facility s Medicaid Case Mix Index ( CMI ) by focusing on MDS integrity audits, ADL breaks review, and the Medicare Part B / Decline in Function programming correlation to KY case mix system. Financial Impact = $78,640 xxx Operational Analysis 6

7 7. Gaining stronger economies of scale from s purchasing power and vendor partnerships related to the hospital based purchasing program associated with the Jewish Hospital System and associated cost structure. The xxx purchasing power will be recognized in the primary vendor contractual relationships relative to pharmacy (Kindred Pharmacy Services) and medical supplies (Medline). Financial Impact = $149,183 These focus points are described in further detail throughout this analysis. Transaction Risks Internal Risk Factors: 1. In-House Therapy Conversion The risk associated is that Frasier Therapy, xxx therapy program provider, plans to transfer all therapy staff currently located and treating at the facility back to their new out-patient facility located in downtown Louisville. This transfer of all therapy staff would create a potential delay in the conversion of the therapy program to the xxx inhouse model based on having to recruit and train new staff (See therapy staffing analysis for current and projected staffing hours for the Four Courts program). xxx Recruiting department is currently in the process of finding a full-time staff for the facility. 2. Benefit Conversion Due to the generous benefit plan associated with the Jewish / St. Mary s Hospital System that the Four Courts staff has traditionally received the conversion to the xxx benefits will be perceived as a reduction in overall benefits received therefore increasing the potential for staff turnover and instability upon transition to xxx. (See Exhibit 5: Benefits Coverage for Employees). It is the stance of xxx that the benefits associated with the Holiday, Sick, and PTO time earned, be paid out to xxx for distribution over a period of time through a bridge methodology to the employees as to reduce the animosity related to the variance in benefit packages. 3. Senior Facility Leadership Stability The facility administrator, xxx, director of nursing, xxx, Human Resources Director, xxx, are all considering leaving the facility either to continue to work within the Jewish / St. Mary s Hospital System. Specifically, Mr. xxx has received approximately three (3) alternate job offers, one of which specifically is to work directly for the president of Jewish Hospital. Ms. xxx, has interviewed for several positions and submitted her resignation, in speaking with her she indicated that she is not interested in being the director of nursing only. Currently, Ms. xxx has direct xxx Operational Analysis 7

8 supervision of the social services director, therapy department, and nursing department. The Human Resources director, Ms. xxx, is currently spending approximately 1-2 days at the facility and is planning on working full-time at the hospital system only. 4. Dietary Services The dietary department is presently managed through a service agreement with Morrison Management Services whereby they provide the dietary program director, xxx, as a contracted employee and charge the facility a monthly fee equivalent to his salary, benefits, and overall program management fee. With the consistency of the dietary program, as reviewed in the due diligence process, it is the recommendation that xxx continues with the Morrison Management Services agreement. The risk associated with continuing this agreement relates to xxx not being able to implement our food services provider agreement and corresponding pricing and not having the program manager, Mr. xxx, as an employee of the facility. External Risk Factors: 1. Medicare Part A Policy Changes: a. Updating the Staff Time Measurement Study (STM) i. Last STM study was done in 1995 & does not reflect current clinical practice ii. Update will likely reflect higher acuity patients and increased use of non-therapy ancillary services b. Reducing Assessment Period from 7 to 5 Days: i. Biggest Impact will be on Rehab Therapy ii. Patients admitted on Friday will need to be evaluated on Saturday or Sunday to qualify for a Rehab RUG iii. Will affect reimbursement for days 1-14 c. Eliminating Therapy Projection on the 5 Day Assessment: i. Implies that all therapy will need to be provided during assessment period d. Limiting Look Back Period in the Hospital: i. From 14 days to 4 days e. Disallowing IV Medications & Fluids when given in the hospital i. Primary reasons the look back period is used ii. Researchers do not fully understand that it is a measure of acuity and that the SNF is not paid for delivering the service itself iii. Change easy for CMS to justify since it is perceived not to directly affect patient care iv. Primary qualifiers for Super RUG categories v. Will affect the 5 day and the 14 day assessments and reimbursement for days 1 30 f. Modification of the RUG Model: xxx Operational Analysis 8

9 i. Purpose is to improve the predictability of the Model and to more appropriately distribute patients throughout the model ii. Should better reflect current clinical practice, but does not evaluate what would be the most effective practice g. Capturing Non-therapy Ancillary Costs: i. Drugs (difficult due to pharmacy differences and differences between Medicare and Medicaid data systems) ii. X-ray, Laboratory, Social Services h. Rebasing the Case-Mix Weights: i. If the non-therapy ancillary costs are appropriately accounted for the affect of re-basing will be off-set ii. Will have the greatest impact on Revenue of all proposed changes iii. Current rates are based on cost based environment pre-pps iv. Rebased rates will be based on cost containment environment post-pps, cost will be significantly lower v. Industry trend to fully dually certify SNF s, cost reports do not reflect MCR only costs but average of all payors i. Eliminating the Use of Grace Days: i. Will affect our process management but not anticipated to negatively impact revenue ii. iii. Grace days have always been discouraged and utilization is low Therapists will have to get all minutes in by the 5th day and the 14th day 2. Medicare Part B Policy Changes a. Physician fee schedule reductions Current projections for a 10% reduction in physician fee schedule which will negatively impact physician and physician extender revenue related to nursing facility visits, therefore potentially limiting physician on-site involvement and willingness to work in LTC environment b. Therapy Caps - The Balanced Budget Act of 1997 instituted an annual Medicare payment cap on outpatient physical, speech, and occupational therapy services. This cap quickly became a problem for many beneficiaries with long term conditions. As a result, the Balanced Budget Refinement Act of 1998 placed a two year moratorium on the payment caps. The moratorium was extended through December 31, 2002 by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 placed an additional two year moratorium on the Medicare payment cap on outpatient physical, speech, and occupational therapy services. Accordingly, the payment cap will not apply to services received during 2004 and Unfortunately, no legislation was passed prior to the end of 2005 to either extend the moratorium or address the cap itself, and so the cap is now in effect. For 2007, the cap amounts are $1, for physical therapy and speech therapy, xxx Operational Analysis 9

10 and another $1, for occupational therapy. The associated risk exposure relative to the caps being increased for 2008 or any period going forward has the potential for negatively impacting Part B therapy revenue at the facility. 3. Regulatory Compliance Environment Potential for changes in the regulatory compliance environment related to the change in state governor. Former State Attorney General, Steve Brashear, defeated incumbent governor Ernie Fletcher in recent election. Risk associated is related to uncertainty in longterm care reimbursement policy and regulatory enforcement under new governor leadership. xxx Operational Analysis 10

11 Exhibit 1: Financial Overview Facility Baseline Statistics xxx Senior Center # Beds Annual Occupancy Facility Statistics Market Statistics* 71 NF; 16 PC; 10 ALF # SNF's 45 NF = 91.2% PC = 40.4% ALF = 26.2% Total = 76.1% # Beds 4,868 Medicare % 18.2% Market Occupancy % 90.6% Net Income ($1,522,490) Market Medicare % 16.2% * Market Statistics Data taken from the 2006 Kentucky Annual Long-Term Care Services Report (January 1, 2006 through December 31, 2006) for the Jefferson County (Louisville market) only. Financial Overview Margin % (26.6%) # Referring Hospitals 9 EBITDA ($1,016,821) # Hospital Beds 3,989 # Hospital Discharges to Margin % (17.7%) SNF s 9,809 EBITDAR ($1,016,821) # MCR Eligible 93,300 # MCR Advantage Margin % (17.7%) Enrolled 19,152 EBITDARM ($509,740) % MCR Adv. Enrolled 20.5% Margin % (8.9%) xxx Senior Center is a 71-bed Skilled Nursing Facility (SNF) with a 16-bed Personal Care (PC) unit, and 10-bed Assisted Living Unit (ALF) located in the xxx neighborhood of Louisville, Kentucky (Jefferson County). Annualizing the Four Courts financial statements for the twelve months ending September 30, 2007, the facility s occupancy finished at 91.2% (NF only), based on the current 71 NF bed configuration, on contributing revenues of $5,730,678 with resulting EBITDA of ($1,016,821). Based upon the due diligence, we are utilizing a conservative revenue growth factor of 5.0%. The primary driver for the revenue growth is related to an 11.4% Medicare Part A census growth resulting in 15.0% revenue improvement over the current base. In this scenario the focus is on improving the Medicare Part A quality mix in place of Medicaid growth. xxx Operational Analysis 11

12 These operating assumptions should create a total capital structure of: xxx Senior Center Facility Purchase Price $7,100,000 Capital Improvements $146,500 Maximum Working Capital Required $345,321 Total Facility Investment $7,591,821 The long-term financial forecast did not address Medicare, Medicaid, or other global policy risks in an effort to compare operating metrics over a similar base. In conclusion, this transaction is very attractive with a purchase price of $7,100,000 or 5.3 times the second year EBITDAR. The rent coverage is 1.1x in the first year, and improves to 1.4x and 1.6x in the second and third year respectively. xxx is forecasted to earn revenue of $6.4 million in the first year with EBITDAR of $1.0 million. The working capital requirement in the first year is $345,321 which is primarily related to the accounts receivable with average DSO of 37. The average cost of borrowing on the revolver is 10.0% per year, representing interest expense of $30,650 in the first year. xxx has an excellent record of turning around under performing properties by implementing their unique operating model, and utilizing their purchasing power. Based upon the pro-forma assumptions, the xxx facility would fit very well in the Kentucky region and would be an excellent addition to the xxx portfolio. xxx Financial Ratios Sept Annualized Year 1 Year 2 Year 3 Purchase Price $7,100,000 EBITDAR ($1,016,821) $1,015,117 $1,340,256 $1,579,660 PP as a Multiple of EBITDAR (7.0) Rent $0 $957,300 $957,300 $986,019 Rent Coverage xxx Operational Analysis 12

