10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014.

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 001-33459

Skilled Healthcare Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-3934755
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
27442 Portola Parkway, Suite 200
Foothill Ranch, California	92610
(Address of principal executive offices)	(Zip Code)

(949) 282-5800

(Registrant’s telephone number, including area code)

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  þ    No  o

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  þ    No  o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o		Accelerated filer	þ
Non-accelerated filer	o	(do not check if smaller reporting company)	Smaller reporting company	o

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on August 8, 2014, was:

Class A common stock, $0.001 par value –24,615,157shares

Class B common stock, $0.001 par value –15,511,603 shares

Skilled Healthcare Group, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2014

Index

		Page Number
Part I.	Financial Information
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets — June 30, 2014 (unaudited) and December 31, 2013	3
	Condensed Consolidated Statements of Operations — Three and six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income — Three and six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
Part II.	Other Information
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	64
Item 4.	Mine Safety Disclosures	64
Item 5.	Other Information	64
Item 6.	Exhibits	65
Signatures		66
Exhibit Index		67

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements.

Skilled Healthcare Group, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

	June 30, 2014			December 31, 2013
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,960		$	4,177
Accounts receivable, less allowance for doubtful accounts of $17,943 and $16,665 at June 30, 2014 and December 31, 2013, respectively	110,443			107,215
Deferred income taxes	11,845			9,876
Prepaid expenses	6,009			8,961
Other current assets	11,115			12,188
Total current assets	147,372			142,417
Property and equipment, less accumulated depreciation of $149,175 and $137,484 at June 30, 2014 and December 31, 2013, respectively	336,360			341,822
Leased facility assets, less accumulated depreciation of $4,674 and $4,432 at June 30, 2014 and December 31, 2013, respectively	9,174			9,416
Other assets:
Notes receivable	2,350			520
Deferred financing costs, net	8,600			9,189
Goodwill	68,983			69,065
Intangible assets, less accumulated amortization of $4,799 and $4,640 at June 30, 2014 and December 31, 2013, respectively	18,648			18,807
Deferred income taxes	7,029			9,472
Restricted Assets	30,246			26,965
Other assets	15,199			15,743
Total other assets	151,055			149,761
Total assets	$	643,961		$	643,416
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	57,868		$	57,179
Employee compensation and benefits	41,385			32,979
Current portion of long-term debt	10,198			7,630
Total current liabilities	109,451			97,788
Long-term liabilities:
Insurance liability risks	29,232			29,534
Other long-term liabilities	12,471			12,367
Long-term debt, less current portion	400,036			411,495
Total liabilities	551,190			551,184
Commitments and contingencies — Note 8
Stockholders’ equity:
Class A common stock, 175,000 shares authorized, $0.001 par value per share; Issued and outstanding - 24,635 and 24,278 at June 30, 2014 and December 31, 2013, respectively	25			24
Class B common stock, 30,000 shares authorized, $0.001 par value per share; Issued and outstanding - 15,512 and 15,515 at June 30, 2014 and December 31, 2013 respectively	16			16
Additional paid-in-capital	380,808			378,756
Accumulated deficit	(288,078		)	(286,592		)
Accumulated other comprehensive income	—			28
Total stockholders’ equity	92,771			92,232
Total liabilities and stockholders’ equity	$	643,961		$	643,416

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

3

Skilled Healthcare Group, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue:
Net patient service revenue	$	206,172		$	209,405		$	412,685		$	423,702
Leased facility revenue	807			787			1,594			1,548
	206,979			210,192			414,279			425,250
Expenses:
Cost of services (exclusive of rent cost of revenue and depreciation and amortization shown below)	178,529			182,815			358,838			369,084
Rent cost of revenue	4,922			4,685			9,696			9,354
General and administrative	7,287			6,837			13,371			13,292
Change in fair value of contingent consideration	(121		)	(2,244		)	(107		)	(2,161		)
Depreciation and amortization	6,034			5,902			12,120			11,800
Governmental investigation expense	6,000			—			6,000			—
Impairment of long-lived assets	82			—			82			—
Loss on disposal of asset	5			—			5			—
	202,738			197,995			400,005			401,369
Other (expenses) income:
Interest expense	(7,945		)	(8,734		)	(15,984		)	(17,409		)
Interest income	302			112			345			224
Other income (expense), net	7			(32		)	60			(62		)
Equity in earnings of joint venture	92			472			638			960
Debt modification/retirement costs	(822		)	(1,088		)	(822		)	(1,088		)
Total other (expenses) income, net	(8,366		)	(9,270		)	(15,763		)	(17,375		)
(Loss) income from continuing operations before (benefit) provision for income taxes	(4,125		)	2,927			(1,489		)	6,506
(Benefit) provision for income taxes	(1,345		)	1,139			(3		)	1,384
(Loss) income from continuing operations	(2,780		)	1,788			(1,486		)	5,122
Loss from discontinued operations, net of tax	—			(265		)	—			(529		)
Net (loss) income	$	(2,780	)	$	1,523		$	(1,486	)	4,593
(Loss) earnings per share, basic:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	0.05		$	(0.04	)	$	0.13
Loss per share from discontinued operations	—			(0.01		)	—			(0.01		)
(Loss) earnings per share	$	(0.07	)	$	0.04		$	(0.04	)	$	0.12
(Loss) earnings per share, diluted:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	0.05		$	(0.04	)	$	0.13
Loss per share from discontinued operations	—			(0.01		)	—			(0.01		)
(Loss) earnings per share	$	(0.07	)	$	0.04		$	(0.04	)	$	0.12
Weighted-average common shares outstanding, basic	38,098			37,646			38,035			37,602
Weighted-average common shares outstanding, diluted	38,098			38,186			38,035			38,139

