10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to _____________

Commission File Number 0-23511

______________________________________________________________________________________________

INTEGRATED HEALTHCARE HOLDINGS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA	87-0573331
(STATE OR OTHER JURISDICTION OF	(I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1301 NORTH TUSTIN AVENUE
SANTA ANA, CALIFORNIA	92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

(714) 953-3503 (Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

______________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T   No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T   No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer £	Accelerated filer  £
Non-accelerated filer  £	Smaller reporting company S

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No S

There were 255,307,262 shares outstanding of the registrant's common stock as of August 7, 2013.

1

INTEGRATED HEALTHCARE HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of June 30 and March 31, 2013 – (unaudited)	3
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2013 and 2012 – (unaudited)	4
	Condensed Consolidated Statement of Stockholders’ Equity (Deficiency) for the three months ended June 30, 2013 – (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2013 and 2012 – (unaudited)	6
	Notes to Condensed Consolidated Financial Statements – (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 6.	Exhibits	31
	Signatures	32

2

PART I - FINANCIAL INFORMATION

Item 1.  Financial statements 

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in 000's, except par value)

(unaudited)

	June 30,			March 31,
	2013			2013
ASSETS
Current assets:
Cash and cash equivalents	$	38,374		$	3,545
Restricted cash		10			13
Accounts receivable, net of allowance for doubtful accounts of $25,671 and $21,143, respectively		61,953			62,821
Inventories of supplies		6,751			6,738
Due from governmental payers		3,583			5,882
Hospital quality assurance fees receivable		70,074			7,690
Prepaid insurance		1,941			115
Deferred tax assets, net		–			6,328
Other prepaid expenses and current assets		7,460			9,208
Total current assets		190,146			102,340
Property and equipment, net		63,551			63,988
Deferred tax assets, net		–			380
Total assets	$	253,697		$	166,708
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Revolving line of credit, net of discount	$	10,328		$	29,527
Accounts payable		59,620			62,515
Accrued compensation and benefits		18,225			19,634
Accrued insurance retentions		13,888			12,938
Hospital quality assurance fees payable		24,358			7,226
Due to governmental payers		463			179
Income taxes payable		41,599			2,869
Other current liabilities		5,884			4,111
Total current liabilities		174,365			138,999
Debt, noncurrent, net of discount		45,683			45,530
Warrant liability, noncurrent		11,922			5,276
Capital lease obligations, net of current portion of $1,162 and $1,101, respectively		6,464			6,789
Total liabilities		238,434			196,594
Commitments and contingencies
Stockholders' equity (deficiency):
Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency):
Common stock, $0.001 par value; 800,000 shares authorized; 255,307 shares issued and outstanding		255			255
Additional paid in capital		62,911			62,911
Accumulated deficit		(41,962	)		(87,365	)
Total Integrated Healthcare Holdings, Inc. stockholders' equity (deficiency)		21,204			(24,199	)
Noncontrolling interests		(5,941	)		(5,687	)
Total stockholders' equity (deficiency)		15,263			(29,886	)
Total liabilities and stockholders' equity (deficiency)	$	253,697		$	166,708

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  

3

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in 000's, except per share amounts)

(unaudited)

	Three months ended June 30,
	2013			2012
Patient service revenues (net of contractual allowances and discounts)	$	237,519		$	90,747
Provision for bad debts		(14,365	)		(9,927	)
Net patient service revenues		223,154			80,820
Other operating revenues		808			845
		223,962			81,665
Operating expenses:
Salaries and benefits		56,063			52,991
Supplies		13,949			14,051
Other operating expenses		51,228			15,043
Depreciation and amortization		2,117			959
		123,357			83,044
Operating income (loss)		100,605			(1,379	)
Other income (expense):
Interest expense, net		(2,807	)		(2,433	)
Gain (loss) on warrants		(6,646	)		731
		(9,453	)		(1,702	)
Income (loss) before income tax provision		91,152			(3,081	)
Income tax provision		45,452			44
Net income (loss)		45,700			(3,125	)
Net income attributable to noncontrolling interests (Note 9)		(297	)		(349	)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$	45,403		$	(3,474	)
Per Share Data (Note 8):
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic	$	0.18		$	(0.01	)
Diluted	$	0.18		$	(0.01	)
Weighted average shares outstanding
Basic		255,307			255,307
Diluted		257,159			255,307

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  

4

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

(amounts in 000's)

(unaudited)

	Integrated Healthcare Holdings, Inc. Stockholders
					Additional
	Common Stock				Paid-in		Accumulated			Noncontrolling
	Shares		Amount		Capital		Deficit			Interests			Total
Balance, March 31, 2013		255,307	$	255	$	62,911	$	(87,365	)	$	(5,687	)	$	(29,886	)
Net income		–		–		–		45,403			297			45,700
Noncontrolling interests distributions		–		–		–		–			(551	)		(551	)
Balance, June 30, 2013		255,307	$	255	$	62,911	$	(41,962	)	$	(5,941	)	$	15,263

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

INTEGRATED HEALTHCARE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in 000's)

(unaudited)

	Three months ended June 30,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	45,700		$	(3,125	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		2,117			959
Provision for bad debts		14,365			9,927
Amortization of debt discount		193			38
Loss (gain) on warrants		6,646			(731	)
Deferred tax assets, net		6,708			–
Changes in operating assets and liabilities:
Accounts receivable		(13,497	)		(8,935	)
Inventories of supplies		(13	)		(116	)
Due from governmental payers		2,299			3,086
Hospital quality assurance fees receivable		(62,384	)		2,436
Prepaid income taxes		–			665
Prepaid insurance, other prepaid expenses and current assets, and other assets		(78	)		(2,604	)
Accounts payable		(3,790	)		(2,411	)
Accrued compensation and benefits		(1,409	)		(1,709	)
Hospital quality assurance fees payable		17,132			–
Due to governmental payers		284			72
Income taxes payable		38,730			–
Accrued insurance retentions and other current liabilities		2,173			608
Net cash provided by (used in) operating activities		55,176			(1,840	)
Cash flows from investing activities:
Decrease in restricted cash		3			(17	)
Additions to property and equipment		(296	)		(601	)
Net cash used in investing activities		(293	)		(618	)
Cash flows from financing activities:
Proceeds from (paydown on) revolving line of credit, net		(19,239	)		–
Noncontrolling interests distributions		(551	)		(300	)
Payments on capital lease obligations		(264	)		(158	)
Net cash used in financing activities		(20,054	)		(458	)
Net increase (decrease) in cash and cash equivalents		34,829			(2,916	)
Cash and cash equivalents, beginning of period		3,545			11,829
Cash and cash equivalents, end of period	$	38,374		$	8,913
Supplemental information:
Cash paid for interest	$	2,417		$	2,282
Cash paid for income taxes	$	–		$	–

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.   

6

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three months ended June 30, 2013 are not necessarily indicative of the results for the entire 2014 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013 filed with the SEC on June 28, 2013.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and the Company is the primary beneficiary and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values). 

LIQUIDITY - As of June 30, 2013, the Company had total stockholders’ equity of $15.3 million and working capital of $15.8 million.  For the three months ended June 30, 2013, the Company had net income of $45.4 million. At June 30, 2013, the Company had $24.2 million in additional availability under its revolving credit facility (Note 3). Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses (Notes 11 and 14). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION - Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net loss of the Company.

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 79% and 54% of the patient service revenues for the three months ended June 30, 2013 and 2012, respectively. No other payers represent a significant concentration of the Company's patient service revenues.

The Company receives all of its inpatient service revenues from operations in Orange County, California. The economic conditions of this service area could affect the ability of patients and third-party payers to reimburse the Company for services through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

7

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

USE OF ESTIMATES - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Three months ended June 30,
	2013		2012
Medicare	$	12,293	$	14,762
Medicaid		156,401		8,784
Managed care		49,155		51,726
Indemnity, self-pay and other		19,670		15,475
	$	237,519	$	90,747

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement payables of $463 and $179 as of June 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $5.6 million and $4.7 million during the three months ended June 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended June 30, 2013 and 2012, was $3.3 million and $1.8 million, respectively. As of June 30 and March 31, 2013, estimated DSH receivables were $3.6 million and $5.9 million, respectively, which are reflected as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $19.8 million and $23.6 million for the three months ended June 30, 2013 and 2012, respectively), are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. The Hospitals estimate the discounts for contractual allowances utilizing billing data on an individual patient basis. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

8

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program ("MEP") screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs. The estimated costs of charity care (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended June 30, 2013 and 2012 were approximately $2.3 million and $2.1 million, respectively.

The Company is not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying unaudited condensed consolidated financial statements.

PROVISION FOR BAD DEBTS - The Company provides for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

The Company's policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.

LETTER OF CREDIT – At June 30 and March 31, 2013, the Company had an outstanding letter of credit totaling $761. This letter of credit correspondingly reduces the Company’s borrowing availability under its revolving line of credit (Note 3).

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from/to government payers as of June 30 and March 31, 2013:

9

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

	June 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	87,624		$	83,964
Allowance for doubtful accounts		(25,671	)		(21,143	)
Accounts receivable, net	$	61,953		$	62,821
Due from government payers:
DSH	$	3,583		$	5,882
	$	3,583		$	5,882
Due to government payers:
Settlement payables	$	463		$	179
	$	463		$	179

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.5% and 6.5% as of June 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.4% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 15.4% and 20.3%, respectively, of managed care patient accounts receivable.

Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending under the MEP, with appropriate contractual allowances recorded. If the patient does not qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for bad debts. Reclassifications of pending Medicaid accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for bad debts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of June 30 and March 31, 2013 based on historical collections experience.

INVENTORIES OF SUPPLIES - Inventories of supplies are valued at the lower of weighted average cost or market.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and any impairment write-downs related to assets held and used. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Capital leases are recorded at the beginning of the lease term as property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of the lease term or their estimated useful life, where applicable.

The Company uses the straight-line method of depreciation for buildings and improvements, and equipment over their estimated useful lives of 25 years, and 3 to 15 years, respectively.

LONG-LIVED ASSETS - The Company evaluates its long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company to be reasonable and supportable. These assumptions take into account patient volumes, changes in payer mix, revenue, and expense growth rates and changes in legislation and other payer payment patterns.

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

10

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 and February 2013 (Note 4).

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at June 30, 2013	$	11,922		–		–	$	11,922
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,646
Balance at June 30, 2013	$	11,922

Additional quantitative information about Level 3 fair value measurements is discussed in Note 4.

WARRANTS - The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The Company has concluded that the warrants should be classified as liabilities as the exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its net deferred tax since they did not meet the more-likely-than-not threshold.

11

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

SEGMENT REPORTING - The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net patient service revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. There are similarities in the region's economic characteristics and the nature of the Hospitals' operations, the regulatory environment in which they operate and the manner in which they are managed. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	June 30,			March 31,
	2013			2013
Buildings	$	36,536		$	36,536
Land and improvements		13,523			13,523
Equipment		30,204			28,534
Assets under capital leases		13,264			13,267
		93,527			91,860
Less accumulated depreciation		(29,976	)		(27,872	)
Property and equipment, net	$	63,551		$	63,988

Accumulated depreciation on assets under capital leases as of June 30 and March 31, 2013 was $6.5 million and $6.2 million, respectively.

The Hospitals are located in an area near active and substantial earthquake faults. The Hospitals carry earthquake insurance with a policy limit of $50.0 million. A significant earthquake could result in material damage and temporary or permanent cessation of operations at one or more of the Hospitals.

The State of California has imposed hospital seismic safety requirements. Under these requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has a seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. The Company does not have an estimate of the cost to remediate the seismic requirements for the administrative building as of June 30, 2013.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on the Company's cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

12

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

NOTE 3 - DEBT

As of June 30, 2013, the Company had the following Credit Agreements:

— A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement by and among the Company, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha Realty, LLC, as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at June 30, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of June 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

— A $35.0 million Revolving Credit Agreement by and among the Company and MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at June 30, 2013) and an unused commitment fee of 0.5% per year ($10.8 million outstanding balance at June 30, 2013).  For purposes of calculating interest, all payments the Company makes on the Revolving Credit Agreement are subject to a five business day clearance period.  As of June 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, 2016. At June 30, 2013, the Company had $24.2 million in additional availability under this facility.

The Company's outstanding debt consists of the following:

	June 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	10,761		$	30,000
Discount		(433	)		(473	)
	$	10,328		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,594	)		(1,747	)
	$	45,683		$	45,530

NOTE 4 - COMMON STOCK WARRANTS

A summary of the warrants outstanding at June 30 and March 31, 2013 is presented as follows.