13 Exhibit 2: Revenue Growth Opportunities xxx s business model success is dependent on the development and implementation of market strategies that help our facilities achieve both clinical and cultural differentiation versus our competitors. That differentiation results in increased Medicare admissions, which leads to enhanced revenue and improved margins. We use a variety of market specific data (market share; hospital DRG analysis; service gap analysis; physician surveys) in conjunction with the facility s core clinical and cultural competencies to develop marketing plans that position the facility to respond to the community s needs. Medicare Part A Through analysis of the data collected, interviews with hospitals and physicians, indepth discussions and xxx training with facility leadership (Administrator, Admissions Director; Director of Nursing) we are confident that we will be able to improve the Medicare mix and grow the revenue at a rate that will exceed the current trends in other Signature facilities located in Kentucky. This rationale is based on the bed planning methodology and positioning in the Louisville specific market where the xxx facility is located. xxx anticipates a capturing of the Louisville market and specifically growth of the quality mix at the xxx facility based on being a premier facility from a physical plant, location, and xxx programming implementation standpoint. In the Louisville market xxx plans to develop the xxx facility as the primary Medicare Rehabilitation / affluent customer focused facility. The other xxx facilities in the market are Meadows East, the Diabetes Centers of Excellence resource, and Meadows South, the standard long-term care skilled nursing facility, this market clustering will enable Signature to capture a broader market base due to the variety of programming choices immediately available. Medicare A Rate Table % Change Blended MCR A Rate $ N/A Market Basket Increase $ % Therapy Component Improvement* $ % New Blended MCR A Rate $ % * Therapy rate component improvement related to improving the facility therapy program to meet the current standards / outcomes of the Kentucky FAB 1 program. The annualized Medicare Part A blended rate for xxx is presently at $ Realizing the 3.1% market basket increase, effective October 1, 2007, of $11.00 and the projected therapy component improvement of $17.06, the new blended Part A rate would be $ Based on this rate change a $120,416 revenue improvement on the current base business would be realized. xxx Operational Analysis 13

14 Revenue Improvement on Base Census MCR A Days Market Basket Therapy Component Revenue Impact xxx 4,291 $11.00 $17.06 $120,416 Currently, the xxx Medicare mix averaged 18.2% of total occupancy, NF only, for the twelve months ending September 30, Utilizing the four (4) model scenarios for Medicare mix improvement, the facility is estimated to improve in a range of 4.7% to 12.7%, or 1,107 and 2,997 days respectively. These improvement scenarios result in a total ADC and percentage Medicare of 14.8 / 23.0%, 16.3 / 25.3%, 18.1 / 28.2%, and 20.0 / 31.0%. Taking the most conservative estimates of the three models, the increase of 4.7% Medicare mix, would result in an annualized revenue increase of $423,866 to the facility operations. Gradual ramp in of the bed planning and corresponding Medicare quality mix growth scenario one (1) at a 50% factor will result in anticipated revenue growth of $211,913. Quality Mix Medicare Improvement (3 Scenarios) xxx MCR A Days % Medicare Mix Incremental Revenue Improvement Base* 4, % $1,518,623 Scenario 1 1, % $423,866 Scenario 2 5, % $637,570 Scenario 3 6, % $892,598 Scenario 4 7, % $1,147,626 * Base reflects the FYE September 30, 2007, data for xxx Senior Center. In addition to the Medicare rate and quality mix census improvements the Average Length of Stay (ALOS) is an area for potential revenue enhancement. The xxx is presently operating at a 28.3 ALOS for the Medicare A population for the nine months ending September 30, The Kentucky FAB 1 ALOS for the quarter ending September 2007 was 35.7 days, or a variance of 7.4 days. The annualized revenue improvement related to an increase in ALOS of 7.4 days is $319,202. xxx Operational Analysis 14

15 The xxx model also focuses on building a marketing message that capitalizes on core clinical competencies and clinical and therapy programming outcomes. We work closely with our Medical Director, DON and Therapy team to build a clinical picture of the types of patients we want to target. We utilize outcomes data and case study examples to illustrate our clinical success stories when communicating our message to targeted referrals sources. Medicare Part B The Medicare Part B / Decline in function program was identified as minimally managed and utilized program through interviews with the therapy, nursing, and management staff at xxx. The caseload for the xxx therapists mainly consisted of Medicare Part A patients. The Medicare Part B patients on caseload sessions per week were sporadic at 2 to 3 visits per week. It is the belief of xxx that the Medicare Part B caseload could be improved through more thorough screening procedures, a focus on identifying changes of condition and education on the Decline in Function therapy programs. From review of the data from January 2007 to October 2007 it was apparent that Part B services are not being billed consistently and that many services provided are based on therapy staffing capabilities. It was determined that the average case load for Part B was roughly 11% of the Non-Medicare Part A residents in-house. This reflects a variance of 9% from the xxx Part B / Decline in Function benchmark of 20%. The table below reflects the estimated revenue based on an 11% caseload compared to that of the xxx 20% benchmark. (Refer to Therapy Department Analysis for a detailed description of the Part B program review). Medicare Part B / Decline in Function Program Average Part B Census Facility Annualized % Utilization Revenue Rate* Total Revenue xxx Senior Center % $1,190 $72,672 xxx Benchmark % $1,190 $132,130 Variance % $1,190 $59,459 *Revenue Rate is based off of Kentucky FAB 1 Blended Part B revenue rate per month for Decline in Function program. Medicaid Case-Mix Index (CMI) Kentucky s Medicaid Reimbursement System is based on a Case Mix System and rates are issued quarterly based on the previous quarters Medicaid Case Mix. Based on if the facility is Rural or Urban, they have a base rate and then that rate is indexed by the Medicaid Case Mix for that quarter. The Kentucky Medicaid Case-mix index for Four Courts presently at runs a CMI index of for the quarter beginning October 1, The xxx team identified opportunity for improving the score through a more accurate capturing of the patient acuities in the MDS process as well as through the xxx Operational Analysis 15

16 proper utilization of the Medicare Part B / Decline in Function program, the Restorative Nursing program, and accurately capturing change related to depression indicators on the MDS. In the current model, as indicated in the chart below, an improvement in the these case-mix areas in addition to an assumed increase in the capturing of MDS tracking data, the rate would be increased by a $9.58 per day or $78,640 annualized. Medicaid Case-Mix Index (CMI) Improvements CMI Improvement Rate Annualized Revenue Medicare Part B $6.84 $56,103 Restorative Nursing $0.83 $6,847 Depression Indicators $1.91 $15,690 Total Improvement $9.58 $78,640 Summary The following table summarizes the revenue growth opportunities identified at the xxx facility during the due diligence process. This information is based on full implementation of xxx specific programs and reaching identified benchmarks or Kentucky FAB 1 operating performance results. Revenue Growth Opportunity Summary Table Program Financial Impact % Improvement over Base Revenue Medicare Part A $863, % Medicare Part B $59, % Medicaid CMI $78, % Total $1,000, % xxx Operational Analysis 16

17 Exhibit 3: Signature Operational Efficiencies In addition to the Revenue Growth Opportunities identified by during the due diligence site visit, the xxx team estimates additional operational efficiencies to be established after the acquisition of the xxx facility. The primary areas associated with the operating efficiency pick-ups are related to nursing labor management, vendor purchasing agreements and volume, and other labor related efficiencies. Nursing Labor Management During the site visit and upon review of the payroll reports the areas of nursing agency utilization, Acuity Based Staffing (ABS), and overtime labor management opportunities were identified. Acuity Based Staffing The xxx utilization of an ABS nursing staffing model has enabled our organization to ensure that we are matching labor resources to patient acuity needs. The ABS model has been in place since mid 2002 and has resulted in our organization having the most accurate model for determining labor utilization for the nursing component of the facility. The Four Coxxx staffing model indicates that the facility has averaged a 4.33 Nursing Hours per Patient Day (NHPPD), including a.61 NHPPD of nursing agency labor, for the six months ending September 30, 2007, compared to that of the ABS model which reflects a 3.12 NHPPD for the same period. In analyzing the labor management for the nursing department, the facility is operating at a 3.73 NHPPD with their own internal staff in addition to the.61 NHPPD of agency. The agency nursing utilization will be addressed separately. The internal 3.73 NHPPD, or.61 labor overage variance, is estimated to yield operating efficiency savings of $368,543 on an annualized basis. Nursing Labor Management Acuity Based Staffing (ABS) xxx Senior Center 6 Month NHPPD Average Nursing Hours Average Nursing Wage Monthly Impact Annual Impact Actual ,660 $22.33 $189,170 $2,270,038 ABS ,155 $22.33 $158,458 $1,901,494 Variance.61 16,505 $22.33 $30,712 $368,543 xxx Operational Analysis 17