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

4

Skilled Healthcare Group, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Net (loss) income	$	(2,780	)	$	1,523		$	(1,486	)	$	4,593
Other comprehensive (loss) income:
Unrealized loss on investment available for sale - net of income tax benefit of $9 for the three months ended June 30, 2013; net of income tax benefit of $10 for the six months ended June 30, 2013.				(14		)				(16		)
Reclassification adjustments:
Gain realized in net loss on investments available for sale - net of income tax expense of $17 for the three and six months ended June 30, 2014.	(28		)	—			(28		)
Interest expense on interest rate swap - net of income tax expense of $56 and $107 for the three and six months ended June 30, 2013.	—			87			—			169
Other comprehensive (loss) income, net of tax	(28		)	73			(28		)	153
Comprehensive (loss) income	$	(2,808	)	$	1,596		(1,514		)	4,746

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

5

Skilled Healthcare Group, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2014			2013
Cash Flows from Operating Activities
Net (loss) income	$	(1,486	)	$	4,593
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	12,120			12,266
Change in fair value of contingent consideration	(107		)	(2,161		)
Provision for doubtful accounts	6,625			6,097
Non-cash stock-based compensation	1,446			1,634
Loss on disposal of assets	5			—
Amortization of deferred financing costs	1,803			1,323
Debt modification/retirement costs	822			1,088
Deferred income taxes	474			4,080
Impairment of long lived assets	82			—
Amortization of discount on debt	282			475
Changes in operating assets and liabilities:
Accounts receivable	(12,643		)	(21,037		)
Payments on notes receivable	727			1,419
Other current and non-current assets	2,004			(1,642		)
Accounts payable and accrued liabilities	1,298			766
Employee compensation and benefits	5,739			(328		)
Insurance liability risks	1,812			4,271
Other long-term liabilities	211			945
Net cash provided by operating activities	21,214			13,789
Cash Flows from Investing Activities
Additions to property and equipment	(6,261		)	(5,981		)
Proceeds from maturity of investments	1,060			—
Net cash used in investing activities	(5,201		)	(5,981		)
Cash Flows from Financing Activities
Borrowings under line of credit	157,000			165,000
Repayments under line of credit	(163,057		)	(161,000		)
Repayments of long-term debt	(4,741		)	(9,121		)
Proceeds from exercise of stock options	948			—
Taxes paid related to net share settlement of equity awards	(343		)	(222		)
Payment of financing costs	(2,037		)	(2,449		)
Net cash used in financing activities	(12,230		)	(7,792		)
Increase in cash and cash equivalents	3,783			16
Cash and cash equivalents at beginning of period	4,177			2,003
Cash and cash equivalents at end of period	$	7,960		$	2,019

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

6

	Six Months Ended June 30,
	2014			2013
Supplemental cash flow information
Cash paid for:
Interest expense	$	13,073		$	15,684
Income taxes, net	$	(1,838	)	$	181
Non-cash activities:
Conversion of accounts receivable into notes receivable	$	2,782		$	—
Insurance premium financed	$	1,625		$	1,187