	Shares issuable under warrants		Weighted- average exercise price		Expiration date
Outstanding, June 30 and March 31, 2013		405,000	$	0.07		April 13, 2016

On April 13, 2010 the Company issued three-year warrants (the “Omnibus Warrants”) to purchase its common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

In addition, on April 13, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from its prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, the Company entered into the following transactions involving warrants:

13

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

The Company entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of the Company’s common stock at an exercise price of $0.07 per share. The Company repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, the Company issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, the Company extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

The Company assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the “IHHI Warrants.” As of June 30, 2013, the fair value of the IHHI Warrants was $11.9 million.

The gain (loss) related to the change in fair value of the Company’s outstanding warrants for the three months ended June 30, 2013 and 2012 was $(6.6) million and $.07 million, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which it believes is the appropriate valuation method under the circumstances. Since the Company’s stock is thinly traded, the expected volatility is based on an analysis of its stock and the stock of eight other publicly traded companies that own hospitals.

The risk-free interest rate is based on the average yield on U.S. Treasury notes with maturity commensurate with the terms of the warrants. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.  The assumptions used in the Black-Scholes valuation model are as follows:

	June 30, 2013		March 31, 2013
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.6%		0.4%
Expected volatility		39.8%		39.9%
Expected term (in years)		2.80		3.05

NOTE 5 - INCOME TAXES

The utilization of net operating loss (“NOL”) and credit carryforwards is limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. Section 382 of the IRC of 1986 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. In fiscal year 2009, the Company entered into the amended purchase agreement which resulted in a change in control. The Company conducted an analysis and determined that it is subject to significant IRC Section 382 limitations. For both Federal and State tax purposes, the Company's utilization of NOL and credit carryforwards is subject to significant IRC Section 382 limitations. The Company evaluates its ability to utilize the net operating losses each period with regard to the limitations imposed under IRC 382 and also considering the continuing expiration of statutes of limitation for prior years; and in the prior year determined that a portion of the federal and state net operating losses were no longer realizable, and removed from the schedule of deferreds those net operating losses in excess of the IRC 382 limitation and also considering prior years statutes now closed.

The difference between the reported income tax provision and the amount computed by multiplying income (loss) before income tax provision in the accompanying unaudited condensed consolidated statements of operations for the three months ended June 30, 2013 and 2012 by the statutory federal income tax rate primarily relates to the impact of the valuation allowance reserving certain net deferred assets, permanently nondeductible expenses, state and local income taxes, and variable interest entity.

14

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

The application of FASB Interpretation Number 18 requires the Company to compute the interim period income tax provision (benefit) by applying the estimated annual effective tax rate to the loss from continuing operations for the three months ended June 30, 2013, which resulted in the recognition of a tax expense for the three months ended June 30, 2013.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at June 30, 2013 could be realized and, based on this analysis, the Company concluded that there was not sufficient positive evidence to support further realization of its net deferred tax assets, and therefore, as of June 30, 2013, will maintain a 100% valuation allowance against its net deferred assets.

PCHI TAX STATUS – PCHI is a limited liability company. PCHI's taxable income or loss will flow through to its owners and be their separate responsibility. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any amounts for the income tax expense or benefit, or liabilities related to PCHI's income or loss.

NOTE 6 - STOCK INCENTIVE PLAN

The Company's 2006 Stock Incentive Plan (the "Plan"), which is shareholder-approved, permits the grant of share options to its employees and board members for up to a maximum aggregate of 12.0 million shares of common stock. In addition, as of the first business day of each calendar year in the period 2007 through 2015, the maximum aggregate number of shares shall be increased by a number equal to one percent of the number of shares of common stock of the Company outstanding on December 31 of the immediately preceding calendar year. Accordingly, as of June 30, 2013, the maximum aggregate number of shares under the Plan was 26.1 million. The Company believes that such awards better align the interests of its employees with those of its shareholders. In accordance with the Plan, incentive stock options, nonqualified stock options, and performance based compensation awards may not be granted at less than 100 percent of the estimated fair market value of the common stock on the date of grant. Incentive stock options granted to a person owning more than 10 percent of the voting power of all classes of stock of the Company may not be issued at less than 110 percent of the fair market value of the stock on the date of grant. Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.

When the measurement date is certain, the fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model. Since there is limited historical data with respect to both pre-vesting forfeiture and post-vesting termination, the expected life of the options was determined utilizing the simplified method, whereby the expected term is calculated by taking the sum of the vesting term plus the original contractual term and dividing that quantity by two.

No options were granted or exercised during the three months ended June 30, 2013 and 2012. All outstanding options were fully vested as of June 30 and March 31, 2013.

A summary of stock option activity for the three months ended June 30, 2013 is presented as follows.

	Shares			Weighted- average exercise price		Weighted- average grant date fair value	Weighted- average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, March 31, 2013	7,595		$	0.18
Granted	–		$	–	$	–
Exercised	–		$	–
Forfeited or expired	(10	)	$	0.26
Outstanding, June 30, 2013	7,585		$	0.18			1.4	$	–
Exercisable at June 30, 2013	7,585		$	0.18			1.4	$	–

15

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

NOTE 7 - RETIREMENT PLAN

The Company has a 401(k) plan for its employees. All employees with 90 days of service are eligible to participate, unless they are covered by a collective bargaining agreement which precludes coverage. The Company matches employee contributions up to 3% of the employee's compensation, subject to IRS limits. During the three months ended June 30, 2013 and 2012, the Company incurred expenses of $750 and $804, respectively. These costs are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At June 30 and March 31, 2013, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $1.7 million and $4.1 million, respectively, in accrued employer contributions.

NOTE 8 - INCOME (LOSS) PER SHARE

Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds.

Since the Company incurred a loss for the three months ended June 30, 2012, the potential shares of common stock consisting of approximately 413 million shares issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive.

Income per share for the three months ended June 30, 2013 was computed as shown below. Stock options and warrants aggregating approximately 411 million shares were not included in the diluted calculation since they were anti-dilutive.

	Three months ended June 30,
	2013		2012
Numerator:
Net income attributable to
Integrated Healthcare Holdings, Inc.	$	45,403	$	(3,474	)
Denominator:
Weighted average common shares		255,307		255,307
Dilutive options		1,852		–
Denominator for diluted calculation		257,159		255,307
Income per share - basic	$	0.18	$	(0.01	)
Income per share - diluted	$	0.18	$	(0.01	)

NOTE 9 - VARIABLE INTEREST ENTITY

Concurrent with the close of the Acquisition, PCHI simultaneously acquired title to substantially all of the real property acquired by the Company in the Acquisition. The Company received $5.0 million and PCHI guaranteed the Company's $47.277 million term loan. The Company remains primarily liable as the borrower under the $47.277 million term loan notwithstanding its guarantee by PCHI. The $47.277 million term loan is cross-collateralized by substantially all of the Company's assets and all of the real property of the Hospitals. All of the Company's operating activities are directly affected by the real property that was sold to PCHI, which is a related party entity that is affiliated with the Company through common ownership and control. As of June 30, 2013, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri (majority stockholder in the Company).

The Company entered into a lease agreement dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI (Note 13). The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all the properties. However, until PCHI refinances the related $47.277 million term loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company offsets, against its rental payments owed to PCHI, interest payments that it makes on the related $47.277 million term loan. Lease payments to PCHI and offsetting interest payments are eliminated in consolidation.

16

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

GAAP defines variable interest entities (“VIE”) as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as a VIE, the guidance sets forth a model to a primary beneficiary based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stands to gain from a majority of its expected returns and has the power to direct activities of the VIE that impacts economic performance. The primary beneficiary of a VIE should consolidate the VIE.

The Company determined that it provides the majority of financial support to PCHI through various sources including lease payments, remaining primarily liable under the $47.277 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $47.277 million term loan. The Company concluded that PCHI is a VIE and it is the primary beneficiary. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

PCHI's assets, liabilities, and deficiency are set forth below.

	June 30, 2013			March 31, 2013
Cash	$	252		$	147
Property, net		39,374			39,696
Other		119			49
Total assets	$	39,745		$	39,892
Debt ($47,277, net of discount) (as guarantor)	$	45,683		$	45,530
Other		442			488
Total liabilities		46,125			46,018
Deficiency		(6,380	)		(6,126	)
Total liabilities and accumulated deficit	$	39,745		$	39,892

As noted above, PCHI is a guarantor on the $47.277 million term loan should the Company not be able to perform.  PCHI's total liabilities represent the Company's maximum exposure to loss. Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Notes 2 and 13).

PCHI rental income and the Company’s related rental expense of $2.0 million and $2.0 million were eliminated upon consolidation for the three months ended June 30, 2013 and 2012, respectively.

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company leases substantially all of the real property of the acquired Hospitals from PCHI which is owned by various physician investors and Ganesha, which is managed by Dr. Chaudhuri. As of June 30 and March 31, 2013, Dr. Chaudhuri and Mr. Thomas are the beneficial holders of an aggregate of 447.5 million shares of the outstanding stock of the Company. As described in Note 9, PCHI is a variable interest entity and the Company is the primary beneficiary, accordingly, the Company has consolidated the financial statements of PCHI in the accompanying unaudited condensed consolidated financial statements.

NOTE 11 - HOSPITAL QUALITY ASSURANCE FEES (“QAF”)

In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”).  In February 2011, CMS gave final approval for the 2010 QAF. During fiscal year 2011, the Company recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF.

17

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

In December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”).  Accordingly, for the year ended March 31, 2012 the Company recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 QAF.

In June 2012, CMS conditionally approved the extension of the QAF for the thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”).  In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012.  As a result, during the year ended March 31, 2013, the Company recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF for the periods from July 1, 2011 through March 31, 2013.

In May 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2011 through June 30, 2012. On June 26, 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2012 through June 30, 2013. As a result, during the three months ended June 30, 2013, the Company recognized revenue of $142.2 million and expenses of $33.5 million relating to the 2013 QAF for the periods from July 1, 2011 through June 30, 2013.

Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses.

The Company cannot provide any assurances or estimates in connection with CMS’s final managed care approval of the 2013 QAF (for the period from July 1, 2013 to December 31, 2013) or a possible continuation of the QAF program beyond December 31, 2013.

NOTE 12 – ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or meaningful use of certified EHR technology.

CMS has established the final rule which requires eligible providers in their first year of participation in the Medicaid incentive payment program to demonstrate that they have adopted (acquired, purchased, or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During the second and subsequent years of the program, eligible providers are required to meet other criteria, including meaningful use, to receive additional funds. The Company has been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period. The Company adopted certified EHR technology and it recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.

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.

18

INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

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. As of June 30, 2013 the Company completed conversion of all of its facilities to the McKesson system. 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.

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 $6.7 million and $7.1 million are included in the accompanying unaudited condensed consolidated balance sheets as of June 30 and March 31, 2013, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

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 June 30 and March 31, 2013, the Company had accrued $11.5 million and $10.6 million, respectively, which is comprised of $5.8 million and $5.5 million, respectively, in incurred and reported claims, along with $5.7 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.3 million and $2.1 million are included in other prepaid expenses and current assets as of June 30 and March 31, 2013, respectively.

The Company has purchased statutory coverage insurance to fund its obligations under its workers compensation program. The Company has a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a $250 deductible, per occurrence/loss limit. The prefunded program is subject to an annual adjustment until all losses are closed. 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 June 30 and March 31, 2013, the Company had accrued $470 and $500, respectively, comprised of $195 and $200, respectively, in incurred and reported claims, along with $275 and $300, respectively, in estimated IBNR.

In addition, the Company has a self-insured health benefits plan for its employees. As a result, the Company has established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company’s IBNR accruals at June 30 and March 31, 2013 were based upon projections. The Company determines the adequacy of this accrual by evaluating its limited historical experience and trends related to both health insurance claims and payments, information provided by its 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 the Company’s unaudited condensed consolidated financial statements. As of June 30 and March 31, 2013, the Company had accrued $1.9 million and $1.9 million, respectively, in estimated IBNR.

The Company has also purchased excess liability policies with aggregate limits of $25 million. The excess liability 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 June 30, 2013, the Company finances various insurance policies at an interest rate of 4.1% per annum. The Company incurred finance charges relating to such policies of $11.2 and $12.1 for the three months ended June 30, 2013 and 2012, respectively. As of June 30 and March 31, 2013, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

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INTEGRATED HEALTHCARE HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

	June 30, 2013		March 31, 2013
Prepaid insurance	$	1,941	$	115
Accrued insurance premiums	$	–	$	69
(Included in other current liabilities)

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.