18 Nursing Agency Utilization xxx is strongly opposed to the utilization of nursing staffing agency as a means to care for the patients within our facilities. The rationale behind our stance on nursing agency utilization is based on the following beliefs: (a) Agency nursing staff has no vested interest in the patients being cared for or the facility in which they are working. (b) Agency nursing staff is unfamiliar with facility policies, procedures, and protocols. (c) Agency nursing staff is rotated through multiple facilities and/or locations. (d) Agency staff has many times been former facility employees terminated for cause. (e) Highly unreliable, inconsistent, and disruptive in meeting facility staffing needs. Patient care and consistency is of primary importance in our facilities, as such xxx has taken the stance that nursing agency staffing goes against our operating principles. During our analysis of the nursing labor management at the xxx facility it was identified through financial analysis and discussions with senior facility management staff that the use of nursing staffing agency is a constant at the facility. For the six (6) months analyzed, April through September 07, the facility used approximately 16,519 nursing agency hours or.61 NHPPD for this time period. In comparing the nursing agency NHPPD to the facility internal NHPPD, 3.73 and.61 for a total of 4.33, it is evident that based on the Acuity Based Staffing (ABS) model that the facility already had exceeded the recommended nursing hours prior to even using the nursing agency. The annualized fiscal impact of the nursing agency utilization is $368,861, of which would be a direct add-back to the facility operations. Nursing Labor Management Nursing Agency Utilization Four Courts Senior Center 6 Month NHPPD Average Patient Days Average Nursing Wage Monthly Impact Annual Impact Nursing Agency.61 27,279 $22.33 $30,748 $368,861 Nursing Department Overtime In addition to the savings related to the ABS model and nursing agency, additional operating efficiency savings were identified in the management of overtime utilization. The xxx model for overtime management establishes a benchmark of 3% allowable nursing overtime. The analysis of the payroll reports for the xxx facility reflected that nursing overtime was at an annual run rate of 8%, or in excess to the Signature benchmark by 5%. This variance is estimated to yield an operating efficiency savings of approximately $38,076 annualized. xxx Operational Analysis 18

19 Nursing Labor Management - Overtime Analysis OT % Monthly Cost Annualized Cost xxx 8% $5,225 $62,694 xxx 3% $2,052 $24,618 Variance 5% $3,173 $38,076 Vendor Purchasing Relationships The vendor purchasing relationships that Signature has established with national providers allows our organization to realize savings related to volume and associated contractual pricing that typically adds operating efficiency savings in acquisitions of smaller sized organizations or single entity operators, such as that of xxx. xxx has had an advantage that other individual operators do not have in that they are able to capture the purchasing power of the hospital system, however in analyzing the two (2) primary vendor pricings and corresponding invoices for the pharmacy and medical supplies, it is evident that the hospital cost structure associated with these purchasing agreements is significantly higher than that realized through the Signature relationships. Purchasing Variance Analysis Summary Category Pricing Variance % Savings Pharmacy $52, % Medical Supplies $96, % Total $149, % Summary The following table summarizes the operating efficiency savings opportunities identified at the xxx facility during the due diligence process. This information is based on full implementation of xxx specific programs and reaching identified benchmarks or Kentucky FAB 1 operating performance results. Operating Efficiency Summary Table Program Financial Impact % Improvement over Base Expenses Nursing Labor Mgmt $775, % Vendor Purchasing $149, % Total $924, % Operational Analysis 19

20 Exhibit 4: Therapy Analysis Therapy Services Overview In addition to being one of the most visible centers of positive resident outcomes in a nursing facility, therapy services are also the area of highest margins in long term care. Therapy services delivered within a SNF can be very rewarding from both a financial and functional patient outcome perspective. However, many SNFs operate these departments through rehab contracts that can decrease therapy margins as well as eliminate management capabilities. One of xxx s guiding principles is to deliver quality therapy services through an in-house therapy program. The main focus of xxx therapy services is to ensure positive resident outcomes followed by efficient, cost effective management by the facility administrator and RSM (Rehab Service Manager). Equal focus is placed on Medicare A residents and long-term Non-Medicare A residents, whose needs are addressed through Signature s Decline in Function program. Monitoring Activities of Daily Living (ADLs) between assessment periods and the ratio of discharges to home, in addition to, an analysis of the therapy margin are just a few of the key indicators xxx utilizes to determine the effectiveness of its therapy departments. These indicators are reviewed and managed by both the facility administrator and the RSM to ensure proper resource allocation and program outcomes. The benchmarks are achieved through synergies created in having the entire facility staff in-house. The goals and outcomes of resident care, set forth by facility management and the therapy staff, are completely parallel, which is a direct result of this management alignment. After a comprehensive analysis of current operating outcomes in the xxx Therapy Department, xxx recommends the conversion from the current model of shared hospital therapy services provided by the Fraser Rehab Institute, to xxx s in-house therapy model. It is xxx s belief that this will create a more cohesive culture within the building, contribute immensely to the clinical outcomes of the residents, but also improve the financial performance of the facility. In-House Therapy Overview One of the key operating areas to review in a Skilled Nursing Facility (SNF) is the facility s Therapy Department. A detailed analysis of this department is crucial in order to determine missed operating potential and to identify possible improvements in functional resident outcomes. xxx Operational Analysis 20

21 xxx has one of the most knowledgeable teams in the area of rehabilitative services and has a proven track record of building and operating successful in-house therapy programs that have served to enhance both resident outcomes and profitability in its nursing facilities. In order to conduct a comprehensive review of the Four Courts therapy program, xxx analyzed, but was not limited to the following: Current management alignment of therapy staff; Therapy staff interviews; ADL improvements for therapy caseload; Financial performance of therapy department; Medicare Part A therapy program; Medicare Part B therapy program; Reimbursement Verification; Forecasting xxx in-house Therapy Model. Utilizing information provided by the facility, xxx was able to perform a detailed review of therapy service delivery, current financial results and forecast improved operating performance within xxx. It should be noted that certain analysis could not be completed because the necessary information was not available during our visit and/or there were inconsistencies in data provided. To determine the quality and profitability of a therapy program it is important to understand the cost per minute (CPM) and efficiency or productivity numbers. Just as important is the analysis of RUGs utilization in the Medicare Part A and Medicare Part B caseloads, the revenue per minute billed and the ADL improvements to quantify profit margins and functional patient outcomes. In reviewing the xxx therapy program, the due diligence team assembled data from the billing and manual reporting systems available. This allowed analysis of RUGs utilization in the rehab categories and ADL progression over assessment periods, as well as, the Medicare Part B / Decline in Function program utilization. After assembling this information, the team calculated the therapy Medicare Part A rates and reviewed the ADL improvements for residents and the Medicare Part B caseloads. Implementation of xxx Therapy In-house Model In order to determine the possible resident care enhancements and financial implications of moving to an in-house therapy model, the due diligence team performed an analysis of the xxx rehab program s current operating performance compared to the historical performance of buildings in the xxx portfolio. The team was able to forecast the implications on both the Part A and Part B programs and the resulting financial impact. xxx has witnessed great success in implementing its vision of an in-house therapy model within its SNF portfolio. The diversification of xxx s portfolio allows analysis of its individual facility Therapy Departments based on volume levels of each xxx Operational Analysis 21

22 program. xxx has uniquely created therapy benchmarks customized to a facility s operating capabilities in the area of labor management. xxx also has developed minimum standard benchmarks in its Decline in Function Program. It is with this access to historical data that the due diligence team forecasted results for the xxx facility. xxx believes in delivering therapy services on a more individualized basis. This care is delivered based on the resident s individual needs. This philosophy has positively impacted xxx facilities and leads to improved functional resident outcomes. Therapy Staff Overall the Therapy Department at xxx is staffed with knowledgeable and caring personnel. However, all of the staff are PRN and/or contracted to provide discipline specific services. According to discussions with the Director of Network Services, Frasier Rehab Institute, xxx, the full-time therapy staff at xxx left in July 2007 due to the facility being for sale. As a result Frasier Rehab decided it was easier to staff the facility with PRN and contract therapists versus finding and placing full-time staff at the facility. The facility currently does not employee a Rehab Service Manager (RSM). Upon acquisition the due diligence team recommends recruiting all new therapy staff with the option to utilize the current PRN staff for coverage until full-time replacements can be hired. Actual Therapy Staffing Facility xxx Senior Center PT PTA OT COTA ST TOTAL 2.5 FTE / Week 0.5 FTE / Week 2.0 FTE / Week 1.0 FTE / Week 0.5 FTE / Week 6.5 FTE / Week Therapy Labor Management (Cost per Minute and Efficiency) Two key indicators that are directly correlated and reveal therapy department effectiveness are cost per minute (billed) and efficiency. Cost Per Minute (CPM) The cost per minute for a therapy department is calculated by dividing the total cost for the therapy department by the total minutes billed (Cost / Minutes billed) for a specific time period. With an in-house therapy program administrators must fully understand how to monitor the therapist aggregate activity. It is commonly found that individual and small skilled facility operators do not have access to such reporting mechanisms due to prohibitive cost of a software product that produces such reporting. The xxx therapy program, managed through the Frasier Rehab Institute, has never had the clinical therapy software system that the hospital and free-standing out-patient centers utilize. It is imperative that the facility xxx Operational Analysis 22