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

7

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business

Current Business

Skilled Healthcare Group, Inc. ("Skilled") is a holding company that owns subsidiary companies that operate long-term care facilities and provides a wide range of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. Skilled and its consolidated wholly-owned companies are collectively referred to as the "Company." As of June 30, 2014, the Company operated facilities in California, Iowa, Kansas, Missouri, Nevada, Nebraska, New Mexico and Texas, including 73 skilled nursing facilities ("SNFs"), which offer sub-acute care, rehabilitative, specialty healthcare, and skilled nursing care, and 22 assisted living facilities ("ALFs"), which provide room and board and assistance with activities of daily living. The Company leases five skilled nursing facilities in California to an unaffiliated third party operator. In addition, through its Hallmark Rehabilitation subsidiary ("Hallmark"), the Company provides a variety of rehabilitative services such as physical, occupational and speech therapy in Company-operated facilities and unaffiliated facilities. Furthermore, as of June 30, 2014, the Company provided hospice care and home health services in Arizona, California, Idaho, Montana, Nevada and New Mexico. The Company also provides private duty care services in Idaho, Montana, and Nevada. The Company has an administrative services company that provides a full complement of administrative and consultative services that allows affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. The Company currently has one such service agreement with an unrelated skilled nursing facility operator. The Company also owns a 50% interest in an institutional pharmacy in Texas, which currently serves eight of the Company's SNFs as well as other facilities unaffiliated with the Company.

In June 2014, the Company commenced operations at its state-of-the-art skilled nursing facility in Kansas City, Kansas. The facility is co-located within the University of Kansas' acute rehabilitation hospital adjacent to the medical school. This facility added 96 licensed beds to the Company's long term care operations. As of June 30, 2014, the newly leased facility was not at full operation.

2. Discontinued Operations

On December 1, 2013, the Company disposed of two skilled nursing facilities, one owned facility in Texas and one leased facility in California. The results of operations of these facilities for all periods presented and the losses associated with the transaction have been classified as discontinued operations, net of tax, in the accompanying condensed consolidated statements of operations as the operations have been eliminated from the Company’s ongoing operations.

A summary of the discontinued operations for the periods presented is as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Net operating revenues	$	—	$	3,500		$	—	$	7,317
Operating expenses	—		3,932			—		8,180
Loss from discontinued operations	—		(432		)	—		(863		)
Income tax benefit	—		(167		)	—		(334		)
Loss from discontinued operations	$	—	$	(265	)	$	—	$	(529	)

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 (collectively, the "Interim Financial Statements"), are unaudited. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted, as permitted under applicable U.S. Securities and Exchange Commission rules and regulations. Readers of the Interim Financial Statements should refer to the Company's audited consolidated financial statements and notes thereto (as updated by Note 3, "Summary of Significant Accounting Policies," in this filing), for the year ended December 31, 2013, which are

8

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

included in the Company's 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Management believes that the Interim Financial Statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company's financial information in all material respects as of the dates and for the periods presented. The results of operations presented in the Interim Financial Statements are not necessarily indicative of operations to be expected for the entire year or any other period.

The accompanying Interim Financial Statements include the accounts of Skilled and its consolidated wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Estimates and Assumptions

The interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which require the Company to consolidate company financial information and make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the Company’s interim financial statements relate to revenue, allowance for doubtful accounts, self-insured liability risks, income taxes, governmental investigation, and valuation of contingent consideration.

Revenue and Accounts Receivables

Revenue and accounts receivable are recorded on an accrual basis as services are performed at their estimated net realizable value. The Company derives a majority of its revenue from funds under federal Medicare and state Medicaid assistance programs, the continuation of which are dependent upon governmental policies and are subject to audit risk and potential recoupment.

Overall payments made by Medicare for hospice services are subject to an annual cap amount on a per hospice agency basis. Total Medicare payments received for services rendered during the applicable Medicare hospice cap year by each Medicare-certified agency during this period are compared to the cap amount for the relevant period. Payments in excess of the cap are subject to recoupment by Medicare. For the three months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $1.4 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the three months ended June 30, 2014, $0.5 million was related to the 2014 cap year and $0.4 million was related to the 2013 cap year. Of the $1.4 million recorded in the three months ended June 30, 2013, $0.7 million was related to the 2013 cap year and $0.7 million was related to the 2012 cap year. For the six months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $2.9 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the six months ended June 30, 2014, $0.5 million was related to the 2014 cap year and$0.4 million was related to the 2013 cap year. Of the $2.9 million recorded in the six months ended June 30, 2013, $0.7 million was related to the 2013 cap year, $2.0 million was related to the 2012 cap year, and $0.2 million was related to the 2011 cap year.

Notes Receivable

As of June 30, 2014 and December 31, 2013, net notes receivable were approximately $4.1 million and $2.0 million, respectively, of which $1.7 million and $1.5 million was reflected as current assets as of June 30, 2014 and December 31, 2013, with the remaining balances reflected as long-term assets. Interest rates on these notes approximated market rates as of the date the notes were originated.

As of June 30, 2014, two customers of the Company's rehabilitation therapy services business were responsible for 100% of the net notes receivable balance. The notes receivable, as well as the receivables from these customers, are secured by the assets of the customers as well as a personal guaranty by the principal owners of the customers. Additionally, the customers represented $8.5 million, or 43.6% of the net accounts receivable for the Company's rehabilitation therapy services business and approximately $19.3 million, or 41.7%, of the external revenue of the rehabilitation therapy services business for the six months ended June 30, 2014.