There have been no material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 28, 2013.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks discussed under the caption “Risk Factors” in our Annual Report on Form 10-K filed on June 28, 2013 that may cause our Company's or our industry's actual results, levels of activity, performance, or achievements to be materially different from those expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as may be required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

As used in this report, the terms “we,” “us,” “our,” “the Company,” “Integrated Healthcare Holdings” or “IHHI” mean Integrated Healthcare Holdings, Inc., a Nevada corporation, unless otherwise indicated.

Unless otherwise indicated, all amounts included in this Item 2 are expressed in thousands (except percentages and per share amounts).

OVERVIEW

On March 8, 2005, we completed our acquisition (the "Acquisition") of four Orange County, California hospitals and associated real estate, including: (i) 282-bed Western Medical Center - Santa Ana, CA; (ii) 188-bed Western Medical Center - Anaheim, CA; (iii) 178-bed Coastal Communities Hospital in Santa Ana, CA; and (iv) 114-bed Chapman Medical Center in Orange, CA (collectively, the "Hospitals") from Tenet Healthcare Corporation. The Hospitals were assigned to four of our wholly owned subsidiaries formed for the purpose of completing the Acquisition. We also acquired the following real estate, leases and assets associated with the Hospitals: (i) a fee interest in the Western Medical Center at 1001 North Tustin Avenue, Santa Ana, CA, a fee interest in the administration building at 1301 North Tustin Avenue, Santa Ana, CA, certain rights to acquire condominium suites located in the medical office building at 999 North Tustin Avenue, Santa Ana, CA; (ii) a fee interest in the Western Medical Center at 1025 South Anaheim Blvd., Anaheim, CA; (iii) a fee interest in the Coastal Communities Hospital at 2701 South Bristol Street, Santa Ana, CA, and a fee interest in the medical office building at 1901 North College Avenue, Santa Ana, CA; (iv) a lease for the Chapman Medical Center at 2601 East Chapman Avenue, Orange, CA, and a fee interest in the medical office building at 2617 East Chapman Avenue, Orange, CA; and (v) equipment and contract rights. At the closing of the Acquisition, we transferred all of the fee interests in the acquired real estate (the "Hospital Properties") to Pacific Coast Holdings Investment, LLC ("PCHI"), a company owned 51% by various physician investors and 49% by our largest shareholder.

SIGNIFICANT CHALLENGES

COMPANY - Our Acquisition involved significant cash expenditures, debt incurrence and integration expenses that has seriously strained our consolidated financial condition. If we are required to issue equity securities to raise additional capital or for any other reasons, existing stockholders will likely be substantially diluted, which could affect the market price of our stock. In April 2010 we issued warrants to existing shareholders and a lender. In February 2013 we repurchased certain warrants, issued new warrants, and extended the expiration dates of the remaining warrants. (see "WARRANTS”).

INDUSTRY - Our Hospitals receive a substantial portion of their revenues from Medicare and Medicaid. The healthcare industry is experiencing a strong trend toward cost containment, as the government seeks to impose lower reimbursement and resource utilization group rates, limit the scope of covered services and negotiate reduced payment schedules with providers. These cost containment measures generally have resulted in a reduced rate of growth in the reimbursement for the services that we provide relative to the increase in our cost to provide such services.

Changes to Medicare and Medicaid reimbursement programs have limited, and are expected to continue to have limited, payment increases. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints resulting in a risk that the time period between submission of claims and payment could increase. Further, within the statutory framework of the Medicare and Medicaid programs, a substantial number of areas are subject to administrative rulings and interpretations which may further affect payments.

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Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure and certification of facilities, and reimbursement. These regulations relate, among other things, to the adequacy of physical property and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Since these regulations are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including (with respect to inpatient care) fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of a facility or site of service.

We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. Rights and remedies available to these programs include repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. These programs may also impose fines, criminal penalties or program exclusions. Other third-party payer sources also reserve rights to conduct audits and make monetary adjustments in connection with or exclusive of audit activities.

The healthcare industry is highly competitive. We compete with a variety of other organizations in providing medical services, many of which have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than we do and may thereby attract patients or customers who are presently our patients or customers or are otherwise receiving our services.

An increasing trend in malpractice litigation claims, rising costs of malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for hospital facilities. Also, a tightening of the reinsurance market has affected property, vehicle, and excess liability insurance carriers.

We receive all of our inpatient services revenue from operations in Orange County, California. The economic condition of this market could affect the ability of our patients and third-party payers to reimburse us for our services, through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs. An economic downturn, or changes in the laws affecting our business in our market and in surrounding markets, could have a material adverse effect on our financial position, results of operations, and cash flows.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. As of June 30, 2013, we had total stockholders’ equity of $15.3 million and working capital of $15.8 million.  For the three months ended June 30, 2013, we had net income of $45.4 million. At June 30, 2013, we had $24.2 million in additional availability under our revolving credit facility (see “DEBT”). Through June 30, 2013, we have recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, we anticipate recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses (See “HOSPITAL QUALITY ASSURANCE FEES”). We are reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on our liquidity and financial position and value of our common stock.

Key items for the three months ended June 30, 2013 included:

1.   Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the three months ended June 30, 2013 and 2012 were $223.2 million and $80.8 million, respectively, representing an increase of $142.4 million, or 176.2%. The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental net revenues increased $141.7 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.  The increase was primarily related to Hospital Quality Assurance Fee (“QAF”) revenues received from the State of California. For the three months ended June 30, 2013, we recorded $142.2 million in QAF revenues compared to $0 during the three months ended June 30, 2012 (see “HOSPITAL QUALITY ASSURANCE FEES”).

Inpatient admissions decreased by 7.8% to 4.7 for the three months ended June 30, 2013 compared to 5.1 for the three months ended June 30, 2012. The decline in admissions is primarily related to reductions in managed care, shifts from inpatient to outpatient observation, and lower obstetrics admissions.

Uninsured patients, as a percentage of gross charges (retail charges), were 7.6% for the three months ended June 30, 2013 compared to 5.4% for the three months ended June 30, 2012.

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2.   Operating expenses: Management is working aggressively to reduce costs without reduction in service levels. These efforts have in large part been offset by inflationary pressures. Operating expenses for the three months ended June 30, 2013 were $123.4 million, representing an increase of $40.4 million, or 48.7%, compared to the three months ended June 30, 2012. The increase is primarily related to QAF expenses of $33.5 million incurred during the three months ended June 30, 2013 compared to $0 incurred during the three months ended June 30, 2012.

DEBT – As of June 30, 2013, we had the following Credit Agreements:

— A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement by and among us, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha Realty, LLC, as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at June 30, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of June 30, 2013, we were in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

— A $35.0 million Revolving Credit Agreement by and among us and MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at June 30, 2013) and an unused commitment fee of 0.5% per year ($10.8 million outstanding balance at June 30, 2013).  For purposes of calculating interest, all payments we make on the Revolving Credit Agreement are subject to a five business day clearance period.  As of June 30, 2013, we were in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, 2016. At June 30, 2013, we had $24.2 million in additional availability under this facility.

Our outstanding debt consists of the following:

	June 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	10,761		$	30,000
Discount		(433	)		(473	)
	$	10,328		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,594	)		(1,747	)
	$	45,683		$	45,530

WARRANTS – On April 13, 2010 we issued three-year warrants (the “Omnibus Warrants”) to purchase our common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

In addition, on April 13, 2010, we issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling us to recover amounts due from our prior lender and a $1.0 million reduction in principal of our outstanding debt, among other benefits to us.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, we entered into the following transactions involving warrants:

We entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of our common stock at an exercise price of $0.07 per share. We repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, we issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

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Also simultaneous with the transactions described above, we extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

We assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the “IHHI Warrants.” As of June 30, 2013, the fair value of the IHHI Warrants was $11.9 million.

The gain (loss) related to the change in fair value of the Company’s outstanding warrants for the three months ended June 30, 2013 and 2012 was $(6.6) million and $.07 million, respectively.

HOSPITAL QUALITY ASSURANCE FEES - In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”).  In February 2011, CMS gave final approval for the 2010 QAF. During fiscal year 2011, we recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF.

In December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”).  Accordingly, for the year ended March 31, 2012 we recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 QAF.

In June 2012, CMS conditionally approved the extension of the QAF for the thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”).  In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012.  As a result, during the year ended March 31, 2013, we recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF for the periods from July 1, 2011 through March 31, 2013.

Through June 30, 2013, we have recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, we anticipate recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses.

We cannot provide any assurances or estimates in connection with CMS’s final managed care approval of the 2013 QAF (for the period from July 1, 2013 to December 31, 2013) or a possible continuation of the QAF program beyond December 31, 2013.

ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM – Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or meaningful use of certified EHR technology.

CMS has established the final rule which requires eligible providers in their first year of participation in the Medicaid incentive payment program to demonstrate that they have adopted (acquired, purchased, or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During the second and subsequent years of the program, eligible providers are required to meet other criteria, including meaningful use, to receive additional funds. We have been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period. We adopted certified EHR technology and we recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.

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LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY – On April 13, 2010, we 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 us 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.

COMMITMENTS AND CONTINGENCIES – The State of California has imposed hospital seismic safety requirements. Under these requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has a seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. We do not have an estimate of the cost to remediate the seismic requirements for the administrative building as of June 30, 2013.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on our cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

On July 1, 2011, we entered into software and services agreements with McKesson Technologies Inc. (“McKesson”) to upgrade our information technology systems.

Under the agreements, McKesson will provide us with a variety of services, including new software implementation and education/training services for our personnel, software maintenance services and professional services related to movement and migration of data from legacy systems.  McKesson will also furnish to us 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.  We have entered into the arrangement to enhance our clinical information systems and upgrade our 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 us for successive periods.  The agreements do not provide that they may be terminated by us 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. As of June 30, 2013 we completed conversion of all of our facilities to the McKesson system. We are also continuing to test and develop system applications where necessary.

CASH FLOW – Net cash provided by (used in) operating activities for the three months ended June 30, 2013 and 2012 was $55.2 million and $(1.8) million, respectively. Net income (loss), adjusted for depreciation and other non-cash items, excluding the provision for bad debts and net income (loss) from non-controlling interests (not a measurement under accounting principles generally accepted in the United States of America (“GAAP”), totaled $61.4 million and $(2.9) million for the three months ended June 30, 2013 and 2012, respectively. We provided $0.8 million and $1.4 million in working capital for the three months ended June 30, 2013 and 2012, respectively. Net cash used in payment of accounts payable, accrued compensation and benefits and other current liabilities was $3.0 million and $3.5 million for the three months ended June 30, 2013 and 2012, respectively. Cash provided by accounts receivable, net of provision for bad debts, was $0.9 million and $1.0 million for the three months ended June 30, 2013 and 2012, respectively.

Net cash used in investing activities during the three months ended June 30, 2013 and 2012 was $0.3 million and $0.6 million, respectively. In the three months ended June 30, 2013 and 2012, we invested $0.3 million and $0.6 million in cash, respectively, in new property and equipment.

Net cash used in financing activities for the three months ended June 30, 2013 and 2012 was $20.1 million and $0.5 million, respectively. The increase in net cash used in financing activities for the three months ended June 30, 2013 was primarily related to a paydown on our revolving line of credit of $19.2 million.    

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RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table sets forth, for the three months ended June 30, 2013 and 2012 our unaudited condensed consolidated statements of operations expressed as a percentage of net patient service revenues.