23 Therapy Manager, once established, and Administrator monitor daily the skilled rehab documentation to ensure that it supports the skilled therapy services and demonstrates functional patient outcomes. The R-Net therapy software, utilized by Signature, will assist the Administrator and the Therapy Manager in managing the skilled services provided to the residents while ensuring that the documentation supports those services. Utilizing reports provided by xxx Senior Center, the due diligence team calculated the xxx Therapy Services at $1.74 annualized from the three (3) months of data provided, July 2007 to September In addition, the therapy temporary staffing agency costs and hours billed from the same time frame were calculated into the CPM. Sampling was taken from the Selected Charge Report provided by Jewish Hospital systems. Efficiency Therapy department productivity or efficiency is a key indicator that allows management to determine staffing needs, identify process improvement initiatives and manage individual staff members. Therapy efficiency is calculated by dividing the minutes billed by the minutes worked during the same time period. xxx has established an efficiency benchmark for the therapy program at 75%. Ultimately, the rehab efficiency benchmark determines how effectively the facility rehab department is delivering the rehab product. Utilizing reports provided by the facility and Hospital therapy department, the team determined that the efficiency at xxx was approximately 35% based on the 3 months, July through September 2007, worth of data available. This number was also verified by sampling patient charts and caseload reports. It should be noted that the labor hours were taken from the Hours Worked by Job Code report provided by Jewish Hospital systems and Frazier Rehab. Based on staff interviews and observation of therapy sessions it felt that hours being allocated to Four Courts are overstated and inflated. Medicare Part A Typically, when facilities utilize an outside rehab provider to deliver therapy services, greater focus is placed on Medicare Part A patients. In reviewing therapist caseloads at xxx, a majority of each individual therapist s caseload consisted of Part A patients. Minimal transition through the RUGs categories was also discovered during the MDS review. Currently the percentage RUG level utilization for the twelve months ending September 30, 2007, was: RU 9.0%, RV 51.4%, RH 16.4%, RM 23.2%, RL 0.0%. The due diligence team identified that in the Medicare A analysis of minutes provided in correlation to the appropriate RUG level, that the therapy staff was inconsistently xxx Operational Analysis 23

24 managing the amount of therapy time provided related to the number of minutes required per RUG level. It is the belief of xxx that opportunity exists with regard to the therapy program at Four Courts. We can capitalize on these opportunities through the following: Increasing the number of therapy hours; Increased focus on management of the program; Increased focus on RUG level management; Additional education on the PPS / RUGs system; Increased focus on management of the MDS Assessment Reference Dates (ARDs). By utilizing facility reimbursement rates and RUG billing data, xxx was able to calculate the average Medicare Part A rate for therapy. The calculated average for the quarter ending September 30, 2007, for Therapy Part A rate was $125.76, equating to daily revenue of approximately $1,308. This results in annual therapy Part A revenue of $478,282. The current Therapy Part A rate average for the xxx Kentucky portfolio of facilities is $146.38, equating to a difference of $20.62, or $1,596 daily revenue. Therapy Part A Program Facility Part A per diem Rehab Days/Mo Average Case Load Part A Revenue Per Month Part A Revenue annually xxx $ $40,984 $491,804 xxx KY (FAB 1) $146.38* $46,390 $556,683 Variance $ $5,407 $64,879 *xxx KY Part A Per Diem is based on Kentucky average for the quarter ending September 30, 2007, all other comparison data remaining constant for comparison purposes. Medicare Part B When reviewing any therapy program, it is crucial to understand the service delivery to the facility s long-term population, usually covered by Medicaid. Medicare Part B most commonly covers therapy services delivered to this population. As stated before, the caseload for the xxx therapists mainly consisted of Medicare Part A patients. The Medicare Part B patients on caseload for each therapist xxx Operational Analysis 24

25 was sporadic along with individual resident length of stays over the period reviewed. It is the belief of xxx that the Medicare Part B caseload could be improved through more thorough screening procedures, a focus on identifying changes of condition and education on the Decline in Function therapy programs. The Decline in Function therapy program presents additional avenues to improve quality patient care while achieving a solid margin on service. The decline in function program focuses on a percentage of Non-Medicare patients that receive therapy services. In the geriatric field, it is probably due to the aging process, multiple co-morbidities, and chronic disease states that the patients in a nursing facility will decline in their daily functional abilities. On average, the in-house therapy caseload should consist of no less than 20% of the non-medicare Part A population receiving therapy services. Close attention and adherence to 20% Part B utilization is a critical tool for maintaining high levels of patient independence and receiving actual revenue from the in-house therapy program. From review of the July September 2007 data provided by xxx, it was apparent that the Part B services are not being billed consistently and that many services provided are not at the xxx. It was identified that the average annualized caseload for Part B / Decline in Function was at 11% of the Non-Medicare Part A residents in-house. This equates to approximately 61 residents receiving Part B services versus the 20% xxx benchmark, or 111 patients. Additionally, the Part B /Decline in Function program variance from the Signature standard represents $59,459 in revenue not captured. Conclusion Based on the margin improvements and potential cash flow enhancements to xxx, xxx recommends conversion to its in-house therapy model upon acquisition. The positive financial impact and potentially improved resident functional outcomes are the driving forces behind this recommendation. This decision is also solidified by xxx s historical success in converting contract therapy departments into its in-house model. The key to success in the transition will be comprehensive recruitment of the current therapy staff and external recruitment efforts to fill the staffing requirements under the xxx model. Operational Analysis 25

26 Exhibit 8: Physical Plant Analysis xxx Senior Center is an approx 67,000 +/- sq ft property located on approx 12 acres +/-. The total bed count of the facility is 97. (71 SNF, 16 PC, 10 ALF) The original structure was built in 1979 with 2 X 4 load bearing walls on a concrete slab with a basement and the roof being trussed with shingles. The addition was constructed in 1991 and consists of CBS load bearing wall over a second basement with structural steel and a flat roof. The overall condition of the physical plant is very good with minimal concerns. The following listing is based on long term capital improvement planning needs; the facility is overall in great condition. Minimal issues are present that will need immediate attention. Most items listed are simply due to exceeded life expectancy or optional items to enhance the operations or facilitate potential changes in the operations. These items are marked with an asterisk (*). The possibility exists that this facility could operate the first 12 months with less than $10, capital expense required. The Year 1 capital budget is based on the Short Term Project listing below. For Year 2 the budgeted capital improvement is allocated at $600 per bed with a 4% inflation factor. The following items are listed under the Short Term Project category, therefore, identifying projects to be completed within the first year of operations of the facility. Short Term Projects: Structural Concerns Total Cost: $3, The flat roof is a Dura-Last roof that is approx 15 years old. The roof visually had no concerns or issues. The shingled roof has no concerns or major leaks and is in good condition. There is one small leak around the chimney at the fireplace. The leak is very small and new flashing is needed. Cost: $3,000. Life Safety / OSHA Concerns Total Cost: $55, The fire panels in the facility, two (2), are not addressable. They currently work but may not meet the demands of Life Safety codes in the future. Cost: $40,000*. The sprinkler systems, two (2), have passed all inspections to date but the system is due an internal inspection in There may be issues that arise on this inspection. Cost: $15,000*. xxx Operational Analysis 46

27 Laundry Concerns Total Cost: $13, Washers The facility has two (2) washers. The 35 lb unit was installed in 2000 and is in good condition. The 50 lb unit is original. While still working it has exceeded its useful life and may need to be replaced in the near future. Cost: $10,000*. Dryers The facility has two (2) dryers. The 50 lb unit was installed in 2004 and is in good condition. The 75 lb unit is original and has exceeded the useful life and may need to be replaced in the near future. Cost: $3,500*. Dietary Concerns Total Cost: $20, The facility is equipped for kosher meal service in dietary with two (2) separate kitchens, milk kitchen and meat kitchen, both primarily equipped the same. The equipment is in fair condition with everything working. Most of the cook line equipment however is original dating back to 1979 and has exceeded the useful life. Cost: $20,000*. As with the kitchen set-up the facility has two (2) dish machine rooms, milk and meat. The dishwashers appear to be in good condition. Water System Concerns Total Cost: $10, The building has multiple boilers with all being over 1 million BTU s. One unit providing domestic hot water has a small leak and needs to be retubed or replaced. Cost: $10,000. Shower Room Concerns Total Cost: $15, The facility has two (2) central shower rooms with one (1) being in good condition and the second being original with leaks in the shower pans and tile damage throughout. The original shower room needs to be renovated. Cost: $15,000. Telephone System Concerns Total Cost: $30, The phone system may need to have work performed in the future due to the system having no room for expansion. Cost $30,000*. Short Term Project Total Cost: $146,500 xxx Operational Analysis 47

28 Exhibit 9: Property Plant Assessment CENTER NAME xxx DATE: xxx ADDRESS: xxx CITY/STATE/ZIP CODE: Louisville KY xxx TELEPHONE: xxx0 BED CAPACITY: 71 SNF 16 PC 8 ALF FAX NUMBER: xxx LEVEL OF CARE & NUMBER OF BEDS: Above FRESH AIR SUPPLY THROUGHOUT: Yes HOW? Air handler EXHAUST SYSTEM THROUGHOUT Yes DETACHED STRUCTURES (GARAGES, ETC.): Yes Carriage House serves as a Storage unit or garage. Approx st floor and basement and approx 600 upstairs for An approx 6000 total sq ft INDICATE TYPE OF CONSTRUCTION INCLUDING ROOF, STATEMENT OF USE AND GENERAL CONDITION. CBS stucco tile roof and flat. In need of a new roof and cosmetic. Approx $100K LOCATE ON SITE PLAN VEHICLES: MAKE MODEL YR VIN # STATE PLATE # Chevrolet Truck-108, gcdg14k5le KY miles Ford F-450 Bus-7,900 miles fdxe45551ha50313 KY SITE AND FLOOR PLANS A. SITE PLANS (Surveyors plans also acceptable) PROVIDED? Yes xxx Operational Analysis 48