The notes receivable balance is stated net of an allowance for uncollectibility. At June 30, 2014, there was no note receivable reserve balance.

Recent Accounting Pronouncement

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, ("ASU 2014-08").  This ASU requires an entity to report disposed components or components held-for-sale in discontinued operations if such components represent a strategic shift that have or will have a significant effect on operations and financial results. Additionally, expanded disclosure about discontinued operations and disposals of significant components that do not qualify for discontinued operations presentation will be required. The adoption of ASU 2014-08 is effective prospectively for disposals that occur within annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company is currently evaluating the impact to the consolidated financial statements.

9

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-08").  This ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The ASU is effective beginning in the first quarter of our fiscal year 2017. Early adoption is not permitted. The Company is currently evaluating the impact to the consolidated financial statements.

4. (Loss) Income Per Share

The Company computes (loss) income per share of Class A common stock and Class B common stock using the two-class method. The Company's Class A common stock and Class B common stock are identical in all respects, except with respect to voting rights and that each share of Class B common stock is convertible into one share of Class A common stock under certain circumstances. (Loss) income is allocated on a proportionate basis to each class of common stock in the determination of (loss) income per share.

Basic net (loss) income per share was computed by dividing net (loss) income by the weighted-average number of outstanding shares for the period. Diluted earnings per share is computed by dividing income (loss) plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any. The following table sets forth the computation of basic and diluted net (loss) income per share of Class A common stock and Class B common stock for the three and six months ended June 30, 2014 and June 30, 2013 (amounts in thousands, except per share data):

	Three months ended June 30, 2014									Three months ended June 30, 2013									Six months ended June 30, 2014									Six months ended June 30, 2013
	Class A			Class B			Total			Class A			Class B			Total			Class A			Class B			Total			Class A			Class B			Total
Net (loss) Income per share, basic
Numerator:
Allocation of (loss) income from continuing operations	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	1,048		$	740		$	1,788		$	(880	)	$	(606	)	$	(1,486	)	$	3,000		$	2,122		$	5,122
Allocation of loss from discontinued operations	—			—			—			(155		)	(110		)	(265		)	—			—			—			(310		)	(219		)	(529		)
Allocation of net (loss) income	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	893		$	630		$	1,523		$	(880	)	$	(606	)	$	(1,486	)	$	2,690		$	1,903		$	4,593
Net (loss) income per share, diluted
Numerator:
Allocation of (loss) income from continuing operations	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	1,059		$	729		$	1,788		$	(880	)	$	(606	)	$	(1,486	)	$	3,030		$	2,092		$	5,122
Allocation of loss from discontinued operations	—			—			—			(157		)	(108		)	(265		)	—			—			—			(313		)	(216		)	$	(529	)
Allocation of net (loss) income	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	902		$	621		$	1,523		$	(880	)	$	(606	)	$	(1,486	)	$	2,717		$	1,876		$	4,593
Denominator for basic and diluted (loss) income per share:
Weighted average common shares outstanding, basic	22,585			15,513			38,098			22,070			15,576			37,646			22,521			15,514			38,035			22,026			15,576			37,602
Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable	—			—			—			540			—			540			—			—			—			537			—			537
Adjusted weighted-average common shares outstanding, diluted	22,585			15,513			38,098			22,610			15,576			38,186			22,521			15,514			38,035			22,563			15,576			38,139
(Loss) earnings per share, basic:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.05		$	0.05		$	0.05		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.13		$	0.13		$	0.13
Loss per share from discontinued operations	—			—			—			(0.01		)	(0.01		)	(0.01		)	—			—			—			$	(0.01	)	$	(0.01	)	$	(0.01	)
(Loss) earnings per share	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.04		$	0.04		$	0.04		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.12		$	0.12		$	0.12
(Loss) earnings per share, diluted:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.05		$	0.05		$	0.05		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.13		$	0.13		$	0.13
Loss per share from discontinued operations	—			—			—			(0.01		)	(0.01		)	(0.01		)	—			—			—			$	(0.01	)	$	(0.01	)	$	(0.01	)
(Loss) earnings per share	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.04		$	0.04		$	0.04		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.12		$	0.12		$	0.12

The following were excluded from the weighted-average diluted shares computation for the three and six months ended June 30, 2014 and 2013, as their inclusion would have been anti-dilutive (shares in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Options to purchase common shares	338	585	492	585
Non-vested common shares	198	434	221	911
Total excluded	536	1,019	713	1,496

5. Business Segments

The Company has three reportable operating segments: (i) long-term care services ("LTC"), which includes the operation of SNFs and ALFs (which is the most significant portion of the Company's business), the Company's administrative services provided to an unrelated SNF operator, and the facility lease revenue from a third-party operator; (ii) the Company's rehabilitation therapy services business; and (iii) the Company's hospice and home health businesses. The "other" column in the table below includes general and administrative items, as well as joint venture equity earnings. The Company's reporting segments are business units that offer different services, and that are managed differently due to the nature of the services provided.