	Three months ended June 30,
	2013			2012
Revenues		100.0	%		100.0	%
Operating expenses:
Salaries and benefits		25.0	%		64.9	%
Supplies		6.2	%		17.2	%
Other operating expenses		22.9	%		18.4	%
Depreciation and amortization		1.0	%		1.2	%
		55.1	%		101.7	%
Operating income (loss)		44.9	%		(1.7	)%
Other expense:
Interest expense, net		(1.2	)%		(3.0	)%
Income (loss) on warrants		(3.0	)%		0.9	%
		(4.2	)%		(2.1	)%
Income (loss) before income tax provision		40.7	%		(3.8	)%
Income tax provision		20.3	%		0.1	%
Net income (loss)		20.4	%		(3.9	)%
Net income attributable to noncontrolling interests		(0.1	)%		(0.4	)%
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.		20.3	%		(4.3	)%

THREE MONTHS ENDED JUNE 30, 2013 COMPARED TO THREE MONTHS ENDED JUNE 30, 2012

NET PATIENT SERVICE REVENUES – Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the three months ended June 30, 2013 and 2012 were $223.2 million and $80.8 million, respectively, representing an increase of $142.4 million, or 176.2%. The increase in net patient service revenues was primarily related to QAF revenues. If the QAF payments noted above are excluded, net patient service revenues for the three months ended June 30, 2013 were $0.1 million, or 0.2%, higher than the comparable period in fiscal year 2013. For the three months ended June 30, 2013, we recorded $142.2 million in QAF payments compared to $0 during the three months ended June 30, 2012. The provision for bad debts for the three months ended June 30, 2013 was $14.4 million compared to $9.9 million for the three months ended June 30, 2012, representing a 45.5% increase. The primary reason for the increase in the provision for bad debts was a $7.2 million (39.0%) increase in gross charges related to uninsured patients for the three months ended June 30, 2013 compared to the same period in fiscal 2013. Uninsured patients, as a percentage of gross charges, increased to 7.6% from 5.4% for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Admissions for the three months ended June 30, 2013 decreased 7.8% compared to fiscal year 2013. The decline in admissions is the combined result of lower obstetrical deliveries and psychiatric admissions. Net patient service revenues per admission increased 200.6% during the three months ended June 30, 2013. This increase was primarily due to the QAF revenues. Excluding QAF revenues, the increase in net patient service revenues per admission increased 9.1% during the three months ended June 30, 2013 compared to fiscal year 2013.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 79% and 54% of patient service revenues for the three months ended June 30, 2013 and 2012, respectively.

The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from Medicaid, Medicaid DSH, and Orange County, CA (CalOptima). Governmental revenues (net of contractual allowances and discounts), including QAF funds, increased $141.7 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.  

Other operating revenues of $808 and $845 for the three months ended June 30, 2013 and 2012, respectively, consist primarily of rental income and cafeteria sales.

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OPERATING EXPENSES – Operating expenses for the three months ended June 30, 2013 increased to $123.4 million from $83.0 million, an increase of $40.4 million, or 48.7%, compared to fiscal year 2013. Operating expenses expressed as a percentage of revenues for the three months ended June 30, 2013 and 2012 were 54.8% and 101.7%, respectively. On a per admission basis, operating expenses increased 61.7%. The increase is primarily related to QAF expenses of $33.5 million incurred during the three months ended June 30, 2013 compared to $0 in fiscal year 2013. Also, for the three months ended June 30, 2013, depreciation and amortization relating to the conversion of all of our facilities to the McKesson computer system was $1.3 million compared to $0 in fiscal year 2013 (see “ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM” and “COMMITMENTS AND CONTINGENCIES”).

Salaries and benefits increased $3.1 million (5.9%) for the three months ended June 30, 2013 compared to fiscal year 2013, the increase is primarily related to increased labor needs during the conversion of all of our facilities to the McKesson computer system (see “ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM” and “COMMITMENTS AND CONTINGENCIES”).

Supplies for the three months ended June 30, 2013 were comparable to the amounts incurred in fiscal 2013.

Other operating expenses during the three months ended June 30, 2013 increased to $51.2 million from $15.0 million, an increase of $36.2 million, or 241.3%, compared to fiscal year 2013. The increase is primarily related to QAF expenses of $33.5 million incurred during the three months ended June 30, 2013 compared to $0 during the three months ended June 30, 2012.

OPERATING INCOME (LOSS) – The operating income (loss) for the three months ended June 30, 2013 and 2012 was $100.6 million and $(1.4) million, respectively.

OTHER INCOME (EXPENSE) – Interest expense for the three months ended June 30, 2013 was $2.8 million compared to $2.4 million for fiscal year 2013. The increase primarily related to higher outstanding debt during the three months ended June 30, 2013 prior to the paydown of $19.2 million on our revolving line of credit in late June 2013. 

As of June 30, 2013, the aggregate fair value of the IHHI Warrants was $11.9 million.  A gain (loss) relating to the change in fair value of the outstanding warrants of $(6.6) million and $731 was recorded during the three months ended June 30, 2013 and 2012, respectively. See “WARRANTS.”

NET INCOME (LOSS) - Net income (loss) for the three months ended June 30, 2013 and 2012 was $45.4 million and $(3.5) million, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. We established settlement payables of $463 and $179 as of June 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $5.6 million and $4.7 million during the three months ended June 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended June 30, 2013 and 2012, was $3.3 million and $1.8 million, respectively. As of June 30 and March 31, 2013, estimated DSH receivables were $3.6 million and $5.9 million, respectively.

27

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $19.8 million and $23.6 million for the three months ended June 30, 2013 and 2012, respectively), are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. The Hospitals estimate the discounts for contractual allowances utilizing billing data on an individual patient basis. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. We do not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program ("MEP") screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs. The estimated costs of charity care (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended June 30, 2013 and 2012 were approximately $2.3 million and $2.1 million, respectively.

We are not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying unaudited condensed consolidated financial statements.

PROVISION FOR BAD DEBTS - We provide for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

Our policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. We assess the realization of deferred tax assets to determine whether an income tax valuation allowance is required. We have recorded a 100% valuation allowance on our net deferred tax since they did not meet the more-likely-than-not threshold.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of our income tax provision.

INSURANCE – We accrue for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. We have 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 June 30 and March 31, 2013, we had accrued $11.5 million and $10.6 million, respectively, which is comprised of $5.8 million and $5.5 million, respectively, in incurred and reported claims, along with $5.7 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries were $2.3 million and $2.1 million as of June 30 and March 31, 2013, respectively.

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We have purchased statutory coverage insurance to fund our obligations under our workers compensation program. We have a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a $250 deductible, per occurrence/loss limit. The prefunded program is subject to an annual adjustment until all losses are closed. We accrue 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 June 30 and March 31, 2013, we had accrued $470 and $500, respectively, comprised of $195 and $200, respectively, in incurred and reported claims, along with $275 and $300, respectively, in estimated IBNR.

In addition, we have a self-insured health benefits plan for our employees. As a result, we have established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. Our IBNR accruals at June 30 and March 31, 2013 were based upon projections. We determine 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 unaudited condensed consolidated financial statements. As of June 30 and March 31, 2013, the we had accrued $1.9 million and $1.9 million, respectively, in estimated IBNR.

We have also purchased excess liability policies with aggregate limits of $25 million. The excess liability 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).

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As of June 30, 2013, the Company did not have any investment in, or outstanding liabilities under, market rate sensitive instruments. The Company does not enter into hedging instrument arrangements.

ITEM 4. CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 15d-15(e) under the Exchange Act. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching the Company's desired disclosure control objectives. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 30, 2013, the end of the period of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2013 the Company's disclosure controls and procedures were effective to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

During the three months ended June 30, 2013, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

There have been no material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 28, 2013.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

ITEM 6. EXHIBITS

Exhibit Number	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

31

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: August 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake
		Chief Financial Officer (Principal Financial Officer)

32

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Kenneth K. Westbrook, Chief Executive Officer of Integrated Healthcare Holdings, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated, or caused such disclosure controls and procedures to be designed under our supervision, subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: August 14, 2013	By:	/s/ Kenneth K. Westbrook
		Kenneth K. Westbrook Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14

UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Steven R. Blake, Chief Financial Officer of Integrated Healthcare Holdings, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated, or caused such disclosure controls and procedures to be designed under our supervision, subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: August 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc. (the "Company") for the quarter ended June 30, 2013, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the period indicated.

This Certificate has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: August 14, 2013	By:	/s/ Kenneth K. Westbrook
		Kenneth K. Westbrook Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of Integrated Healthcare Holdings, Inc. (the "Company") for the quarter ended June 30, 2013, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(i) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the period indicated.

This Certificate has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

	INTEGRATED HEALTHCARE HOLDINGS, INC.
Dated: August 14, 2013	By:	/s/ Steven R. Blake
		Steven R. Blake Chief Financial Officer

XML

11. HOSPITAL QUALITY ASSURANCE FEES (QAF)

3 Months Ended

Jun. 30, 2013

Hospital Quality Assurance Fees Qaf

NOTE 11 - HOSPITAL QUALITY ASSURANCE FEES ("QAF")

In October 2009, the Governor of California signed legislation supported by the hospital industry to impose a provider fee on general acute care hospitals that, combined with federal matching funds, would be used to provide supplemental Medi-Cal payments to hospitals. The state submitted the plan to the Centers for Medicare and Medicaid Services (“CMS”) for a required review and approval process, and certain changes in the plan were required by CMS. Legislation amending the fee program to reflect the required changes was passed by the legislature and signed by the Governor on September 8, 2010. Among other changes, the legislation leaves distribution of “pass-through” payments received by Medi-Cal managed care plans that will be paid to hospitals under the program to the discretion of the plans.  The hospital quality assurance fee program (“QAF”) created by this legislation initially provided payments for up to 21 months retroactive to April 2009 and expiring on December 31, 2010 (“2010 QAF”).  In February 2011, CMS gave final approval for the 2010 QAF. During fiscal year 2011, the Company recognized $87.2 million in revenue and recorded expenses of $47.8 million relating to the 2010 QAF. 

In December 2011, CMS gave final approval for the extension of the QAF for the nine month period from January 1 through June 30, 2011 (“2011 QAF”).  Accordingly, for the year ended March 31, 2012 the Company recognized $31.9 million in revenue and recorded expenses of $15.9 million relating to the 2011 QAF.

In June 2012, CMS conditionally approved the extension of the QAF for the thirty month period from July 1, 2011 through December 31, 2013 (“2013 QAF”).  In June 2012, the California State Legislature amended the hospital fee statute to recognize separate CMS approval of the fee-for-service portion and managed care portion of the 2013 QAF, which was further clarified in legislation approved by the governor of California in September 2012.  As a result, during the year ended March 31, 2013, the Company recognized revenue of $54.2 million and expenses of $52.5 million relating to the 2013 QAF for the periods from July 1, 2011 through March 31, 2013.

In May 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2011 through June 30, 2012. On June 26, 2013, CMS approved the managed care portion of the 2013 QAF for the period from July 1, 2012 through June 30, 2013. As a result, during the three months ended June 30, 2013, the Company recognized revenue of $142.2 million and expenses of $33.5 million relating to the 2013 QAF for the periods from July 1, 2011 through June 30, 2013.

Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47.1 million in revenues and incurring approximately $21.2 million in provider fees and other expenses.

The Company cannot provide any assurances or estimates in connection with CMS’s final managed care approval of the 2013 QAF (for the period from July 1, 2013 to December 31, 2013) or a possible continuation of the QAF program beyond December 31, 2013.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Income Statement [Abstract]
Patient service revenues (net of contractual allowances and discounts)	$ 237,519	$ 90,747
Provision for bad debts	(14,365)	(9,927)
Net patient service revenues	223,154	80,820
Other operating revenues	808	845
Total revenues	223,962	81,665
Operating expenses:
Salaries and benefits	56,063	52,991
Supplies	13,949	14,051
Other operating expenses	51,228	15,043
Depreciation and amortization	2,117	959
Total Operating Expenses	123,357	83,044
Operating income (loss)	100,605	(1,379)
Other income (expense):
Interest expense, net	(2,807)	(2,433)
Gain (loss) on warrants	(6,646)	731
Total Other Expense	(9,453)	(1,702)
Income (loss) before income tax provision	91,152	(3,081)
Income tax provision	45,452	44
Net income (loss)	45,700	(3,125)
Net (income) loss attributable to noncontrolling interests (Note 9)	(297)	(349)
Net income (loss) attributable to Integrated Healthcare Holdings, Inc.	$ 45,403	$ (3,474)
Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders
Basic	$ 0.18	$ (0.01)
Diluted	$ 0.18	$ (0.01)
Weighted average shares outstanding
Basic	255,307	255,307
Diluted	257,159	255,307

XML

4. COMMON STOCK WARRANTS

3 Months Ended

Jun. 30, 2013

Common Stock Warrants

NOTE 4 - COMMON STOCK WARRANTS

A summary of the warrants outstanding at June 30 and March 31, 2013 is presented as follows.

	Shares issuable under warrants		Weighted- average exercise price		Expiration date
Outstanding, June 30 and March 31, 2013		405,000	$	0.07		April 13, 2016

On April 13, 2010 the Company issued three-year warrants (the “Omnibus Warrants”) to purchase its common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to its Term Loan lender, Silver Point (SPCP Group, LLC and SPCP Group IV, LLC) or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights.

In addition, on April 13, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated a release enabling the Company to recover amounts due from its prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights.

On February 7, 2013, in connection with the Restated Credit Agreement, the Company entered into the following transactions involving warrants:

The Company entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of the Company’s common stock at an exercise price of $0.07 per share. The Company repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, the Company issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, the Company extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

The Company assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the “IHHI Warrants.” As of June 30, 2013, the fair value of the IHHI Warrants was $11.9 million.