29 B. FLOOR PLANS Yes (Surveyors plans also acceptable) C. NOTES: Photos of building to be attached to separate sheet (See Exhibit ) GENERAL DATA: Land Area: 12 acres +/- # of Stories (excluding basement): 1 Basement: Yes X No Full: Yes X No Partial: Yes No x Elevators: Yes x No Manufacturer: 2-Dover Total of 3 1-Able Service Contractor: Oracle Total Square Footage (bldg.): 67,000 Date of Original Construction: 1979 Model: Age: ADA COMPLIANT YES X NO Date of Addition: 1992 Describe: Approx 30 bed addition onto the Linker wing now referred to as The A wing xxx Operational Analysis 49

30 Date of Renovation: 2001 Describe: Common area renovation including wall covering, paint and Flooring SITE: Water, Municipal Y X Other N Size: 4 Onsite Hydrants Y X N How Many: 2 GENERAL DATA CONT D. Testing Y X N Pressure Problems Y N X Sewer, Municipal Y X N Size: 6 Storm Sewer Y X N Municipal Y X N Other Problems Y N Y N X Storm Water Y Problems N X Retention Pond Fuel Source Y N X Natural Gas Y x xxx Operational Analysis 50

31 Oil N Y N X Electric Power Source Overhead Utility Company LG&E Underground X Volts/Amps 208/230 V & 1200 amp Phase 3 Natural Gas Yes Utility Company LG&E SITE DESCRIPTION/COMMENTS: Portions of structure CBS with brick exterior. Other portions of building stick built with 2X4 lumber also having brick exterior. Roof is flat and shingled. CONSTRUCTION TYPE: BUILDING EXTERIOR: X Structural Steel Frame x Load Bearing Block X x X x X Wood Frame Metal Stud Wall Brick Bearing Dryvit Exterior Gypsum Bd. Cement Stucco Brick Veneer Other WINDOWS: Insulated X x Metal xxx Operational Analysis 51

32 X Wood Approx 20 windows will need replacing. Approx cost of $20K Clad X Vinyl ROOF: Condition: Flat good Shingled good Age: TYPE(S) AND COMPLETE DESCRIPTION: TYPE: Shingled and flat ADDITION: YEAR WARRANTY Yes on flat INTERIOR FRAMING Frame Type Metal and wood studs Sheating Type Other Drywall and block Parking # of Cars: 51 Additional parking needed at approx cost of $120,000 # of Handicaps: 3 Does the Center have a loading Dock? Yes No x TRASH COMPACTORS Yes No x ENVIRONMENTAL ASSESSMENTS: A. Indicate which assessments have been completed. Asbestos No Yes x Date 1979 wing Results In tile mastic portions abated Transformers for PBC No x Yes Date Results xxxoperational Analysis 52

33 Radon No X Yes Date Results Underground No Yes x Date Results Filled Fuel diesel Used for? Generator Structural/Mechanical No x Yes Date Results Lead Paint No x Yes Date Results Other No Yes Date Results Description: OPERATING CERTIFICATES AND LICENSURE A photocopy of the following must accompany this page. A. Operating License issued by State Y X N B. JCAHO Certification (if applicable) Y N x YEAR C. CORF Y N X (Certified Outpatient Rehab Facility) D. CARF Certification (if applicable) Y N X (Certified Acute Rehab Facility) E. Other Applicable Certification Y N X (Attach Copies) xxx Operational Analysis 53

34 F. WAIVERS (list waivers below including expiration date) Yes for closet doors on A wing. Waiver issued in 05 for sprinklers in closets FIRE ALARM SYSTEM: MANUFACTURER Simplex MODEL # 2001 and 4002 VOLTAGE 120v/24v TYPE SERIAL # LOCATION OF CENTRAL UNIT Lower level A wing electrical room and Lower level next to kitchen NUMBER AND LOCATION OF ANNUNCIATOR(S) 2 remotes SERVICED BY: Fire Alarm Pros ATTACH COPY OF CONTRACT IF APPLICABLE PHONE NUMBER: DOES SYSTEM INCLUDE THE FOLLOWING: CENTRAL MONITORING COMPANY YES x NO IS MONITORING COMPANY U.L. APPROVED YES x NO COMPANY NAME Emergency 24 ADDRESS: Chicago Illinois PHONE NUMBER EXTERIOR ALARM BELL YES NO X EXTERIOR ALARM LIGHT YES NO X COMMUNICATIVE SIGNAL YES X NO MANUFACTURER ADDRESS PHONE NUMBER AUTO DIALER VENDOR xxx Operational Analysis 54

35 PHONE NUMBER MANUAL PULL STATION 200 YES x NO TRAVEL EMERGENCY POWER YES x NO HVAC SHUT DOWN YES x NO MAGNETIC DOOR HOLD DEVICES YES x NO FIRE/SMOKE DAMPERS YES x NO SMOKE/HEAT DETECTION 30 O.C. YES x NO ADDRESSABLE YES NO X SIMULTANEOUS AUDIBLE AND VISUAL SIGNALS YES x NO DIETARY HOOD SUPPRESSION SYSTEM YES x NO TIED INTO MAIN SHUT OFF AT STOVE, IF SHUNT VALVE YES x NO PLEASE LOCATE AND IDENTIFY ALL SYSTEM COMPONENTS ON A FIRE EVACUATION PLAN AND ATTACH. SECURITY SYSTEM/CUSTOMER MONITORING SYSTEM: MANUFACTURER Entire facility secured with variety of locks MODEL xxx Operational Analysis 55

36 SERVICE CONTRACTOR PHONE NUMBER IS THIS CONNECTED TO EMERGENCY POWER? YES NO IS THIS CONNECTED TO THE FIRE ALARMS? YES NO ATTACH A FLOOR PLAN YES NO SPRINKLER SYSTEM: SERVICE CONTRACTOR: MidWest Sprinkler PHONE NUMBER: CONTACT PERSON: Mickey INSTALLATION DATE: 1979 wet and 1992 wet and dry ADD ONS YES x NO DATE OF ADD ONS 1992 TYPE: WET x DRY X GLYCOL TOTAL x PARTIAL Awnings Not SOURCE OF WATER Municipal STORAGE TANK SIZE LOCATION COMMENTS MAIN VALVE YES x N O WATER FLOW DEVICE YES x N O Riser room on A wing and boiler room on Linder wing Riser room on A wing and in hall by dietary xxx Operational Analysis 56

37 BACKFLOW PREVENTOR YES x N O A wing, Linker has 2 3 total ELECTRICAL YES x N O CONNECTION TO YES x N O FIRE ALARM SUPERVISED MAIN YES x N O CONTROL TAMPER SWITCH YES x N O SPRINKLER HEAD MANUFACTURER: Central YEAR: Varies MODEL # MAIN DISTRIBUTION: SPRINKLER SYSTEM CONT D. ATTACH COPY OF SERVICE AGREEMENTS: YES NO ATTACH COPY OF LATEST SERVICE REPORTS: YES NO COMMENTS: EXTERIOR LIGHTING: List all existing exterior lighting: EXTERIOR PLAN ATTACH WITH EXTERIOR LIGHTS INDICATED YES NO TYPE MODEL # WATTAGE QUANTITY Exterior lights serviced by LG&E xxx Operational Analysis 57

38 MAIN TRANSFORMER: SIZE VOLTAGE KVA LOCATION COMMENTS IS TRANSFORMER OWNED BY FACILITY OR POWER COMPANY? LG&E GENERATOR LOAD: GENERATOR SET SPECIFICATION: MAKE: Kohler Kohler MODEL: 80r0zj8 100r0z81 FUEL SOURCE: Both diesel KW: SERVICE CONTRACTOR: Veratech PHONE NUMBER: IS GENERATOR CONNECTED TO: COMMENTS FIRE ALARM YES x NO REFUGE HEAT YES x NO HVAC SYSTEM YES NO X (IDENTIFY AREA) EMERGENCY OUTLETS YES x NO xxx Operational Analysis 58

39 NURSES CALL YES x NO EXIT SIGNS AND LIGHTS YES x NO CORRIDORS YES x NO DINING AREAS YES x NO ACTIVITIES YES x NO LOUNGES YES x NO TELEPHONES YES x NO MECHANICAL ROOMS YES x NO ELEVATORS YES x NO EXTERIOR LIGHTING YES x NO ARE ALL OF THE ABOVE PROPERLY IDENTIFIED? yes IS GENERATOR ROOM PROPERLY VENTILATED? Yes DIETARY HOOD AND DUCT SUPPRESSION SYSTEM: SERVICE CONTRACTOR: Fessco PHONE NUMBER: CONTACT PERSON: Steve Emge TYPE Wet MODEL Kidde PROPER COVERAGE: YES x NO NUMBER OF NOZZLES 3 each xxx Operational Analysis 59

40 COMMENTS: TELEPHONE SYSTEM: TYPE Nortel MODEL # # OF PHONES 36 # OF OUTSIDE LINES T1 cable business and 87 res rooms Office and res rooms IS SYSTEM OWNED OR LEASED? Own IF LEASED, ATTACH COPY LOCAL CARRIER Nuvox LOCAL LONG DISTANCE CARRIER Nuvox LONG DISTANCE CARRIER SYSTEM SERVICED BY Hardy Communication DOES SYSTEM HAVE ROOM FOR EXPANSION? No EXPLAIN IN DETAIL: To residents. Telephones in all res rooms provided by the facility at no cost CABLE TV OR SATELLITE DISH: IS FACILITY EQUIPPED WITH CABLE TV OR SATELLITE SYSTEM? Direct Satellite IF CABLE TV NAME OF COMPANY AND CONTRACT? GIVE SPECIFICS OF INSTALLATION AND RESPONSIBILITY OF MAINTENANCE: COMMENTS: Every resident room has access to the system of a basic package. Provided free of charge to residents as a marketing tool. xxx Operational Analysis 60