At June 30, 2014, LTC services included 73 wholly-owned SNF operating companies that offer post-acute, rehabilitative custodial and specialty skilled nursing care, as well as 22 wholly-owned ALF operating companies that provide room and board and social services. Therapy services included rehabilitative services such as physical, occupational and speech therapy provided in the Company's facilities and in unaffiliated facilities. Hospice and home health services were provided by the Company's wholly-owned subsidiaries to patients.

The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. Accordingly, earnings from operations before net interest, tax, depreciation and amortization, non-core expenses ("Adjusted EBITDA") and rent cost of revenue ("Adjusted EBITDAR") is used as the primary measure of each segment’s operating results because it does not include such costs as interest expense, income taxes, depreciation, amortization and rent cost of revenue which may vary from segment to segment depending upon various factors, including the method used to finance the original purchase of assets within a segment or the tax law of the states in which a segment operates. By excluding these items, the Company is better able to evaluate operating performance of the segment by focusing on more controllable measures. Adjusted EBITDA and Adjusted EBITDAR are non‑GAAP financial measures. For a full discussion of the definitions of these terms and the reasons why the Company utilizes such measures, see Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this filing. General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss, and are included in the "other" category in the selected segment financial data that follows. Intersegment sales and transfers are recorded at cost plus standard mark-up; intersegment transactions have been eliminated in consolidation.

10

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table sets forth selected interim financial data consolidated by business segment (dollars in thousands):

	Long-Term Care Services		Therapy Services		Hospice & Home Health Services			Other			Elimination			Total
Three months ended June 30, 2014
Net patient service revenue from external customers	$	162,264	$	23,076	$	20,832		$	—		$	—		$	206,172
Leased facility revenue	807		—		—			—			—			807
Intersegment revenue	503		14,066		—			—			(14,569		)	—
Total revenue	$	163,574	$	37,142	$	20,832		$	—		$	(14,569	)	$	206,979
Operating income (loss)	$	12,950	$	3,892	$	(5,192	)	$	(7,409	)	$	—		$	4,241
Interest expense, net of interest income														(7,643		)
Other income														7
Equity in earnings of joint venture														92
Debt modification/retirement costs														(822		)
Loss from continuing operations before benefit for income taxes														$	(4,125	)
Depreciation and amortization	$	5,520	$	165	$	227		$	122		$	—		$	6,034
Segment capital expenditures	$	2,469	$	18	$	53		$	171		$	—		$	2,711
Adjusted EBITDA	$	18,834	$	4,056	$	1,461		$	(6,074	)	$	—		$	18,277
Adjusted EBITDAR	$	23,297	$	4,056	$	1,920		$	(6,074	)	$	—		$	23,199
Three months ended June 30, 2013
Net patient service revenue from external customers	$	157,512	$	26,637	$	25,256		$	—		$	—		$	209,405
Leased facility revenue	787		—		—			—			—			787
Intersegment revenue	653		14,018		—			—			(14,671		)	—
Total revenue	$	158,952	$	40,655	$	25,256		$	—		$	(14,671	)	$	210,192
Operating income (loss)	$	12,608	$	2,705	$	3,879		$	(6,995	)	$	—		$	12,197
Interest expense, net of interest income														(8,622		)
Other expense														(32		)
Equity in earnings of joint venture														472
Debt modification/retirement costs														(1,088		)
Income from continuing operations before provision for income taxes														$	2,927
Depreciation and amortization	$	5,428	$	174	$	135		$	165		$	—		$	5,902
Segment capital expenditures	$	3,365	$	70	$	83		$	62		$	—		$	3,580
Adjusted EBITDA	$	18,237	$	2,879	$	2,017		$	(4,832	)	$	—		$	18,301
Adjusted EBITDAR	$	22,464	$	2,879	$	2,483		$	(4,840	)	$	—		$	22,986
Six months ended June 30, 2014
Net patient service revenue from external customers	$	322,850	$	46,143	$	43,693		$	—		$	—		$	412,685
Leased facility revenue	1,594		—		—			—			—			1,594
Intersegment revenue	954		27,901		—			—			(28,855		)	—
Total revenue	$	325,398	$	74,044	$	43,693		$	—		$	(28,855	)	$	414,279
Operating income (loss)	$	23,920	$	7,197	$	(3,208	)	$	(13,635	)	$	—		$	14,274
Interest expense, net of interest income														(15,639		)