The gain (loss) related to the change in fair value of the Company’s outstanding warrants for the three months ended June 30, 2013 and 2012 was $(6.6) million and $.07 million, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which it believes is the appropriate valuation method under the circumstances. Since the Company’s stock is thinly traded, the expected volatility is based on an analysis of its stock and the stock of eight other publicly traded companies that own hospitals.

The risk-free interest rate is based on the average yield on U.S. Treasury notes with maturity commensurate with the terms of the warrants. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.  The assumptions used in the Black-Scholes valuation model are as follows:

	June 30, 2013		March 31, 2013
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.6%		0.4%
Expected volatility		39.8%		39.9%
Expected term (in years)		2.80		3.05

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4. COMMON STOCK WARRANTS (Tables)

3 Months Ended

Jun. 30, 2013

Common Stock Warrants

Common Stock Warrants

A summary of the warrants outstanding at June 30 and March 31, 2013 is presented as follows.

	Shares issuable under warrants		Weighted- average exercise price		Expiration date
Outstanding, June 30 and March 31, 2013		405,000	$	0.07		April 13, 2016

Assumptions used in the Black-Scholes valuation model

The assumptions used in the Black-Scholes valuation model are as follows:

	June 30, 2013		March 31, 2013
Expected dividend yield		0.0%		0.0%
Risk-free interest rate		0.6%		0.4%
Expected volatility		39.8%		39.9%
Expected term (in years)		2.80		3.05

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12. ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

3 Months Ended

Jun. 30, 2013

Electronic Health Records Incentive Program

NOTE 12 - ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM

Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or meaningful use of certified EHR technology.

CMS has established the final rule which requires eligible providers in their first year of participation in the Medicaid incentive payment program to demonstrate that they have adopted (acquired, purchased, or secured access to), or implemented, or upgraded to certified EHR technology in order to qualify for an incentive payment. During the second and subsequent years of the program, eligible providers are required to meet other criteria, including meaningful use, to receive additional funds. The Company has been awarded a total amount of $13.6 million under the Medicaid EHR incentive program, which will be earned and received over a four year period. The Company adopted certified EHR technology and it recognized other income of $6.8 million relative to the first year under the Medicaid EHR incentive program during fiscal year 2012.

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4. COMMON STOCK WARRANTS (Details 1) (Warrant)	3 Months Ended	12 Months Ended
	Jun. 30, 2013	Mar. 31, 2013
Warrant
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	0.60%	0.40%
Expected volatility	39.80%	39.90%
Expected term (in years)	2 years 9 months 18 days	3 years 18 days

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9. VARIABLE INTEREST ENTITY (Tables)

3 Months Ended

Jun. 30, 2013

Variable Interest Entity

Variable Interest Entity

PCHI's assets, liabilities, and deficiency are set forth below.

	June 30, 2013			March 31, 2013
Cash	$	252		$	147
Property, net		39,374			39,696
Other		119			49
Total assets	$	39,745		$	39,892
Debt ($47,277, net of discount) (as guarantor)	$	45,683		$	45,530
Other		442			488
Total liabilities		46,125			46,018
Deficiency		(6,380	)		(6,126	)
Total liabilities and accumulated deficit	$	39,745		$	39,892

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8. INCOME (LOSS) PER SHARE (Tables)

3 Months Ended

Jun. 30, 2013

Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders

Schedule of Earnings Per Share

	Three months ended June 30,
	2013		2012
Numerator:
Net income attributable to
Integrated Healthcare Holdings, Inc.	$	45,403	$	(3,474	)
Denominator:
Weighted average common shares		255,307		255,307
Dilutive options		1,852		–
Denominator for diluted calculation		257,159		255,307
Income per share - basic	$	0.18	$	(0.01	)
Income per share - diluted	$	0.18	$	(0.01	)

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10. RELATED PARTY TRANSACTIONS (Details Narrative)	Jun. 30, 2013	Mar. 31, 2013
Related Party Transactions [Abstract]
Common Stock Outstanding by beneficial owners	447,500	447,500

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2. PROPERTY AND EQUIPMENT (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Property and equipment, gross	$ 93,527	$ 91,860
Less accumulated depreciation	(29,976)	(27,872)
Property and equipment, net	63,551	63,988
Buildings
Property and equipment, gross	36,536	36,536
Land and Improvements
Property and equipment, gross	13,523	13,523
Equipment
Property and equipment, gross	30,204	28,534
Assets Held under Capital Leases
Property and equipment, gross	$ 13,264	$ 13,267

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6. STOCK INCENTIVE PLAN (Details) (USD $)	3 Months Ended
	Jun. 30, 2013
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Outstanding, March 31, 2013, Shares	7,595
Granted, Shares
Exercised, Shares
Forfeited or expired, Shares	(10)
Outstanding, June 30, 2013, Shares	7,585
Exercisable at June 30, 2013, Shares	7,585
Weighted- Average Exercise Price
Outstanding, March 31, 2013, exercise price	$ 0.18
Granted, exercise price
Exercised, exercise price
Forfeited or expired, exercise price	$ 0.26
Outstanding,June 30, 2013, exercise price	$ 0.18
Exercisable at June 30, 2013, exercise price	$ 0.18
Weighted- Average remaining contractual term (years)
Outstanding, June 30, 2013, contractual term (years)	1 year 8 months 12 days
Exercisable at June 30, 2013, contractual term (years)	1 year 8 months 12 days
Aggregate intrinsic value
Outstanding, June 30, 2013, intrinsic value
Exercisable at June 30, 2013, intrinsic value

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 11,922	$ 5,276
Fair Value Inputs Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability
Fair Value Inputs Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability
Fair Value Inputs Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 11,922	$ 5,276

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8. INCOME (LOSS) PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Numerator:
Net income attributable to Integrated Healthcare Holdings, Inc.	$ 45,403	$ (3,474)
Denominator:
Weighted average common shares	255,307	255,307
Dilutive options	1,852
Denominator for diluted calculation	257,159	255,307
Income per share - basic	$ 0.18	$ (0.01)
Income per share - diluted	$ 0.18	$ (0.01)

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6. STOCK INCENTIVE PLAN (Tables)

3 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK INCENTIVE PLAN

A summary of stock option activity for the three months ended June 30, 2013 is presented as follows.

	Shares			Weighted- average exercise price		Weighted- average grant date fair value		Weighted- average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, March 31, 2013		7,595		$	0.18
Granted		–		$	–	$	–
Exercised		–		$	–
Forfeited or expired		(10	)	$	0.26
Outstanding, June 30, 2013		7,585		$	0.18				1.4	$	–
Exercisable at June 30, 2013		7,585		$	0.18				1.4	$	–

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net income (loss)	$ 45,700	$ (3,125)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization of property and equipment	2,117	959
Provision for bad debts	14,365	9,927
Amortization of debt discount	193	38
Loss (gain) on warrants	6,646	(731)
Deferred tax assets, net	6,708
Changes in operating assets and liabilities:
Accounts receivable	(13,497)	(8,935)
Inventories of supplies	(13)	(116)
Due from governmental payers	2,299	3,086
Hospital quality assurance fees receivable	(62,384)	2,436
Prepaid income taxes		665
Prepaid insurance, other prepaid expenses and current assets, and other assets	(78)	(2,604)
Accounts payable	(3,790)	(2,411)
Accrued compensation and benefits	(1,409)	(1,709)
Hospital quality assurance fees payable	17,132
Due to governmental payers	284	72
Income taxes payable	38,730
Accrued insurance retentions and other current liabilities	2,173	608
Net cash provided (used) by operating activities	55,176	(1,840)
Cash flows from investing activities:
Decrease in restricted cash	3	(17)
Additions to property and equipment	(296)	(601)
Net cash used in investing activities	(293)	(618)
Cash flows from financing activities:
Proceeds from (paydown on) revolving line of credit, net	(19,239)
Noncontrolling interests distributions	(551)	(300)
Payments on capital lease obligations	(264)	(158)
Net cash provided (used) in financing activities	(20,054)	(458)
Net decrease in cash and cash equivalents	34,829	(2,916)
Cash and cash equivalents, beginning of period	3,545	11,829
Cash and cash equivalents, end of period	38,374	8,913
Supplemental information:
Cash paid for interest	2,417	2,282
Cash paid for income taxes

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2. PROPERTY AND EQUIPMENT

3 Months Ended

Jun. 30, 2013

Property, Plant and Equipment [Abstract]

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	June 30,			March 31,
	2013			2013
Buildings	$	36,536		$	36,536
Land and improvements		13,523			13,523
Equipment		30,204			28,534
Assets under capital leases		13,264			13,267
		93,527			91,860
Less accumulated depreciation		(29,976	)		(27,872	)
Property and equipment, net	$	63,551		$	63,988

Accumulated depreciation on assets under capital leases as of June 30 and March 31, 2013 was $6.5 million and $6.2 million, respectively.

The Hospitals are located in an area near active and substantial earthquake faults. The Hospitals carry earthquake insurance with a policy limit of $50.0 million. A significant earthquake could result in material damage and temporary or permanent cessation of operations at one or more of the Hospitals.

The State of California has imposed hospital seismic safety requirements. Under these requirements, the Hospitals must meet stringent seismic safety criteria in the future. In addition, there could be other remediation costs pursuant to this seismic retrofit.

The State of California has a seismic review methodology known as HAZUS. The HAZUS methodology may preclude the need for some structural modifications. All four Hospitals requested HAZUS review and received a favorable notice pertaining to structural reclassification. All Hospital buildings, with the exception of one (an administrative building), have been deemed compliant until January 1, 2030 for both structural and nonstructural retrofit. The Company does not have an estimate of the cost to remediate the seismic requirements for the administrative building as of June 30, 2013.

There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on the Company's cash flow.  In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.

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5. INCOME TAXES

3 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

NOTE 5 - INCOME TAXES

The utilization of net operating loss (“NOL”) and credit carryforwards is limited under the provisions of the Internal Revenue Code (“IRC”) Section 382 and similar state provisions. Section 382 of the IRC of 1986 generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income where a corporation has undergone significant changes in stock ownership. In fiscal year 2009, the Company entered into the amended purchase agreement which resulted in a change in control. The Company conducted an analysis and determined that it is subject to significant IRC Section 382 limitations. For both Federal and State tax purposes, the Company's utilization of NOL and credit carryforwards is subject to significant IRC Section 382 limitations. The Company evaluates its ability to utilize the net operating losses each period with regard to the limitations imposed under IRC 382 and also considering the continuing expiration of statutes of limitation for prior years; and in the prior year determined that a portion of the federal and state net operating losses were no longer realizable, and removed from the schedule of deferreds those net operating losses in excess of the IRC 382 limitation and also considering prior years statutes now closed.

The difference between the reported income tax provision and the amount computed by multiplying income (loss) before income tax provision in the accompanying unaudited condensed consolidated statements of operations for the three months ended June 30, 2013 and 2012 by the statutory federal income tax rate primarily relates to the impact of the valuation allowance reserving certain net deferred assets, permanently nondeductible expenses, state and local income taxes, and variable interest entity.

The application of FASB Interpretation Number 18 requires the Company to compute the interim period income tax provision (benefit) by applying the estimated annual effective tax rate to the loss from continuing operations for the three months ended June 30, 2013, which resulted in the recognition of a tax expense for the three months ended June 30, 2013.

The Company evaluated its historical and projected sources of income to determine the extent to which the net deferred tax assets projected at June 30, 2013 could be realized and, based on this analysis, the Company concluded that there was not sufficient positive evidence to support further realization of its net deferred tax assets, and therefore, as of June 30, 2013, will maintain a 100% valuation allowance against its net deferred assets.

PCHI TAX STATUS – PCHI is a limited liability company. PCHI's taxable income or loss will flow through to its owners and be their separate responsibility. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any amounts for the income tax expense or benefit, or liabilities related to PCHI's income or loss.

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3. DEBT

3 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

NOTE 3 - DEBT

As of June 30, 2013, the Company had the following Credit Agreements:

— A $47.277 million Term Loan issued under the $80.0 million Restated Credit Agreement by and among the Company, Silver Point Finance, LLC and its affiliate, SPCP Group, LLC (together with Silver Point Finance, LLC, “Silver Point”), and PCHI and Ganesha Realty, LLC, as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% at June 30, 2013). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As of June 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement is April 13, 2016.