41 PLUMBING: GENERAL TEMP. MIXING VALVES: QTY TYPE INSTALL DATE MANUFACTURE N/A HOT WATER/STORAGE TANKS: QTY TYPE INSTALL DATE MANUFACTURE SIZE BTU N/A CIRCULATING PUMPS: QTY TYPE INSTALL DATE MANUFACTURE HP GPM 6 Hot water heat Bell Gossetts PLUMBING CONT D. WATER TREATMENTS YES X NO IF YES, SPECIFY Water softening system BOILER INSPECTION RESULTS ATTACH COPY SERVICE CONTRACTOR: YES NO PHONE NUMBER CONTACT PERSON xxx Operational Analysis 61

42 BOILERS: QTY TYPE MFG INSTALL DATE BTU S HP 1 Domestic Sellers ,200,000 2 Heating Lochinvar ,250,000 1 Heating Cleaver Brooks ,500,000 2 Heating Bryan ,200,000 1 Domestic Ruud ,000 1 Domestic Ruud ,900 IS FACILITY EQUIPPED WITH: GIVE DETAILS: WATER MAIN BACKFLOW PREVENTOR: Yes ANTI-SCALD DEVICES? Tempered at heaters ANTI-SYPHON DEVICES: PLUMBING CONT D. PIPE COLOR CODING? No WATER YES NO x GAS YES NO x O2 YES NO x VAC YES NO x PIPE FLOW DIRECTION INDICATORS: Yes in boiler rooms WRIST BLADE FAUCETS IN RESIDENT AREAS? Yes PARTIAL YES NO COMPLETED YES x NO MISCELLANEOUS PLUMBING COMMENTS: Overall plumbing of the building is in good condition. There is one wing of the building That will need a return line replaced in the near future. Approx cost of replacing this line xxx Operational Analysis 62

43 $7500 LAUNDRY EQUIPMENT: TYPE/ MANUFACTURER VOLTAGE BTUs SIZE INSTALL DATE COMMENTS WASHERS Unimac Fair Unimac Poor DRYERS Unimac Gas Good Unimac Gas Poor COMBUSTION: YES NO AIR X VENTILATION: x EXHAUST x SPRINKLER x AC x HEAT DETECTION X DIETARY EQUIPMENT: xxx Operational Analysis 63

44 TYPE/ VOLTAGE INSTALL COMMENTS MANUFACTURER BTUs DATE REACH IN 2 120/208 V 1980 Original fair REFRIGERATORS REACH IN FREEZERS WALK IN REFRIGERATORS ARE REFRIGERATORS SPRINKLERED? YES X NO WALK IN V 1980 Original fair FREEZER ARE FREEZERS SPRINKLERED? YES X NO 1 4 bin 208 V 2002 Good STEAM TABLE 1 5 bin 208 V 2003 Good RANGE/GRIDDLE TOP CONVECTION V 1997 Fair OVEN OVEN 2 Gas 1980 Fair BROILER GRIDDLE STEAMER Good MIXER/SLICER ICE MACHINE GARBAGE DISPOSAL V 2005 Good V 2000 Good TYPE/ VOLTAGE INSTALL COMMENTS MANUFACTURER BTUs DATE 2 - Hobart 208 V 1980 Fair High Temp DISHWASHER 2 - Jackson 208 V 2004 Good High Temp xxx Operational Analysis 64

45 BOOSTER HEATER RANGE HOOD HOOD & DUCT 2 Kidde WHDR PROTECTION Dry system Good condition DISHWASHER HOOD YES NO MAKE-UP AIR FOR HOODS X FOOD STORAGE VENTS X AC HEAT DETECTORS X X GENERAL COMMENTS: BATHING AREAS/NSG UNIT AND # OF BEDS: NURSING UNIT: 2 NUMBER OF BEDS ON UNIT Approx 44 per LIFTS: YES x NO HOW MANY? 8 MANUAL: MANUFACTURER MODEL # xxx Operational Analysis 65

46 POWERED: MANUFACTURER MODEL # NUMBER OF TUBS: 1 MAKE MODEL NUMBER OF WHIRLPOOLS 2 MAKE MODEL NUMBER OF SHOWER STALLS 2 MAKE MODEL AIR CONDITIONING EQUIPMENT LIST AND NUMBER ALL INDIVIDUAL HEATING/AC SYSTEM COMPONENTS IN THE FACILITY. ALSO LOCATE ON ROOF AND OR BUILDING OUTLINE. USE THE FOLLOWING LIST AS A GUIDE IN IDENTIFYING DIFFERENT COMPONENTS: CHILLED WATER SYSTEM WATER COOLED SELF-CONTAINED SYSTEM AIR COOLED SELF-CONTAINED SYSTEM WATER COOLED SPLIT SYSTEM AIR COOLER PACKAGE UNIT A/C DIRECT EXPANSION REMOTE COMPRESSOR ROOF TOP SYSTEM SINGLES ZONE ROOF TOP SYSTEMS MULTI ZONE CONTRIFUGAL ABSORPTION RECIPROCATING THROUGH THE WALL HEAT PUMP THROUGH THE WALL COOL/HEAT COOLING TOWER CIRCULATING PUMPS TYPE MANF/ VOLTAGE/ AREA MODEL BTUs SERVICED AGE COMMENTS THRU WALL Contained cool hot water heat Dual voltage Resident rooms 2002 or newer 30 units THRU WALL THRU WALL Contained cool hot water heat Contained cool hot water heat Dual voltage Resident rooms Dual voltage Resident rooms Older than units 40 units Split System Trane 10 ton common 1992 Fair Split System Carrier 10 ton common 2002 Good xxx Operational Analysis 66

47 Split System Trane 7.5 ton common 2004 Good Split System Trane 4 ton common 1992 Fair Split System Trane 4 ton common 1992 Fair Split System Trane 10 ton common 2004 Good Split System York 10 ton common 1992 Fair Split System Trane 3 ton common 1997 Good Split System Janitrol 2.5 ton common 1997 Good Split System Bryant 5 ton common 1992 Poor Split System Trane 5 ton common 1992 Poor Split System Trane 4 ton common 1992 Poor Split System Trane 15 ton common 2004 Good Split System Trane 7.5 ton common 1997 Good Split System Trane 7.5 ton common 2004 Good Split System xxx Operational Analysis 67

48 Exhibit 10: Vendor Purchasing Analysis The vendor purchasing agreements established through xxx s purchasing department have enabled the organization to realize significant contracting considerations in comparison to other operators in long-term care. xxx has established multiyear relationships with the two (2) primary vendors for pharmacy services (Kindred / Pharmerica Pharmacy Services) and medical supplies (Medline) that have allowed our organization to leverage these cost centers to realize a positive cost savings in most acquisitions. The primary two (2) areas analyzed in the due diligence of Four Courts were related to pharmacy and medical supplies. Pharmacy Services The relationship with the facility pharmacy services provider is a critical relationship that can directly impact the nursing department, facility billing procedures, physician relationships, and overall resident / family satisfaction. The national pharmacy services provider that xxx presently contracts with is Omnicare Pharmacy services out of Louisville, KY. xxx primarily uses the Kindred / Pharmerica Pharmacy Services to provide coverage for all properties within its portfolio of facilities. In conjunction with the Kindred / Pharmerica pharmacy services, xxx utilizes Long Term Care Solutions to provide pharmacy adjudication services. Pharmacy adjudication provides for an automated programming that compares pharmacy detailed invoices to contracted pricing for variance in charges. In analyzing the most recent three (3) months of pharmacy invoices, September through November 2007, Long Term Care Solutions ran the adjudication program to compare the pricing between the Omnicare contract that xxx utilizes and that of the Signature contracted pricing. The average pricing variance / savings related to the Signature contract resulted in a 17.7% cost reduction, or $52,931 annual savings. Pharmacy Services Pricing Analysis September 2007 October 2007 November Month Total Annualized xxx / Omnicare $19,180 $28,926 $26,790 $74,897 $299,586 xxx / Kindred - Pharmerica $15,634 $23,419 $22,610 $61,664 $246,655 Variance $3,545 $5,507 $4,180 $13,233 $52,931 % Savings 18.5% 19.0% 15.6% 17.7% 17.7% xxx Operational Analysis 68

49 Medical Supplies xxx has partnered with one primary medical supply vendor, Medline, for the entire portfolio of skilled nursing facilities since June This relationship has always been based on superior service and products that have benefited our residents, staff, and facilities. Based on the long term relationship established and corresponding volume level purchasing power that we have had with Medline, xxx has been able to build strong contractual pricing based on an established, dually developed supply formulary. In analyzing the medical supply pricing related to the annualized financial statements for xxx, xxx s Medline pricing comparison realized an average savings rate of 36.6%, or $96,252 annualized. Medical Supplies Pricing Analysis* Cost / PPD Patient Days Annualized Cost xxx $ ,279 $262,701 xxx / Medline $ ,279 $166,449 Variance $ ,279 $96,252 *Medical Supplies Pricing Analysis The comparison was based on costs associated to the Medical Supply line items only for xxx and xxx. The items analyzed were: xxx Nursing Medical, Bandages, Needles/Syringes, and Oxygen; xxx (KY FAB 1 only) Medical Supplies Reimbursable, Medical Supplies Non-Reimbursable, Floor Stock, Incontinent Supplies, IV Supplies, Oxygen, Air Fluidized Therapy, and X-Ray. xxx Operational Analysis 69

