13. COMMITMENTS AND CONTINGENCIES

12 Months Ended

Mar. 31, 2013

Commitments And Contingencies

NOTE 13 - COMMITMENTS AND CONTINGENCIES

NOTE 13 - COMMITMENTS AND CONTINGENCIES

INFORMATION TECHNOLOGY SYSTEMS – On July 1, 2011, the Company entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade the Company’s information technology systems.

Under the agreements, McKesson will provide the Company with a variety of services, including new software implementation and education/training services for the Company’s personnel, software maintenance services and professional services related to movement and migration of data from legacy systems.  McKesson will also furnish to the Company and maintain new hardware to accommodate the upgraded software and systems.  The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance.  The Company has entered into the arrangement to enhance its clinical information systems and upgrade its billing and revenue management information systems.

The agreements will initially run for a period of five years, and the recurring services may be renewed by the Company for successive periods.  The agreements do not provide that they may be terminated by the Company prior to the initial expiration date.  The agreements provide for one-time fees and recurring fees which aggregate a total of $22.0 million.  Approximately 60% of the fees are for one-time charges, while the balance is for recurring services. During the year ended March 31, 2013 the Company completed conversion of one of its facilities to the McKesson system and is continuing to convert the remaining three facilities during the first quarter of the Company’s fiscal year 2014. The Company is also continuing to test and develop system applications where necessary.

OPERATING LEASES AND LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, the Company and PCHI entered into a Second Amendment to Amended and Restated Triple Net Hospital Building Lease (the “2010 Lease Amendment”).  Under the 2010 Lease Amendment, the annual base rent to be paid by the Company to PCHI was increased from $5.4 million to $7.3 million. The base rent is subject to an annual Consumer Price Index increase on January 1 of each year; such increase shall not be less than 2% or more than 6% per year. The annual base rent is currently $7.8 million. If PCHI refinances the $47.277 million term loan, the annual base rent will increase to $8.3 million. This lease commitment with PCHI is eliminated in consolidation.

Following is a schedule of the Company's future minimum operating lease payments, excluding the long term lease commitment with PCHI, that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2013:

Year ended March 31,
2014	$	1,620
2015		1,335
2016		1,253
2017		1,253
2018		1,253
Thereafter		11,627
Total	$	18,341

Total rental expense (excluding PCHI rent) for the years ended March 31, 2013 and 2012 was $5.3 million and $4.8 million, respectively. The Company received sublease rental income in relation to certain leases of approximately $563 and $552 for the years ended March 31, 2013 and 2012, respectively.

CAPITAL LEASES - In connection with the Acquisition, the Company also assumed the leases for the Chapman facility, which include buildings and land with terms that were extended concurrently with the assignment of the leases to December 31, 2023. The Company leases equipment under capital leases expiring at various dates through 2017. Assets under capital leases with a net book value of $7.1 million and $6.2 million are included in the accompanying consolidated balance sheets as of March 31, 2013 and 2012, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

The following is a schedule of future minimum lease payments under the capitalized leases with the present value of the minimum lease payments as of March 31, 2013:

Year ended March 31,
2014	$	1,873
2015		1,899
2016		1,750
2017		1,276
2018		932
Thereafter		4,279
Total minimum lease payments		12,009
Less amount representing interest (weighted average interest rate of 10.2%)		(4,119	)
Net present value of net minimum lease payments		7,890
Less current portion		(1,101	)
Noncurrent portion	$	6,789

INSURANCE – The Company accrues for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The Company has purchased as primary coverage a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported (“IBNR”) claims, are accrued based upon projections and are discounted to their net present value using an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of March 31, 2013 and 2012, the Company had accrued $10.6 million and $11.5 million, respectively, which is comprised of $5.5 million and $4.5 million, respectively, in incurred and reported claims, along with $5.1 million and $7.0 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.1 million and $3.0 million are included in other prepaid expenses and current assets as of March 31, 2013 and 2012, respectively.

The Company has also purchased occurrence coverage insurance to fund our obligations under our workers compensation program. The Company has a "paid loss plan" policy, under which the carrier pays all workers compensation claims, with no deductible or reimbursement required of us. The Company accrues for estimated workers compensation claims, to the extent not covered by insurance, when they are probable and reasonably estimable. The ultimate costs related to this program include expenses for deductible amounts associated with claims incurred and reported in addition to an accrual for the estimated expenses incurred in connection with IBNR claims. Claims are accrued based upon projections and are discounted to their net present value using an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of March 31, 2013 and 2012, the Company had accrued $500 and $673, respectively, comprised of $200 and $338, respectively, in incurred and reported claims, along with $300 and $335, respectively, in estimated IBNR.