— A $35.0 million Revolving Credit Agreement by and among the Company and MidCap Funding IV, LLC, as assigned to it from MidCap Financial, LLC, as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% at June 30, 2013) and an unused commitment fee of 0.5% per year ($10.8 million outstanding balance at June 30, 2013).  For purposes of calculating interest, all payments the Company makes on the Revolving Credit Agreement are subject to a five business day clearance period.  As of June 30, 2013, the Company was in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement is March 25, 2016. At June 30, 2013, the Company had $24.2 million in additional availability under this facility.

The Company's outstanding debt consists of the following:

	June 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	10,761		$	30,000
Discount		(433	)		(473	)
	$	10,328		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,594	)		(1,747	)
	$	45,683		$	45,530

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6. STOCK INCENTIVE PLAN (Details Narrative)	3 Months Ended
	Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum aggregate number of shares under the plan	26,100
Options granted or exercised
Stock Incentive 2006 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Plan description	The Company's 2006 Stock Incentive Plan (the "Plan"), which is shareholder-approved, permits the grant of share options to its employees and board members for up to a maximum aggregate of 12.0 million shares of common stock. In addition, as of the first business day of each calendar year in the period 2007 through 2015, the maximum aggregate number of shares shall be increased by a number equal to one percent of the number of shares of common stock of the Company outstanding on December 31 of the immediately preceding calendar year.
Vesting rights description	Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.

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13. COMMITMENTS AND CONTINGENCIES (Tables)

3 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Financed insurance policies

	June 30, 2013		March 31, 2013
Prepaid insurance	$	1,941	$	115
Accrued insurance premiums	$	–	$	69
(Included in other current liabilities)

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013
Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$ 5,276
Change in fair value of warrant liability included in earnings	6,646
Balance at June 30, 2013	$ 11,922

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4. COMMON STOCK WARRANTS (Details) (USD $)	Mar. 31, 2013	Jun. 30, 2013 Warrant
Shares issuable under warrants Outstanding	405,000	405,000
Weighted-average exercise price	$ 0.07	$ 0.07
Expiration date Outstanding	2016-04-13	2016-04-13

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9. VARIABLE INTEREST ENTITY (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Variable Interest Entity
Rental expense eliminated upon consolidation	$ 2,000	$ 2,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Statement of Financial Position [Abstract]
Allowance for doubtful accounts (in Dollars)	$ 25,671	$ 21,143
Current portion of Capial Lease Obligation (in Dollars)	$ 1,162	$ 1,101
Common stock par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	800,000	800,000
Common stock, shares issued	255,307	255,307
Common stock, shares outstanding	255,307	255,307

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8. INCOME (LOSS) PER SHARE

3 Months Ended

Jun. 30, 2013

Earnings (loss) per common share attributable to Integrated Healthcare Holdings, Inc. stockholders

NOTE 8 - INCOME (LOSS) PER SHARE

Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds.

Since the Company incurred a loss for the three months ended June 30, 2012, the potential shares of common stock consisting of approximately 413 million shares issuable under warrants and stock options were not included in the diluted calculations since they were anti-dilutive.

Income per share for the three months ended June 30, 2013 was computed as shown below. Stock options and warrants aggregating approximately 411 million shares were not included in the diluted calculation since they were anti-dilutive.

	Three months ended June 30,
	2013		2012
Numerator:
Net income attributable to
Integrated Healthcare Holdings, Inc.	$	45,403	$	(3,474	)
Denominator:
Weighted average common shares		255,307		255,307
Dilutive options		1,852		–
Denominator for diluted calculation		257,159		255,307
Income per share - basic	$	0.18	$	(0.01	)
Income per share - diluted	$	0.18	$	(0.01	)

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (USD $) In Thousands, except Share data	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Noncontrolling Interest	Total
Beginning Balance, Amount at Mar. 31, 2013	$ 255	$ 62,911	$ (87,365)	$ (5,687)	$ (29,886)
Beginning Balance, Shares at Mar. 31, 2013	255,307
Net income (loss)			45,403	297	45,700
Noncontrolling interest distributions				(551)	(551)
Ending Balance, Amount at Jun. 30, 2013	$ 255	$ 62,911	$ (41,962)	$ (5,941)	$ 15,263
Ending Balance, Shares at Jun. 30, 2013	255,307

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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (USD $)	Jun. 30, 2013	Mar. 31, 2013
Current assets:
Cash and cash equivalents	$ 38,374,000	$ 3,545,000
Restricted cash	10,000	13,000
Accounts receivable, net of allowance for doubtful accounts of $25,671 and $21,143, respectively	61,953,000	62,821,000
Inventories of supplies	6,751,000	6,738,000
Due from governmental payers	3,583,000	5,882,000
Hospital quality assurance fee receivable	70,074,000	7,690,000
Prepaid insurance	1,941,000	115,000
Deferred tax assets, net		6,328,000
Other prepaid expenses and current assets	7,460,000	9,208,000
Total current assets	190,146,000	102,340,000
Property and equipment, net	63,551,000	63,988,000
Deferred tax assets, net		380,000
Total assets	253,697,000	166,708,000
Current liabilities:
Revolving line of credit, net of discount	10,328,000	29,527,000
Accounts payable	59,620,000	62,515,000
Accrued compensation and benefits	18,225,000	19,634,000
Accrued insurance retentions	13,888,000	12,938,000
Hospital quality assurance payable	24,358,000	7,226,000
Due to governmental payers	463,000	179,000
Income taxes payable	41,599,000	2,869,000
Other current liabilities	5,884,000	4,111,000
Total current liabilities	174,365,000	138,999,000
Debt, noncurrent, net of discount	45,683,000	45,530,000
Warrant liability, noncurrent	11,922,000	5,276,000
Capital lease obligations, net of current portion of $1,162 and $1,101, respectively	6,464,000	6,789,000
Total liabilities	238,434,000	196,594,000
Integrated Healthcare Holdings, Inc. stockholders' deficiency:
Common stock, $0.001 par value; 800,000 shares authorized; 255,307 shares issued and outstanding	255,000	255,000
Additional paid in capital	62,911,000	62,911,000
Accumulated deficit	(41,962,000)	(87,365,000)
Total Integrated Healthcare Holdings, Inc. stockholders' deficiency	21,204,000	(24,199,000)
Noncontrolling interests	(5,941,000)	(5,687,000)
Total stockholders' deficiency	15,263,000	(29,886,000)
Total liabilities and stockholders' deficiency	$ 253,697,000	$ 166,708,000

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	$ 237,519	$ 90,747
Medicare [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	12,293	14,762
Medicaid [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	156,401	8,784
Managed Care [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	49,155	51,726
Indemnity Self Pay And Other [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Sources of patient service revenues	$ 19,670	$ 15,475

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3. DEBT (Tables)

3 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

Outstanding Debt

The Company's outstanding debt consists of the following:

	June 30, 2013			March 31, 2013
Current:
Revolving line of credit	$	10,761		$	30,000
Discount		(433	)		(473	)
	$	10,328		$	29,527
Noncurrent:
Term loan	$	47,277		$	47,277
Discount		(1,594	)		(1,747	)
	$	45,683		$	45,530

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9. VARIABLE INTEREST ENTITY (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Property, net	$ 63,551	$ 63,988
Total assets	253,697	166,708
Total liabilities	238,434	196,594
Total liabilities and accumulated deficit	253,697	166,708
PCHI [Member]
Cash	252	147
Property, net	39,374	39,696
Other	119	49
Total assets	39,745	39,892
Debt (as guarantor)	45,683	45,530
Other	442	488
Total liabilities	46,125	46,018
Deficiency	(6,380)	(6,126)
Total liabilities and accumulated deficit	$ 39,745	$ 39,892

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Disclosure - 4. COMMON STOCK WARRANTS (Narrative) (Warrant, USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Warrant
Fair value of Warrants	$ 11,900
Gain (loss) related to change in fair value of warrants	$ (6,600)	$ 700

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2. PROPERTY AND EQUIPMENT (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Property, Plant and Equipment [Abstract]
Accumulated depreciation on assets under capital lease	$ 6,500	$ 6,200

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3. DEBT (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Current:
Revolving line of credit	$ 10,761	$ 30,000
Discount	(433)	(473)
Total	10,328	29,527
Noncurrent:
Term loan	47,277	47,277
Discount	(1,594)	(1,747)
Total noncurrent debt	$ 45,683	$ 45,530

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7. RETIREMENT PLAN

3 Months Ended

Jun. 30, 2013

Retirement Plan

NOTE 7 - RETIREMENT PLAN

The Company has a 401(k) plan for its employees. All employees with 90 days of service are eligible to participate, unless they are covered by a collective bargaining agreement which precludes coverage. The Company matches employee contributions up to 3% of the employee's compensation, subject to IRS limits. During the three months ended June 30, 2013 and 2012, the Company incurred expenses of $750 and $804, respectively. These costs are included in salaries and benefits in the accompanying unaudited condensed consolidated statements of operations.  At June 30 and March 31, 2013, accrued compensation and benefits in the accompanying unaudited condensed consolidated balance sheets included $1.7 million and $4.1 million, respectively, in accrued employer contributions.

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Accounts receivable:
Patient accounts receivable	$ 87,624	$ 83,964
Allowance for doubtful accounts	(25,671)	(21,143)
Accounts receivable, net	61,953	62,821
Due from government payers:
DSH	3,583	5,882
Total Amount due from Government	3,583	5,882
Due to government payers:
Settlement payables	463	179
Total Amount due to Government	$ 463	$ 179

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Disclosure - 7. RETIREMENT PLAN (Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Mar. 31, 2013
Disclosure - 7. Retirement Plan Narrative
Matching contribution	3.00%
Contribution expense	$ 750	$ 804
Accrued compensation benefits	$ 1,700		$ 4,100

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10. RELATED PARTY TRANSACTIONS

3 Months Ended

Jun. 30, 2013

Related Party Transactions [Abstract]

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company leases substantially all of the real property of the acquired Hospitals from PCHI which is owned by various physician investors and Ganesha, which is managed by Dr. Chaudhuri. As of June 30 and March 31, 2013, Dr. Chaudhuri and Mr. Thomas are the beneficial holders of an aggregate of 447.5 million shares of the outstanding stock of the Company. As described in Note 9, PCHI is a variable interest entity and the Company is the primary beneficiary, accordingly, the Company has consolidated the financial statements of PCHI in the accompanying unaudited condensed consolidated financial statements.

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6. STOCK INCENTIVE PLAN

3 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

NOTE 6 - STOCK INCENTIVE PLAN

The Company's 2006 Stock Incentive Plan (the "Plan"), which is shareholder-approved, permits the grant of share options to its employees and board members for up to a maximum aggregate of 12.0 million shares of common stock. In addition, as of the first business day of each calendar year in the period 2007 through 2015, the maximum aggregate number of shares shall be increased by a number equal to one percent of the number of shares of common stock of the Company outstanding on December 31 of the immediately preceding calendar year. Accordingly, as of June 30, 2013, the maximum aggregate number of shares under the Plan was 26.1 million. The Company believes that such awards better align the interests of its employees with those of its shareholders. In accordance with the Plan, incentive stock options, nonqualified stock options, and performance based compensation awards may not be granted at less than 100 percent of the estimated fair market value of the common stock on the date of grant. Incentive stock options granted to a person owning more than 10 percent of the voting power of all classes of stock of the Company may not be issued at less than 110 percent of the fair market value of the stock on the date of grant. Option awards generally vest based on 3 years of continuous service (1/3 of the shares vest on the twelve month anniversary of the grant date, and an additional 1/12 of the shares vest on each subsequent fiscal quarter-end of the Company following such twelve month anniversary). Certain option awards provide for accelerated vesting if there is a change of control, as defined. The option awards have 7-year contractual terms.

When the measurement date is certain, the fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model. Since there is limited historical data with respect to both pre-vesting forfeiture and post-vesting termination, the expected life of the options was determined utilizing the simplified method, whereby the expected term is calculated by taking the sum of the vesting term plus the original contractual term and dividing that quantity by two.

No options were granted or exercised during the three months ended June 30, 2013 and 2012. All outstanding options were fully vested as of June 30 and March 31, 2013.

A summary of stock option activity for the three months ended June 30, 2013 is presented as follows.

	Shares			Weighted- average exercise price		Weighted- average grant date fair value		Weighted- average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, March 31, 2013		7,595		$	0.18
Granted		–		$	–	$	–
Exercised		–		$	–
Forfeited or expired		(10	)	$	0.26
Outstanding, June 30, 2013		7,585		$	0.18				1.4	$	–
Exercisable at June 30, 2013		7,585		$	0.18				1.4	$	–

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three months ended June 30, 2013 are not necessarily indicative of the results for the entire 2014 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013 filed with the SEC on June 28, 2013.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and the Company is the primary beneficiary and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values). 