50 Exhibit 11: Human Resources Analysis The xxx executive team understands that there can be no revolution in long-term care without building a strong culture in the organizations facilities. Facilities without the Signature culture face higher than average turnover rates, high rates of employee dissatisfaction, poor customer service and customer dissatisfaction, and poor survey and clinical scores. The xxx team has been able to achieve a high rate of employee buy-in to the company mission and vision at all levels of the organization. Attached in Exhibit 13 are the company s Guiding Principles. These are the specific principles we believe are necessary in order to create a revolution and to bring about positive change in long-term care. The company realizes that our employees are important stakeholders in the company and is firmly committed to providing the best possible culture and working environment for company employees. The xxx assessment team did a thorough analysis on the current culture and benefits provided at xxx. xxx provides an excellent benefit proposal to the staff of the facility. Unfortunately, the benefits package has not translated into improved culture or an effective recruiting or retention tool. The facility relies heavily on agency staff in the nursing department and the recent employee satisfaction survey shows 80.2% overall satisfaction. By contrast, xxx provides a benefit package better than the industry standard but less generous than the Four Courts benefit plan. Recently xxx performed a My Innerview employee satisfaction survey that was rated much higher in the organization s Kentucky portfolio of facilities than state specific and national averages. One of the areas of concern identified in the site visit was the inefficiencies related to the hiring process for the facility. The recruiting, interviewing, credentialing, and hiring process currently takes approximately four (4) to six (6) weeks within the Jewish Hospital system. The employee candidate recruiting and new hire credentialing is all conducted at the Jewish Hospital Louisville Campus, thus causing significant frustrations and delays for the facility in approving and employing a candidate. This delay causes a significant number of applicants to take other full-time and part-time positions in order to begin working and earning income. Additionally, the facility management staff believes this is a contributing factor for the utilization of nursing staffing agency within the facility. The xxx operational analysis team conducted an in-depth analysis of the current human resources environment and the information contained in this summary reflects only the data made available. Below is a table outlining the current benefit differential between the xxx and xxx benefit plans. xxx Operational Analysis 70

51 2008 Benefits Comparison MEDICAL Humana HDPD Humana CF B xxx Humana CF A Humana PPO B Humana PPO A Anthem PPO xxx Blue Cross/Blue Shield PPO 100/70 100/70 80/60 80/60 80/60 90/70 90/50 80/50 60/50 Eligibility 1 st of the month following 3 months of service 1st of the month following 90 days of employment FT at least 36 hours per week & PT hours per week FT at least 36 hours per week or PTI at 32+ hrs Health Savings Account Yes n/a n/a n/a n/a n/a n/a Biweekly Rates: Full time vs. Part Time Full Time & Part Time Insurance Employee Only $18.13 $20.27 $26.76 $46.71 $66.11 $98.40 $67.17 $69.30 $75.79 $98.02 $ $ $69.98 $60.04 $43.72 Employee & Child(ren) $35.71 $39.52 $51.19 $87.11 $ $ $ $ $ $ $ $ $ $ $93.75 Employee & Spouse $45.23 $49.56 $63.17 $ $ $ $ $ $ $ $ $ $ $ $ Employee & Family $60.79 $67.02 $86.47 $ $ $ $ $ $ $ $ $ $ $ $ PHA Discount -$ $ $ $ $ $15.00 n/a n/a n/a Co-Pay n/a $25 PCP $40 Spec $25 PCP $40 Spec $20 PCP $35 Spec $15 PCP $30 Spec $10 PCP $10 Spec $30 $30 for PCP $40 for Spec 71 $30 for PCP $40 for Spec Deductible - Individual $2,200 $3,000 $1,000 $500 $250 $200 $0 $1,000 $1,000 Deductible - Family $4,400 $6,000 $2,000 $1,000 $500 $400 $0 $3,000 $3,000 Prescription Drug Co Pays $7 Generic - $40 Preferred - $80 Non Preferred $10 Generic - $40 Preferred - $55 Non Preferred DENTAL Delta Premier Delta PPO MetLife Biweekly Rates: Full Time Part Time Full Time Part Time Full Time & PTI Employee Only $5.31 $9.09 $2.55 $6.33 $7.17 Employee & Child(ren) $14.17 $19.95 $8.65 $14.44 $16.84 Employee & Spouse $13.20 $18.74 $8.01 $13.54 $14.17 Employee & Family $18.94 $28.77 $10.68 $20.51 $26.14 Deductible - Individual $50 $50 In Network / $100 Non $50 Deductible - Family $150 $150 In Network / $500 Non $100 Benefit Maximum $1,500 $2,000 In Network / $1,500 Non $1,000 / $1,000 Orthodontic Max VISION VSP Avesis Advantage Plus Vision Care Biweekly Rates: Full and Part Time Employees Full Time and PTI Employee Only $2.89 $2.26 Employee & Child(ren) $5.30 $4.19 Employee & Spouse $5.21 $3.96 Employee & Family $7.86 $5.88 LIFE INSURANCE Unum Provident MetLife Eligibility Up to 1 x salary $10,000 - $20,000 - $50,000 Basic - Company Paid Up to 1 x salary $10,000 - $20,000 - $50,000 Supplemental Purchase up to 5 x salary (Max: EE $500K, Spouse $250K, Child $10k) Purchase up to $500,000 (Spouse 50%/Child $7,500) AD&D 1 x salary co paid + option to purchase $25,000-$400,000 of coverage n/a STD Unum Provident MetLife Rates Company Paid Based on earnings certain positions co paid Eligibility Full and Part time - 1 st of the month following DOH for exempt, 1 st of the month following six months employment for non-exempt FT & PTI - 1 st of the month following 90 days of employment Benefit 60% of Regular Pay 60% of Gross Weekly Wages Elimination Period 45 Days 14 Days Maximum Weekly Benefit $1,200 per pay period $700 or $1,000 depending on Job Maximum Period Up to 135 days Up to 24 Weeks (168 days) LTD Unum Provident MetLife Eligibility Full Time - 1 st of the month following DOH for exempt, 1 st of the month following six months employment for non-exempt Full Time and PTI 1 st of the month following 90 days of employment Rates Company Paid Based on earnings certain positions co paid Benefit 60% of monthly salary 60% of pre-disability monthly earnings Elimination Period 180 days 180 Days Max Monthly Benefit $7,500 per month $3,000 and up depending on position

52 2008 Benefits Comparison FLEXIBLE SPENDING ACCT xxx Pre Tax Per Year $2,500 Healthcare / $5,000 Dependent Care xxx Pre Tax Per Year $1,500 Healthcare / $5,000 Dependent Care RETIREMENT PLAN 403 (b) John Hancock 401(k) Eligibility Age 21 or older Age 21 or older Entry Date After 1 year of employment 1 st of the month following 90 days employment Hours Requirement Minimum of 1,000 hours Must be classified RFT 36+, RPT 20+ or PTI 32+ Employer Match Match based on LOS (2-50%) up to 6% deferral $.25/$1.00 match up to 3% deferral Vesting Three year cliff vesting Five year vesting end of year 1,000 hr minimum Auto enrollment yes Auto enroll at 3% PENSION PLAN Hours requirement One year of service with a minimum of 1,000 hours worked n/a Benefit Based on LOS, age and annual salary n/a Vesting 3 years (any calendar year with minimum 1,000 hrs worked) n/a PAID TIME OFF (PTO) (Vacation, Holidays and Personal Days including 2 days illness) (Vacation, Sick, Personal & Holidays) Hours Requirement Full Time and Part Time Full Time at least 36 per week Accrual begins After 90 days of employment for team members On date of hire for management Immediately upon hire Full Time Accrual Rates Yrs of Service FT TM Manager Director 0 to 1 Year of Service.0423 (11 Days) 1-4 years 20 days yr 25 days yr 25 days yr 1 to 3 Year of Service.0615 (16 Days) 5-9 years 26 days yr 31 days yr 31 days yr 4 to 6 Year of Service.0692 (18 Days) years 31 days yr 31 days yr 31 days yr 7 to 9 Year of Service.0808 (21 Days) 20+ years 31 days yr + buy up to 5 31 days yr + buy up to 5 31 days yr 10+ Years of Service.1 (26 Days) Part Time Accrual Rates Prorated based on hours of service n/a Carryover Allowed up to 2 x annual accrual Up to 40 hours payout of unused at y/e Cash out up to 80 if 80 remains in bank No payout of unused at term No No HOLIDAYS EXTENDED ILLNESS BENEFIT (EIB) Paid time and a half for hours worked on recognized holidays (10:29 pm on eve of holiday to 10:29 pm on holiday). Employees that work the holiday can also use PTO for holiday. If an employee does not work the holiday, then he/she MUST use PTO. Paid time and a half for hours worked on recognized holidays (12:01 am to midnight on holiday) Hours Requirement Full Time or Part Time n/a Accrual begins After 90 days of service n/a Accrual Rates FT earn 64 hours per year (8 days) & PT earn a prorated amount n/a Use Employee can use beginning 3 rd day of absence due to injury or illness up to two weeks at a time. Can also be used for sick child, parent or spouse. Carryover Up to 256 hours from year to year n/a TUITION REIMBURSEMENT Eligibility Full and Part Time Employees Full time employees Benefit per year FT $2,000 / PT $1,000 $1,000 annual max Requirement A/B Grades A/B Grades EDUCATION LOAN PROGRAM Eligibility After 90 days of employment - One year LOS required for each $6K n/a Benefit $6,000-8,000 n/a n/a xxx Operational Analysis 72