11

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Other			Elimination			Total
Other income													60
Equity in earnings of joint venture													638
Debt modification/retirement costs													(822		)
Loss from continuing operations before provision from income taxes													$	(1,489	)
Depreciation and amortization	$	11,061	$	333	$	462	$	264		$	—		$	12,120
Segment capital expenditures	$	5,307	$	54	$	107	$	793		$	—		$	6,261
Adjusted EBITDA	$	35,964	$	7,530	$	3,863	$	(11,227	)	$	—		$	36,130
Adjusted EBITDAR	$	44,735	$	7,530	$	4,788	$	(11,227	)	$	—		$	45,826
Six months ended June 30, 2013
Net patient service revenue from external customers	$	318,608	$	53,744	51,350		$	—		$	—		$	423,702
Leased facility revenue	1,548		—		—		—			—			1,548
Intersegment revenue	1,194		29,190		—		—			(30,384		)	—
Total revenue	$	321,350	$	82,934	51,350		$	—		$	(30,384	)	$	425,250
Operating income (loss)	$	25,289	$	5,659	6,583		$	(13,650	)	$	—		$	23,881
Interest expense, net of interest income													(17,185		)
Other expense													(62		)
Equity in earnings of joint venture													960
Debt modification/retirement costs													(1,088		)
Income from continuing operations before provision for income taxes													$	6,506
Depreciation and amortization	$	10,802	$	350	$	291	$	357		$	—		$	11,800
Segment capital expenditures	$	5,562	$	93	$	213	$	113		$	—		$	5,981
Adjusted EBITDA	$	36,987	$	6,010	$	5,219	$	(10,856	)	$	—		$	37,360
Adjusted EBITDAR	$	45,423	$	6,010	$	6,137	$	(10,856	)	$	—		$	46,714

12

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

A reconciliation of Adjusted EBITDA and Adjusted EBITDAR to net (loss) income is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Adjusted EBITDAR	$	23,199		$	22,986		$	45,826		$	46,714
Rent cost of revenue	(4,922		)	(4,685		)	(9,696		)	(9,354		)
Adjusted EBITDA	18,277			18,301			36,130			37,360
Depreciation and amortization	(6,034		)	(5,902		)	(12,120		)	(11,800		)
Interest expense	(7,945		)	(8,734		)	(15,984		)	(17,409		)
Interest income	302			112			345			224
Change in fair value of contingent consideration	121			2,244			107			2,161
Organization restructure costs	(631		)	(1,549		)	(1,071		)	(1,549		)
Exit costs related to divested facilities	27			—			(340		)	—
Losses at skilled nursing facility not at full operation	(133		)	—			(133		)	—
Governmental investigation expense	(6,000		)	—			(6,000		)	—
Professional fees related to non-routine matters	(1,205		)	(457		)	(1,519		)	(1,393		)
Debt modification/retirement costs	(822		)	(1,088		)	(822		)	(1,088		)
Impairment of long-lived assets	(82		)	—			(82		)	—
Discontinued operations, net of taxes	—			(265		)	—			(529		)
Benefit (provision) for income taxes	1,345			(1,139		)	3			(1,384		)
Net (loss) income	$	(2,780	)	$	1,523		$	(1,486	)	$	4,593

The following table presents the segment assets as of June 30, 2014 compared to December 31, 2013 (in thousands):

	Long-Term Care  Services		Therapy Services		Hospice & Home Health Services		Other		Total
June 30, 2014:
Segment total assets	$	448,036	$	49,664	$	78,472	$	67,789	$	643,961
Goodwill and intangibles included in total assets	$	1,168	$	23,693	$	62,770	$	—	$	87,631
December 31, 2013:
Segment total assets	$	445,987	$	48,251	$	80,290	$	68,888	$	643,416
Goodwill and intangibles included in total assets	$	1,300	$	23,693	$	62,879	$	—	$	87,872

6. Property and Equipment

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014			December 31, 2013
Land and land improvements	$	62,370		$	62,370
Buildings and leasehold improvements	324,121			320,923
Furniture and equipment	90,695			87,392
Construction in progress	8,349			8,621
	485,535			479,306
Less accumulated depreciation	(149,175		)	(137,484		)
	$	336,360		$	341,822

13

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Leased facility assets consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014			December 31, 2013
Leased facility assets	$	13,848		$	13,848
Less accumulated depreciation	(4,674		)	(4,432		)
	$	9,174		$	9,416

The Company began leasing five skilled nursing facilities in California to an unaffiliated third party operator in April 2011 and at that time signed a 10-year lease with two10-year extension options exercisable by the lessee.

