Accounting Policies

Cash and Cash Equivalents

The Company considers all investments with a maturity date of three months or less from their date of acquisition to be cash equivalents, including money market funds invested in U.S. Treasury securities, short-term treasury bills and commercial paper. Cash and cash equivalents also included amounts on deposit with several major financial institutions in excess of the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these major financial institutions are viable entities.

The Company had operating funds of approximately $5.6 million and $6.6 million at June 30, 2011 and December 31, 2010, respectively, which exclusively relate to a non-profit hospice operation managed in Florida.

Investments

At June 30, 2011 and December 31, 2010, the Company held an ownership interest of approximately 22 percent and 30 percent, respectively, in the combined preferred and common equity of CareCentrix Holdings Inc. During the second quarter of 2011, the Company exchanged 135,870 shares of class A preferred stock of CareCentrix Holdings Inc. for shares of class A common stock of CareCentrix Holdings Inc. The Company then sold such shares of class A common stock to a new investor in CareCentrix. The Company received $18.2 million of which $4.6 million represented accumulated and unpaid dividends on the preferred shares which were reflected in dividend income in the Company's consolidated statements of income.

The Company's ongoing ownership interest is subject to dilution following any equity issuances to employees of CareCentrix Holdings Inc. and any other parties. The Company accounts for its investment in this unconsolidated affiliate using the equity method of accounting, since the Company has the ability to exercise significant influence, but not control, over the affiliate. Significant influence is deemed to exist through the Company's representation on the CareCentrix's Board of Directors and as a result of the $25 million subordinated promissory note from CareCentrix Holdings (see Note 7). The Company's equity ownership interest in CareCentrix Holdings Inc. is recorded in investment in CareCentrix in the accompanying consolidated balance sheets.

At June 30, 2011 and December 31, 2010, the Company had assets of $28.8 million and $26.0 million, respectively, held in a Rabbi Trust for the benefit of participants of the Company's non-qualified defined contribution retirement plan. The corresponding amounts payable to the plan participants are equivalent to the underlying value of the assets held in the Rabbi Trust. Assets held in the Rabbi Trust and amounts payable to plan participants are classified in other assets and other liabilities, respectively, in the Company's consolidated balance sheets.

Debt Issuance Costs

The Company amortizes deferred debt issuance costs over the term of its senior secured credit agreement utilizing an effective interest rate methodology. The Company had unamortized debt issuance costs of $58.1 million at June 30, 2011 and $54.3 million at December 31 2010, recorded in other assets in the Company's consolidated balance sheets. During the first quarter of 2011, the Company (i) incurred incremental debt issuance costs of approximately $10.9 million and (ii) recorded a write-off of deferred debt issuance costs of approximately $3.5 million in connection with the refinancing of the Company's Term Loan A and Term Loan B under the Company's senior secured credit agreement. See Note 11.

Fixed Assets

Fixed assets, including costs of Company developed software, are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the improvement. Repairs and maintenance costs are expensed as incurred.

As of June 30, 2011 and December 31, 2010, fixed assets, net were $85.8 million and $85.7 million, respectively, and included deferred software development costs of $40.6 million and $37.2 million, respectively, primarily related to the Company's LifeSmart clinical management system and replacement of the Company's financial, payroll and human resources systems in 2011. The Company depreciates its clinical management software on a straight-line basis utilizing a seven year useful life, at the time that the technology becomes available for its intended use within a specific branch. Depreciation expense, relating to LifeSmart, approximated $0.3 million and $0.6 million for the second quarter and first six months of 2011, respectively. Depreciation expense, relating to LifeSmart, approximated $0.2 million and $0.4 million for the second quarter and first six months of fiscal 2010, respectively. In connection with the Odyssey acquisition, the Company is conducting a strategic evaluation of its various field operating systems to review alternatives towards achieving a comprehensive platform, capable of handling both its Home Health and Hospice business segments.

Goodwill and Other Indefinite-Lived Intangible Assets

The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and between annual tests if current events or circumstances require an interim impairment assessment. The Company allocates goodwill to its various operating units. The Company compares the fair value of each operating unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of an operating unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the operating unit is less than the carrying value of its goodwill.

The Company is required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values of other indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.

The annual impairment test of goodwill and other indefinite-lived intangible assets for the Company's operating units was performed and the results indicated that there was no impairment for the year ended December 31, 2010. During the second quarter and first six months of 2011, no events or circumstances required an interim impairment assessment.

Home Medical Equipment

As of both June 30, 2011 and December 31, 2010, the net book value of home medical equipment was approximately $1.8 million, representing monitoring and other devices used primarily in the Company's home health business, which are included in fixed assets, net in the Company's consolidated balance sheets.

Obligations Under Self Insurance Programs

As of June 30, 2011 and December 31, 2010, the Company's obligations under insurance programs were $54.1 million and $61.9 million, respectively. The decrease is primarily attributable to the settlement of certain outstanding insurance obligations for less than recorded reserves and timing of payments.

Workers' compensation and professional and general liability expenses were $2.1 million and $6.3 million for the second quarter and first six months of 2011, respectively, as compared to $1.7 million and $8.9 million for the corresponding periods of 2010.

Employee health and welfare expenses were $24.4 million and $44.7 million for the second quarter and first six months of 2011, as compared to $12.9 million and $25.0 million for the corresponding periods of 2010, primarily resulting from an increased number of benefit eligible employees associated with the Odyssey acquisition.

Nursing Home Costs

For patients receiving nursing home care under a state Medicaid program who elect hospice care under Medicare or Medicaid, the Company contracts with nursing homes for the nursing homes to provide patients' room and board services. The state must pay the Company, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to at least 95 percent of the Medicaid daily nursing home rate for room and board furnished to the patient by the nursing home. Under the Company's standard nursing home contracts, the Company pays the nursing home for these room and board services at the Medicaid daily nursing home rate. Nursing home costs are offset by nursing home net revenue, and the net amount is included in cost of services sold in the Company's consolidated statements of income.