LIQUIDITY - As of June 30, 2013, the Company had total stockholders’ equity of $15.3 million and working capital of $15.8 million.  For the three months ended June 30, 2013, the Company had net income of $45.4 million. At June 30, 2013, the Company had $24.2 million in additional availability under its revolving credit facility (Note 3). Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47 million in revenues and incurring approximately $21.2 million in provider fees and other expenses (Notes 11 and 14). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION - Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net loss of the Company.

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 79% and 54% of the patient service revenues for the three months ended June 30, 2013 and 2012, respectively. No other payers represent a significant concentration of the Company's patient service revenues.

The Company receives all of its inpatient service revenues from operations in Orange County, California. The economic conditions of this service area could affect the ability of patients and third-party payers to reimburse the Company for services through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

USE OF ESTIMATES - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Three months ended June 30,
	2013		2012
Medicare	$	12,293	$	14,762
Medicaid		156,401		8,784
Managed care		49,155		51,726
Indemnity, self-pay and other		19,670		15,475
	$	237,519	$	90,747

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement payables of $463 and $179 as of June 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $5.6 million and $4.7 million during the three months ended June 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended June 30, 2013 and 2012, was $3.3 million and $1.8 million, respectively. As of June 30 and March 31, 2013, estimated DSH receivables were $3.6 million and $5.9 million, respectively, which are reflected as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $19.8 million and $23.6 million for the three months ended June 30, 2013 and 2012, respectively), are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. The Hospitals estimate the discounts for contractual allowances utilizing billing data on an individual patient basis. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program ("MEP") screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs. The estimated costs of charity care (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended June 30, 2013 and 2012 were approximately $2.3 million and $2.1 million, respectively.

The Company is not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying unaudited condensed consolidated financial statements.

PROVISION FOR BAD DEBTS - The Company provides for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

The Company's policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.

LETTER OF CREDIT – At June 30 and March 31, 2013, the Company had an outstanding letter of credit totaling $761. This letter of credit correspondingly reduces the Company’s borrowing availability under its revolving line of credit (Note 3).

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from/to government payers as of June 30 and March 31, 2013:

	June 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	87,624		$	83,964
Allowance for doubtful accounts		(25,671	)		(21,143	)
Accounts receivable, net	$	61,953		$	62,821
Due from government payers:
DSH	$	3,583		$	5,882
	$	3,583		$	5,882
Due to government payers:
Settlement payables	$	463		$	179
	$	463		$	179

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.5% and 6.5% as of June 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.4% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 15.4% and 20.3%, respectively, of managed care patient accounts receivable.

Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending under the MEP, with appropriate contractual allowances recorded. If the patient does not qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for bad debts. Reclassifications of pending Medicaid accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for bad debts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of June 30 and March 31, 2013 based on historical collections experience.

INVENTORIES OF SUPPLIES - Inventories of supplies are valued at the lower of weighted average cost or market.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and any impairment write-downs related to assets held and used. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Capital leases are recorded at the beginning of the lease term as property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of the lease term or their estimated useful life, where applicable.

The Company uses the straight-line method of depreciation for buildings and improvements, and equipment over their estimated useful lives of 25 years, and 3 to 15 years, respectively.

LONG-LIVED ASSETS - The Company evaluates its long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company to be reasonable and supportable. These assumptions take into account patient volumes, changes in payer mix, revenue, and expense growth rates and changes in legislation and other payer payment patterns.

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 and February 2013 (Note 4).

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at June 30, 2013	$	11,922		–		–	$	11,922
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,646
Balance at June 30, 2013	$	11,922

Additional quantitative information about Level 3 fair value measurements is discussed in Note 4.

WARRANTS - The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The Company has concluded that the warrants should be classified as liabilities as the exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its net deferred tax since they did not meet the more-likely-than-not threshold.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

SEGMENT REPORTING - The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net patient service revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. There are similarities in the region's economic characteristics and the nature of the Hospitals' operations, the regulatory environment in which they operate and the manner in which they are managed. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

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13. COMMITMENTS AND CONTINGENCIES (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Commitments and Contingencies Disclosure [Abstract]
Prepaid insurance	$ 1,941	$ 115
Accrued insurance premiums (Included in other current liabilities)		$ 69

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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative 1) (USD $)	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Mar. 31, 2013
Working capital	$ 16,400,000
Settlement payables	463,000		179,000
Revenue received from supplemental payments	237,519,000	90,747,000
Accounts receivable from government payors	3,583,000		5,882,000
Medicare and Medicaid
Percentage of patient service revenue	79.00%	54.00%
Charity care cost	2,300,000	2,100,000
DSH and CMAC
Proceeds from supplemental payments	5,600,000	4,700,000
Revenue received from supplemental payments	3,300,000	1,800,000
Accounts receivable from government payors	3,600,000		5,900,000
Self-Pay Uninsured and Insured
Self pay collection rate	6.50%		6.50%
Self-Pay Uninsured
Allowance for doubtful accounts	95.20%		95.20%
Self-Pay After Insurance
Allowance for doubtful accounts	76.40%		78.00%
Managed Care
Revenue received from supplemental payments	$ 49,155,000	$ 51,726,000
Allowance for doubtful accounts	15.40%		20.30%

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13. COMMITMENTS AND CONTINGENCIES

3 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

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. As of June 30, 2013 the Company completed conversion of all of its facilities to the McKesson system. 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.

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 $6.7 million and $7.1 million are included in the accompanying unaudited condensed consolidated balance sheets as of June 30 and March 31, 2013, respectively. Interest rates used in computing the net present value of the lease payments are based on the interest rates implicit in the leases.

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 June 30 and March 31, 2013, the Company had accrued $11.5 million and $10.6 million, respectively, which is comprised of $5.8 million and $5.5 million, respectively, in incurred and reported claims, along with $5.7 million and $5.1 million, respectively, in estimated IBNR. Estimated insurance recoveries of $2.3 million and $2.1 million are included in other prepaid expenses and current assets as of June 30 and March 31, 2013, respectively.

The Company has purchased statutory coverage insurance to fund its obligations under its workers compensation program. The Company has a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a $250 deductible, per occurrence/loss limit. The prefunded program is subject to an annual adjustment until all losses are closed. 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 June 30 and March 31, 2013, the Company had accrued $470 and $500, respectively, comprised of $195 and $200, respectively, in incurred and reported claims, along with $275 and $300, respectively, in estimated IBNR.

In addition, the Company has a self-insured health benefits plan for its employees. As a result, the Company has established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. The Company’s IBNR accruals at June 30 and March 31, 2013 were based upon projections. The Company determines the adequacy of this accrual by evaluating its limited historical experience and trends related to both health insurance claims and payments, information provided by its 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 the Company’s unaudited condensed consolidated financial statements. As of June 30 and March 31, 2013, the Company had accrued $1.9 million and $1.9 million, respectively, in estimated IBNR.

The Company has also purchased excess liability policies with aggregate limits of $25 million. The excess liability 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 June 30, 2013, the Company finances various insurance policies at an interest rate of 4.1% per annum. The Company incurred finance charges relating to such policies of $11.2 and $12.1 for the three months ended June 30, 2013 and 2012, respectively. As of June 30 and March 31, 2013, the accompanying unaudited condensed consolidated balance sheets include the following balances relating to the financed insurance policies.

	June 30, 2013		March 31, 2013
Prepaid insurance	$	1,941	$	115
Accrued insurance premiums	$	–	$	69
(Included in other current liabilities)

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.

There have been no material developments in the matters identified in the Company’s Form 10-K filed with the SEC on June 28, 2013.

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9. VARIABLE INTEREST ENTITY

3 Months Ended

Jun. 30, 2013

Variable Interest Entity

NOTE 9 - VARIABLE INTEREST ENTITY

Concurrent with the close of the Acquisition, PCHI simultaneously acquired title to substantially all of the real property acquired by the Company in the Acquisition. The Company received $5.0 million and PCHI guaranteed the Company's $47.277 million term loan. The Company remains primarily liable as the borrower under the $47.277 million term loan notwithstanding its guarantee by PCHI. The $47.277 million term loan is cross-collateralized by substantially all of the Company's assets and all of the real property of the Hospitals. All of the Company's operating activities are directly affected by the real property that was sold to PCHI, which is a related party entity that is affiliated with the Company through common ownership and control. As of June 30, 2013, PCHI was owned 51% by various physician investors and 49% by Ganesha, which is managed by Dr. Chaudhuri (majority stockholder in the Company).

The Company entered into a lease agreement dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI (Note 13). The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all the properties. However, until PCHI refinances the related $47.277 million term loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company offsets, against its rental payments owed to PCHI, interest payments that it makes on the related $47.277 million term loan. Lease payments to PCHI and offsetting interest payments are eliminated in consolidation.

GAAP defines variable interest entities (“VIE”) as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as a VIE, the guidance sets forth a model to a primary beneficiary based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stands to gain from a majority of its expected returns and has the power to direct activities of the VIE that impacts economic performance. The primary beneficiary of a VIE should consolidate the VIE.

The Company determined that it provides the majority of financial support to PCHI through various sources including lease payments, remaining primarily liable under the $47.277 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $47.277 million term loan. The Company concluded that PCHI is a VIE and it is the primary beneficiary. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

PCHI's assets, liabilities, and deficiency are set forth below.

	June 30, 2013			March 31, 2013
Cash	$	252		$	147
Property, net		39,374			39,696
Other		119			49
Total assets	$	39,745		$	39,892
Debt ($47,277, net of discount) (as guarantor)	$	45,683		$	45,530
Other		442			488
Total liabilities		46,125			46,018
Deficiency		(6,380	)		(6,126	)
Total liabilities and accumulated deficit	$	39,745		$	39,892

As noted above, PCHI is a guarantor on the $47.277 million term loan should the Company not be able to perform.  PCHI's total liabilities represent the Company's maximum exposure to loss. Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Notes 2 and 13).

PCHI rental income and the Company’s related rental expense of $2.0 million and $2.0 million were eliminated upon consolidation for the three months ended June 30, 2013 and 2012, respectively.

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2. PROPERTY AND EQUIPMENT (Tables)

3 Months Ended

Jun. 30, 2013

Property, Plant and Equipment [Abstract]

Property and Equipment

Property and equipment consists of the following:

	June 30,			March 31,
	2013			2013
Buildings	$	36,536		$	36,536
Land and improvements		13,523			13,523
Equipment		30,204			28,534
Assets under capital leases		13,264			13,267
		93,527			91,860
Less accumulated depreciation		(29,976	)		(27,872	)
Property and equipment, net	$	63,551		$	63,988

XML

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BASIS OF PRESENTATION

BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated financial statements of Integrated Healthcare Holdings, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, the accompanying unaudited condensed consolidated statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments that are of a normal and recurring nature necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows. The results of operations for the three months ended June 30, 2013 are not necessarily indicative of the results for the entire 2014 fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013 filed with the SEC on June 28, 2013.

The Company has determined that Pacific Coast Holdings Investment, LLC ("PCHI") (Note 9), is a variable interest entity as defined by GAAP and the Company is the primary beneficiary and, accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all amounts included in these notes to the condensed consolidated financial statements are expressed in thousands (except per share amounts, percentages and stock option prices and values). 

LIQUIDITY

LIQUIDITY - As of June 30, 2013, the Company had total stockholders’ equity of $15.3 million and working capital of $15.8 million.  For the three months ended June 30, 2013, the Company had net income of $45.4 million. At June 30, 2013, the Company had $24.2 million in additional availability under its revolving credit facility (Note 3). Through June 30, 2013, the Company has recorded $196.4 million in revenues and incurred $86.0 million in provider fees and other expenses relating to the 2013 hospital quality assurance fee program. For the remaining term of the 2013 hospital quality assurance fee program, the Company anticipates recording approximately $47 million in revenues and incurring approximately $21.2 million in provider fees and other expenses (Notes 11 and 14). The Company is reliant on funds received under the hospital quality assurance fee program and not receiving such funding could have a material adverse effect on its liquidity and financial position and value of its common stock.

DESCRIPTION OF BUSINESS

DESCRIPTION OF BUSINESS - Effective March 8, 2005, the Company acquired four hospitals (the "Hospitals") from subsidiaries of Tenet Healthcare Corporation (the "Acquisition"). The Company owns and operates the four community-based hospitals located in southern California, which are:

● 282-bed Western Medical Center in Santa Ana

● 188-bed Western Medical Center in Anaheim

● 178-bed Coastal Communities Hospital in Santa Ana

● 114-bed Chapman Medical Center in Orange

RECLASSIFICATION FOR PRESENTATION

RECLASSIFICATION FOR PRESENTATION - Certain amounts previously reported have been reclassified to conform to the current period's presentation with no impact on the reported net loss of the Company.