7. Income Taxes

For the three months ended June 30, 2014, the Company recorded an income tax benefit of $1.3 million representing an effective tax rate of 32.6% compared to an income tax expense of $1.1 million from continuing operations for the same period in 2013. The reduction in tax expense for the three months ended June 30, 2014 was primarily due to a $7.1 million decrease in pretax income, from $2.9 million for the three months ended June 30, 2013 to a loss from continuing operations of $4.1 million for the three months ended June 30, 2014, offset by $0.3 million of tax expense related to stock compensation for shares that vested at a lower price than the grant value.

For the six months ended June 30, 2014, the Company recorded an income tax expense of less than $0.1 million representing an effective tax rate of negative 0.2% compared to an income tax expense of $1.4 million from continuing operations for the same period in 2013. The reduction in tax expense for the six months ended was primarily due to a $8.0 million decrease in pretax income, from $6.5 million for the six months ended June 30, 2013 to a loss from continuing operations of $1.5 million for the six months ended June 30, 2014.  

14

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8. Commitments and Contingencies

Legal Matters

General

Skilled and its subsidiaries are party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of business, including without limitation claims that their services have resulted in injury or death to patients who receive care from the Company's businesses and claims related to employment, staffing requirements and commercial and other matters. Although Skilled and its subsidiaries intend to vigorously defend themselves in these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on the Company's results of operations and financial condition. The Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of settlement negotiations, judicial and administrative rulings, advice of legal counsel and other information and events pertaining to a particular case.

Skilled and its subsidiaries operate in a highly regulated industry. They are subject to ongoing regulatory oversight by state and federal regulatory authorities. Actual or alleged failure to comply with legal and regulatory requirements could subject Skilled and its subsidiaries to civil, administrative or criminal fines, penalties or restitutionary relief, and authorities could seek the suspension or exclusion of the offending provider or individual from participation in government healthcare programs and could lead to recoupment claims on prior payments by government healthcare programs. Adverse determinations in legal and regulatory investigations, actions and proceedings, whether currently asserted or arising in the future, could have a material adverse effect on the Company's financial position, results of operations and cash flows.

See also Part II, Item 1A -- Risk Factors, included elsewhere in this report, including without limitation the sections therein entitled "Significant legal actions, which are commonplace in our professions, could subject us to increased operating costs and substantial uninsured liabilities, which would materially and adversely affect our results of operations, liquidity and financial condition," "Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction or repayment," "We are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance" and "We face reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business."

Creekside Hospice Investigation

On August 2, 2013, the United States Attorney for the District of Nevada and the Civil Division of the U.S. Department of Justice (collectively, the “DOJ”) informed us that its Civil Division was investigating the Company, as well as its subsidiary, Creekside Hospice II, LLC, for possible violations of federal and state healthcare fraud and abuse laws and regulations. Those laws could have included the federal False Claims Act ("FCA") and the Nevada False Claims Act ("NFCA"). The FCA provides for civil and administrative fines and penalties, plus treble damages. The NFCA provides for similar fines and penalties, including treble damages. Violations of those federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs.

On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intends to take over the actions and file an amended complaint within 90 days, asserting that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 did not meet Medicare requirements for reimbursement and are in violation of the civil False Claims Act. The Company believes that False Claims Act remedies will be pursued for an unspecified amount, with a request to treble provable damages and impose penalties per proved false claim in the amount ranging from $5,500 to $11,500 per claim. Additionally, alternative remedies such as overpayment, mistake or unjust enrichment may be sought.

While the Company denies the allegations and will defend this action, the Company has accrued $6.0 million as a contingent liability in connection with the matter, but it could ultimately cost more than that amount to settle or otherwise resolve it, including to satisfy any judgment that might be rendered against the Company or Creekside if the litigation defense were ultimately unsuccessful.

15

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Humboldt County Litigation

In connection with the September 2010 settlement of class action litigation against Skilled and certain of its subsidiaries related to, among other matters, alleged understaffing at certain California skilled nursing facilities operated by Skilled's subsidiaries (the "Humboldt County Action"), Skilled and its defendant subsidiaries (collectively, the "Defendants”) entered into settlement agreements with the plaintiffs and intervenor and agreed to an injunction. The settlement was approved by the Superior Court of California, Humboldt County on November 30, 2010. Under the terms of the settlement agreements, the defendant entities deposited a total of $50.0 million into escrow accounts to cover settlement payments to class members, notice and claims administration costs, reasonable attorneys' fees and costs and certain other payments, including $5.0 million to settle certain government agency claims and potential government claims that may arise. Of the $5.0 million provided for such government claims, $1.0 million was initially released by the court to the Humboldt County Treasurer-Tax Collector on behalf of the People of the State of California for their release of the Defendants. The remaining $4.0 million was available for the settlement and releases by the California Attorney General and certain other District Attorneys. However, in the event that any of these government authorities were to instead file certain actions against the Defendants by February 2013, the entire $4.0 million would have reverted to the Defendants upon their request to the Settlement Administrator.No such actions were filed, however, resulting in an additional $1.0 million distribution to the Humboldt County District Attorney's Office and the remaining $3.0 million was distributed to the class settlement fund, as required by the settlement agreement.