53 Current Wage Analysis Position Minimum Average Maximum C.N.A. $11.12 $12.62 $14.24 LPN $12.00 $17.74 $21.03 RN $20.00 $24.40 $27.42 Environmental $8.86 $9.68 $10.45 Dietary $8.52 $9.18 $9.75 Shift Differentials Hours worked from 4:00pm 6:29am (7 days a week) Nursing Assistant $.50 per hour LPN/RN $1.50 per hour Extra Shift Bonus $2.00 per hour for extra shift pick up during the week $3.00 per hour for extra shift pickup during the weekend Critical Extra Shift Bonus RNs - Hours worked above 40 hrs will be paid at the PRN rate of $27.00 per hour plus a $5 bonus per hour for 1 st shift & $7 per hour for 2 nd and 3 rd shift LPNs Hours worked above 40 will be paid at the PRN rate of $19.00 per hour plus a $5 bonus per hour for 1 st shift and $7 per hour for 2 nd and 3 rd shift Transportation Bonus $10.00 per week if no call in or tardy for that week for all non-exempt employees Turnover Due to heavy agency use, the Four Courts turnover is not an accurate reflection of total nursing staff. Refer to enclosed YTD turnover report by department. Agency Shift Utilization 1.6 LPN/RN per day 3.7 C.N.A. per day YTD spend (Jan-Sept) is $347, Refer to enclosed detailed monthly report by discipline by agency. xxx Operational Analysis 73

54 Exhibit 13: Medicaid CMI Overview Kentucky Medicaid Program Overview The Kentucky Medicaid program makes reimbursement to nursing facilities for routine services they provide plus ancillaries. A nursing facility s Medicaid routine per diem rate is established by Medicaid based on a prospective Case-Mix assessment reimbursement system. This is based on MDS 2.0 data which utilizes the RUG III 34 group model. MDS data is extracted from NF s MDS on the last day of each quarter. Each facility has to file an annual cost report with the state. These are due 5 months after the fiscal year-end. Ancillary services are the only items on the Medicaid cost reports for which the state issues a settlement Standard Per Diem Rate Setting Methodology 1. Rates are set to reflect differential in wages, property values and cost of operations in rural and urban designated areas. Effective July 1, 2003 the Department of Medicaid services in Kentucky begun utilizing the Budget s Metropolitan Statistical Area (MSA) data to classify a nursing facility as being in an Urban or Rural Area. 2. The Standard rate is a combination of: a. Total Case-mix adjusted component ( Direct care personnel, nonpersonnel operating costs ) b. Total non-case mix adjusted component ( Administration, Non-direct personnel, food, professional services, consultation) c. Non-capital facility d. Capital component ( Bed value= NF depreciated replacement cost / total NF licensed beds) limited at $40,000 per bed e. Inflationary adjustment for Standard price 3. The standard price is adjusted every July I and rebased every 4 years thereafter. Rates are issued quarterly on the 1 st day of a fiscal quarter (January 1 st, April 1 st, July 1 st, October 1 st ) 4. The Medicaid rate comprises of 2 main components a. Non- facility Specific components- applied uniformly to either Urban or Rural facilities which include: 1. Direct Care Cost, Operating cost, Administration cost, nondirect personnel cost, benefits, and Non-facility capital component rate b. Facility Specific components which are unique to a facility include: 1. Case-mix index, Capital rate component, Inflationary adjustment Medicaid CMI Impact xxx Operational Analysis 80

55 Under the Kentucky CMI system the Medicare Part B therapy component, Restorative nursing program, and Depression indicators as identified through the MDS process assist, when utilized properly, will classify residents into the Medicaid RUG categories. Therefore, having a therapy department and restorative program that are working to improve the functional declines of the resident populations on their caseload will increase the overall acuity levels and correspondingly the case-mix scores of the residents participating in these programs. In order to capture the benefit of these programs the appropriate systems must be in place between nursing, therapy, and the MDS team. In the assessment of the xxx Part B / Decline in Function program, it was identified that improving the percentage of participation to the Signature benchmark would assist in increasing the overall CMI score for the facility and in turn the revenue associated with these programs. The following tables identifies the past twelve months trends related to CMI, Medicare Part B / Decline in Function caseload, Restorative program, and Depression indicators and the corresponding CMI and revenue impact associated. Medicaid CMI Analysis Rate Change related to Medicare Part B CMI EFFECTIVE DATE ACTUAL CURRENT CMI ACTUAL # MEDICAID RESIDENTS ACTUAL # MEDICAID ON REHAB ACTUAL % MCD ON REHAB* ADC VARIANCE TO BENCHMARK CMI Increase Adjusted CMI Rate Estimated Increase to Rate Additional Annualized Revenue 20% 10/1/ % $6.84 $56,103 Rate Change related to Restorative Indicators CMI EFFECTIVE DATE ACTUAL CURRENT CMI ACTUAL # MEDICAID RESIDENTS # MEDICAID ON RESTORATIVE % MCD ON RESTORATIVE ADC VARIANCE TO BENCHMARK CMI Increase Adjusted CMI Rate Estimated Increase to Rate Additional Annualized Revenue 15% 10/1/ % $0.83 $6,847 Rate Change related to Depression Indicators CMI EFFECTIVE DATE ACTUAL CURRENT CMI ACTUAL # MEDICAID RESIDENTS ACTUAL # MEDICAID W/DEPRESSION ACTUAL % MCD W/DEPRESSION ADC VARIANCE TO BENCHMARK CMI Increase Adjusted CMI Rate Estimated Increase to Rate Additional Annualized Revenue 30% 10/1/ % $1.91 $15,690 Annualized Total Rehab Part B, Restorative, & Depression $78,640 * Actual % Medicaid on Rehab reflects only the Medicaid population, does not include Private or other payers eligible, the facility has trended at 11% total Medicare Part B therapy caseload. xxx Operational Analysis 81

56 Exhibit 14: Marketing Analysis xxx Senior Center (Louisville, KY) 97 Beds xxx Senior Center is a 71-bed Skilled Nursing Facility (SNF) with a 16 bed Personal Care (PC) unit, and 10-bed Assisted Living Unit (ALF) located in the xxx neighborhood of Louisville, Kentucky (Jefferson County). The population of Jefferson County is projected at 701,500 for census year 2006 with 13.3% of the population over 65 years of age and currently is growing at 1.1% annually. Four Courts is one of forty-five (45) long-term care facility s in Jefferson County and is located in the Kentuckiana Area Development District which averages 88.1% Nursing Facility (NF) occupancy rates over the past three (3) years with a 2006 occupancy rate of 89.93%. Four Courts averaged 91.2% occupancy rates for the twelve months ending September 30, 2007 for their SNF beds. For this same timeframe, Medicaid census accounted for 45.6% (10,775) of resident days, Private pay accounted for 26.6% (6,285) of resident days, and Medicare Part A census accounted for 18.2% (4,307) of resident days for the SNF beds. The remaining 9.6% (2,275) of resident days consists of managed care, hospice and charitable care days. HQM currently operates three facilities within 25 miles of the xxx facility; Meadows East Care & Rehabilitation Center in Louisville, Meadows South Care & Rehabilitation Center in Louisville, and Valley View Health Care & Rehabilitation Center Taylorsville, KY. There are approximately 39 facilities within 10 miles, in the immediate Louisville market, that compete with Four Courts. Below is a table listing the facility, number of beds, occupancy percentage and percentage of Medicare residents: Thru December 2006 Facility Licensed Beds % Occupancy % Medicare Nazareth Home % 7.4% Twinbrook Nursing Home % 12.8% Brownsboro Hills Nursing Home % 16.1% Golden Living Center Mt. Holly % 15.1% Home of the Innocents % 0.0% Marian House Ursuline Sisters % 6.9% Sacred Heart Village % 19.3% xxx Operational Analysis 82

57 Bashford East Health Care % 13.2% Klondike Manor Nursing & Rehab % 12.8% Westminster Terrace % 14.1% Golden Living Center St. Matthews % 14.2% Little Sisters of the Poor % 4.8% Parkway Medical Center % 14.6% Christopher East Health Care % 30.9% Golden Living Center Hillcreek % 15.7% Harborside Healthcare Louisville Rehab & Nursing % 11.9% Hurstbourne Care Center at Stony Brook % 32.1% Meadows East Care & Rehab % 20.7% Christian Health Center % 15.1% Episcopal Church Home % 5.0% Golden Living Center- Camelot % 9.4% James S. Taylor Memorial Home % 10.1% Jefferson Manor % 19.6% Jefferson Place % 43.3% Northfield Centre for Health & Rehab % 14.9% Treyton Oak Towers % 18.4% Franciscan Health Care Center % 15.6% Regency Rehab & Nursing Center % 16.0% Wesley Manor Nursing Center % 5.1% Meadows South Care & Rehab % 29.1% Masonic Home of Louisville % 12.6% Meadowview Health & Rehab % 10.1% Baptist Home East % 19.5% The Forum at Brookside % 17.1% xxx Operational Analysis 83

58 Georgetown Manor % 16.1% Rockford Manor % 8.9% Summerfield Health & Rehab Center % 15.9% Good Samaritan Center % 10.4% Britthaven of Prospect % 6.9% xxx uses a Quadrant Marketing report to help the facility and home office marketers understand the facility s competitive environment and to understand referral trends. This report is completed on a regular basis and would contain referral information in order to recognize referral trends. The buildings labeled number 18 and number 31 represent sister facilities (Meadows East & Meadows South, respectively) located within the ten (10) mile radius indicated in the quadrant map below and show the current local xxx footprint with regards to xxx. xxx Operational Analysis 84