In addition, the Company has a self-insured health benefits plan for our employees. As a result, the Company has established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. Our IBNR accruals at March 31, 2013 and 2012 were based upon projections. The Company determines the adequacy of this accrual by evaluating our limited historical experience and trends related to both health insurance claims and payments, information provided by our insurance broker and third party administrator, and industry experience and trends. The accrual is an estimate and is subject to change. Such change could be material to our consolidated financial statements. As of March 31, 2013 and 2012, the Company had accrued $1.9 million and $2.2 million, respectively, in estimated IBNR.

The Company has also purchased umbrella liability policies with aggregate limits of $25 million. The umbrella policies provide coverage in excess of the primary layer and applicable retentions for insured liability risks such as general and professional liability, auto liability, and workers compensation (employers liability).

As of March 31, 2013, the Company finances various insurance policies at an interest rate of 4.4% per annum. The Company incurred finance charges relating to such policies of $32.2 and $32.9 for the years ended March 31, 2013 and 2012, respectively. As of March 31, 2013 and 2012, the accompanying consolidated balance sheets include the following balances relating to the financed insurance policies.

	March 31, 2013		March 31, 2012
Prepaid insurance	$	115	$	366
Accrued insurance premiums	$	69	$	60
(Included in other current liabilities)

PURCHASE COMMITMENTS - The Company has commitments with two unrelated party service provider vendors extending over one year.  Commitments total $3.8 million and $1.0 million for the years ending March 31, 2014 and 2015, respectively.

UNION CONTRACTS - Approximately 37% of the Company’s employees are represented by labor unions as of March 31, 2013.  The CNA Agreement and the SEIU Agreement both expire on August 31, 2014. The agreements have “no strike” provisions and compensation caps which provide the Company with long term compensation and workforce stability.   

For both unions, all prior grievances regarding retiree medical benefits, the administration of pay adjustments and pay practices, changes in medical benefits and several wrongful terminations have been resolved in the form of settlement agreements.

CLAIMS AND LAWSUITS – The Company and the Hospitals are subject to various legal proceedings, most of which relate to routine matters incidental to operations. The results of these claims cannot be predicted, and it is possible that the ultimate resolution of these matters, individually or in the aggregate, may have a material adverse effect on the Company's business (both in the near and long term), financial position, results of operations, or cash flows. Although the Company defends itself vigorously against claims and lawsuits and cooperates with investigations, these matters (1) could require payment of substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under insurance policies where coverage applies and is available, (2) cause substantial expenses to be incurred, (3) require significant time and attention from the Company's management, and (4) could cause the Company to close or sell the Hospitals or otherwise modify the way its business is conducted. The Company accrues for claims and lawsuits when an unfavorable outcome is probable and the amount is reasonably estimable.

On June 5, 2009, a potential class action lawsuit was filed against the Company by Alexandra Avery.  Ms. Avery purports to represent all 12-hourly employees and the complaint alleges causes of action for restitution of unpaid wages as a result of unfair business practices, injunctive relief for unfair business practices, failure to pay overtime wages, and penalties associated therewith. On December 23, 2009, the Company filed an answer to the complaint, generally denying all of the plaintiff's allegations.  On January 25, 2010, a potential class action lawsuit was filed against the Company by Julie Ross.  Ms. Ross purports to represent all similarly-situated employees and the complaint alleges causes of action for violation of the California Labor Code and unfair competition law.  On September 3, 2010 the plaintiffs in both the Avery and Ross actions filed a consolidated complaint (the "Consolidated Complaint") that alleges the causes of action found in the initial Ross complaint.  On October 12, 2010, the Company filed an answer to the Consolidated Complaint, which generally denied all allegations.  On July 18, 2011, the Company filed a motion to compel arbitration of the matter, which was denied on October 21, 2011.  The Company appealed this decision and the Court of Appeal decided against the Company on June 26, 2013. The Company intends to vigorously defend itself in connection with the claims in the Consolidated Complaint.   Discovery is ongoing and at this stage in the proceedings, the Company is unable to determine the cost of defending this lawsuit or the impact, if any, this action may have on its results of operations.

On February 13, 2013, the jury in Fitzgibbons v. IHHI, et. al., awarded $500,000 in punitive damages against the Company, bringing the jury’s total verdict in this lawsuit for intentional infliction of emotional distress to $5.7 million. The Company thereafter filed two post-trial motions, one seeking a new trial and another seeking a judgment in the Company’s favor notwithstanding the verdict. On April 30, 2013, the trial judge granted the Company’s motion for a judgment notwithstanding the verdict and in the alternative granted the Company’s motion for a new trial. The same day the trial judge signed a judgment in the Company’s favor by which Dr. Fitzgibbons took nothing by way of his complaint and the Company was entitled to recover its costs of suit from Dr. Fitzgibbons. Dr. Fitzgibbons filed a notice of appeal of the judgment in the Company’s favor on May 6, 2013. The Company estimates the appeal will take at least one year to resolve. Due to these favorable rulings, the Company reversed the $5.2 million contingent loss that was reserved on its financial statements as of December 31, 2012.