CONCENTRATION OF RISK

CONCENTRATION OF RISK - The Hospitals are subject to licensure by the State of California and accreditation by the Joint Commission. Loss of either licensure or accreditation would impact the ability to participate in various governmental and managed care programs, which provide the majority of the Company's revenues.

Substantially all patient service revenues come from external customers. The largest payers are Medicare and Medicaid (including Medicare and Medicaid managed care plans), which combined accounted for 79% and 54% of the patient service revenues for the three months ended June 30, 2013 and 2012, respectively. No other payers represent a significant concentration of the Company's patient service revenues.

The Company receives all of its inpatient service revenues from operations in Orange County, California. The economic conditions of this service area could affect the ability of patients and third-party payers to reimburse the Company for services through its effect on disposable household income and the tax base used to generate state funding for Medicaid programs.

USE OF ESTIMATES

USE OF ESTIMATES - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Principal areas requiring the use of estimates include third-party cost report settlements, income taxes, accrued insurance retentions, self-insurance reserves, and net patient receivables. Management regularly evaluates the accounting policies and estimates that are used. In general, management bases the estimates on historical experience and on assumptions that it believes to be reasonable given the particular circumstances in which its Hospitals operate. Although management believes that all adjustments considered necessary for fair presentation have been included, actual results may materially vary from those estimates.

PATIENT SERVICE REVENUES

PATIENT SERVICE REVENUES – Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by Medicare, Medicaid, managed care, and other health plans. Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in the consolidated statements of operations. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of payment under managed care contracts (such as stop-loss payments). Since Medicare requires that a hospital's gross charges be the same for all patients (regardless of payer category), gross charges are also what the Hospitals charge all other patients prior to the application of discounts and allowances.

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Three months ended June 30,
	2013		2012
Medicare	$	12,293	$	14,762
Medicaid		156,401		8,784
Managed care		49,155		51,726
Indemnity, self-pay and other		19,670		15,475
	$	237,519	$	90,747

Revenues under the traditional fee-for-service Medicare and Medicaid programs are based primarily on prospective payment systems. Discounts for retrospectively cost based revenues and certain other payments, which are based on the Hospitals' cost reports, are estimated using historical trends and current factors. Cost report settlements for retrospectively cost-based revenues under these programs are subject to audit and administrative and judicial review, which can take several years until final settlement of such matters are determined and completely resolved. Estimates of settlement receivables or payables related to a specific year are updated periodically and at year end and at the time the cost report is filed with the fiscal intermediary. Typically no further updates are made to the estimates until the final Notice of Program Reimbursement is received, at which time the cost report for that year has been audited by the fiscal intermediary. There could be a time lag of several years between the submission of a cost report and receipt of the Final Notice of Program Reimbursement. Since the laws, regulations, instructions and rule interpretations governing Medicare and Medicaid reimbursement are complex and change frequently, the estimates recorded by the Hospitals could change by material amounts. The Company has established settlement payables of $463 and $179 as of June 30 and March 31, 2013, respectively.

The Hospitals receive supplemental payments from the State of California to support indigent care (Medi-Cal Disproportionate Share Hospital payments or "DSH") and from the California Medical Assistance Commission ("CMAC") under the SB 1100 and SB 1255 programs. The Hospitals received supplemental payments of $5.6 million and $4.7 million during the three months ended June 30, 2013 and 2012, respectively. The related revenue recorded for the three months ended June 30, 2013 and 2012, was $3.3 million and $1.8 million, respectively. As of June 30 and March 31, 2013, estimated DSH receivables were $3.6 million and $5.9 million, respectively, which are reflected as due from government payers in the accompanying unaudited condensed consolidated balance sheets.

Revenues under managed care plans, including Medicare and Medicaid managed care plans (with patient service revenues of $19.8 million and $23.6 million for the three months ended June 30, 2013 and 2012, respectively), are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues are also subject to review and possible audit by the payers. The payers are billed for patient services on an individual patient basis. An individual patient's bill is subject to adjustment on a patient-by-patient basis in the ordinary course of business by the payers following their review and adjudication of each particular bill. The Hospitals estimate the discounts for contractual allowances utilizing billing data on an individual patient basis. Management believes the estimation and review process allows for timely identification of instances where such estimates need to be revised. The Company does not believe there were any adjustments to estimates of individual patient bills that were material to patient service revenues.

The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for Medicaid and other programs they may be eligible for, such as state disability, Victims of Crime, or county indigent programs. Patient advocates from the Hospitals' Medical Eligibility Program ("MEP") screen patients in the hospital and determine potential linkage to financial assistance programs. They also expedite the process of applying for these government programs. The estimated costs of charity care (based on direct and indirect costs as a ratio of gross uncompensated charges associated with providing care to charity patients) for the three months ended June 30, 2013 and 2012 were approximately $2.3 million and $2.1 million, respectively.

The Company is not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying unaudited condensed consolidated financial statements.

PROVISION FOR BAD DEBTS

PROVISION FOR BAD DEBTS - The Company provides for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.

The Company's policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.

CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.

LETTER OF CREDIT

LETTER OF CREDIT – At June 30 and March 31, 2013, the Company had an outstanding letter of credit totaling $761. This letter of credit correspondingly reduces the Company’s borrowing availability under its revolving line of credit (Note 3).

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS – The following is a summary of the principal components of accounts receivable and due from/to government payers as of June 30 and March 31, 2013:

	June 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	87,624		$	83,964
Allowance for doubtful accounts		(25,671	)		(21,143	)
Accounts receivable, net	$	61,953		$	62,821
Due from government payers:
DSH	$	3,583		$	5,882
	$	3,583		$	5,882
Due to government payers:
Settlement payables	$	463		$	179
	$	463		$	179

The Company’s self-pay collection rate, which is the blended collection rate for uninsured and balance after insurance accounts receivable, was approximately 6.5% and 6.5% as of June 30 and March 31, 2013, respectively. These self-pay collection rates include payments made by patients, including co-payments and deductibles paid by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay uninsured was 95.2% and 95.2%, respectively, of self-pay uninsured patient accounts receivable. As of June 30 and March 31, 2013, the allowance for doubtful accounts for self-pay balance after insurance was 76.4% and 78.0%, respectively, of self-pay balance after insurance patient accounts receivable, consisting primarily of co-pays and deductibles owed by patients with insurance. As of June 30 and March 31, 2013, the allowance for doubtful accounts for managed care was 15.4% and 20.3%, respectively, of managed care patient accounts receivable.

Receivables from patients who are potentially eligible for Medicaid are classified as Medicaid pending under the MEP, with appropriate contractual allowances recorded. If the patient does not qualify for Medicaid, the receivables are reclassified to charity care and written off, or they are reclassified to self-pay and adjusted to their net realizable value through the provision for bad debts. Reclassifications of pending Medicaid accounts to self-pay do not typically have a material impact on the results of operations as the estimated Medicaid contractual allowances initially recorded are not materially different than the estimated provision for bad debts recorded when the accounts are reclassified. All accounts classified as pending Medicaid, as well as certain other governmental receivables, over the age of 90 days were reserved in contractual allowances as of June 30 and March 31, 2013 based on historical collections experience.

INVENTORIES OF SUPPLIES

INVENTORIES OF SUPPLIES - Inventories of supplies are valued at the lower of weighted average cost or market.

PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and any impairment write-downs related to assets held and used. Additions and improvements to property and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Capital leases are recorded at the beginning of the lease term as property and equipment and a corresponding lease liability is recognized. The value of the property and equipment under capital lease is recorded at the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of the lease term or their estimated useful life, where applicable.

The Company uses the straight-line method of depreciation for buildings and improvements, and equipment over their estimated useful lives of 25 years, and 3 to 15 years, respectively.

LONG-LIVED ASSETS

LONG-LIVED ASSETS - The Company evaluates its long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from established market values of comparable assets or internal calculations of estimated undiscounted future net cash flows. The estimates of future net cash flows are based on assumptions and projections believed by the Company to be reasonable and supportable. These assumptions take into account patient volumes, changes in payer mix, revenue, and expense growth rates and changes in legislation and other payer payment patterns.

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS - The Company's financial assets and liabilities recorded in the unaudited condensed consolidated balance sheets include cash and cash equivalents, restricted cash, receivables, debt, accounts payable, and other liabilities, all of which are recorded at book value which approximates fair value.

GAAP has established a hierarchy for ranking the quality and reliability of the information used to determine fair values and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:	Unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2:	Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3:	Unobservable inputs for the asset or liability.

The Company utilizes the best available information in measuring fair value.  Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company currently has no financial or nonfinancial assets or liabilities subject to fair value measurement on a recurring basis except for warrants issued in April 2010 and February 2013 (Note 4).

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and where they are classified within the hierarchy as of June 30 and March 31, 2013:

	Total		Level 1		Level 2		Level 3
Warrant liability at June 30, 2013	$	11,922		–		–	$	11,922
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,646
Balance at June 30, 2013	$	11,922

Additional quantitative information about Level 3 fair value measurements is discussed in Note 4.

WARRANTS

WARRANTS - The Company has entered into complex transactions that contain warrants (Notes 3 and 4). If an instrument (or an embedded feature) that has the characteristics of a derivative instrument is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The Company has concluded that the warrants should be classified as liabilities as the exercise price is subject to a weighted average ratchet down provision if the Company subsequently sells shares at a price lower than the then exercise price.

INCOME (LOSS) PER COMMON SHARE

INCOME (LOSS) PER COMMON SHARE – Income (loss) per share is calculated under two different methods, basic and diluted. Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted average shares of common stock outstanding during the period and dilutive potential shares of common stock. Dilutive potential shares of common stock, as determined under the treasury stock method, consist of shares of common stock issuable upon exercise of stock warrants or options, net of shares of common stock assumed to be repurchased by the Company from the exercise proceeds (Note 8).

INCOME TAXES

INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. The Company assesses the realization of deferred tax assets to determine whether an income tax valuation allowance is required. The Company has recorded a 100% valuation allowance on its net deferred tax since they did not meet the more-likely-than-not threshold.

There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California. Certain tax attributes carried over from prior years continue to be subject to adjustment by taxing authorities. Any penalties or interest arising from federal or state taxes are recorded as a component of the Company’s income tax provision.

SEGMENT REPORTING

SEGMENT REPORTING - The Company operates in one line of business, the provision of healthcare services through the operation of general hospitals and related healthcare facilities. The Company's Hospitals generate substantially all of its net patient service revenues.

The Company's four Hospitals and related healthcare facilities operate in one geographic region in Orange County, California. There are similarities in the region's economic characteristics and the nature of the Hospitals' operations, the regulatory environment in which they operate and the manner in which they are managed. This region is an operating segment, as defined by GAAP. In addition, the Company's Hospitals and related healthcare facilities share certain resources and benefit from many common clinical and management practices. Accordingly, the Company aggregates the facilities into a single reportable operating segment.

XML

Document and Entity Information	3 Months Ended
	Jun. 30, 2013	Aug. 07, 2013
Document And Entity Information
Entity Registrant Name	Integrated Healthcare Holdings Inc
Entity Central Index Key	0001051488
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		255,307,262
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2014

XML

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

3 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

PATIENT SERVICE REVENUES

The following is a summary of sources of patient service revenues (net of contractual allowances and discounts) before provision for doubtful accounts:

	Three months ended June 30,
	2013		2012
Medicare	$	12,293	$	14,762
Medicaid		156,401		8,784
Managed care		49,155		51,726
Indemnity, self-pay and other		19,670		15,475
	$	237,519	$	90,747

RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

	June 30,			March 31,
	2013			2013
Accounts receivable:
Patient accounts receivable	$	87,624		$	83,964
Allowance for doubtful accounts		(25,671	)		(21,143	)
Accounts receivable, net	$	61,953		$	62,821
Due from government payers:
DSH	$	3,583		$	5,882
	$	3,583		$	5,882
Due to government payers:
Settlement payables	$	463		$	179
	$	463		$	179

Warrant liability

	Total		Level 1		Level 2		Level 3
Warrant liability at June 30, 2013	$	11,922		–		–	$	11,922
Warrant liability at March 31, 2013	$	5,276		–		–	$	5,276

Warrant liability - fair value measurements using significant unobservable inputs

Warrant liability - fair value measurements using significant unobservable inputs (Level 3)
Balance at March 31, 2013	$	5,276
Change in fair value of warrant liability included in earnings		6,646
Balance at June 30, 2013	$	11,922