In addition to the payments to the Humboldt County Treasurer-Tax Collector on behalf of the People of the State of California, the court alsoapproved payments from the escrow of up to approximately $24.8 million for plaintiff attorneys' fees and costs and $10,000 to each of the three named plaintiffs.  Pursuant to the injunction, the twenty-two Defendants that operated California nursing facilities were required to provide specified nurse staffing levels, comply with specified state and federal regulations governing staffing levels and posting requirements, and provide reports and information to a court-appointed auditor. The injunction was to remain in effect for a period of twenty-four months unless extended for additional three-month periods as to any Defendants who violated the injunction. Defendants demonstrating compliance for an eighteen-month period that ended September 30, 2012 were permitted to petition for early termination of the injunction. The Defendants were required to demonstrate over the term of the injunction that the costs of the injunction met a minimum threshold level pursuant to the settlement agreement, which level, initially $9.6 million, was reduced by the portion attributable to any Defendant in the case that no longer operated a skilled nursing facility during the injunction period.

In April 2011, five of the subsidiary Defendants transferred their operations to an unaffiliated third party skilled nursing facility operator (the “Former Humboldt County Facilities”). On November 14, 2012, the Defendants filed a motion to terminate the injunction and vacate the final judgment in the Humboldt County Action. Based upon compliance with the injunction through the requisite eighteen-month period, on December 21, 2012, the Superior Court of California, Humboldt County granted the Defendants' motion for early termination of the injunction, and the injunction has now ended with respect to the 17 California nursing facilities that the subsidiary Defendants still operate. In its order, the court determined that the injunction termination did not apply to the Former Humboldt County Facilities. However, the 2010 court-approved stipulation and order establishing the injunction provides that the injunction applies to the named defendants and any successor licensees of the applicable nursing facilities, but only if those successor licensees are affiliates of the named defendants. As noted above, the Former Humboldt County Facilities have been operated by an unaffiliated third party since April 2011. Therefore, under the terms of the injunction it does not apply to the Former Humboldt County Facilities unless an affiliate of the Defendants operates them. Pursuant to the BMFEA matter discussed below the California theories in this context were released in February 2013.

In the course of ongoing communications with the California Attorney General's Bureau of Medi-Cal Fraud & Elder Abuse ("BMFEA") related to the BMFEA matter discussed below, representatives of the California Attorney General and the U.S. Department of Justice ("DOJ") indicated an interest in pursuing an action under the False Claims Act ("FCA"). The DOJ expressed that it believes the company has FCA and other legal liabilities based upon the jury findings in the Humboldt County Action and otherwise related to staffing and perhaps other considerations related thereto. While the Company continues to cooperate with the government's evaluation of the matter, the Company views the government's apparent legal theories, including the False Claims Act theories, as lacking support in the established case law. The Company intends to vigorously defend any such action if brought.

BMFEA Matter

On April 15, 2009, two of Skilled's wholly-owned companies, Eureka Healthcare and Rehabilitation Center, LLC (“EHRC”), which at the time operated Eureka Healthcare and Rehabilitation Center (the "Facility"), and Skilled Healthcare, LLC (“SHC”), the administrative services provider for the Facility, were served with a search warrant that related to an investigation of the Facility by the BMFEA. The search warrant related to, among other things, records, property and information regarding certain enumerated patients of the Facility and covered the period from January 1, 2007 through the date

16

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

of the search. On October 31, 2012, the BMFEA filed a criminal complaint (the “BMFEA Action”) in California Superior Court, Humboldt County against EHRC, SHC and Skilled alleging elder endangerment in nine misdemeanor counts under Penal Code Section 368(c) and two felony counts under Penal Code Section 368(b)(1) related to the care of certain patients at the Facility in 2008. No individuals were named as defendants in the complaint. The Company disputed the BMFEA's theories of alleged criminal liability and vigorously defended the action. The charges filed by the BMFEA, if proven, would have carried fines of up to $6,000 for each of the two felony counts and $2,000 for each of the nine misdemeanor counts. Convictions could also lead to exclusion from participation in federal healthcare programs under federal laws such as the Federal False Claims Act and the Civil Monetary Penalty Law, which could be materially adverse to Skilled's business. EHRC transferred its operations in April 2011 to an unaffiliated third party skilled nursing facility operator, and has not had any ongoing operations since that time.

On February 15, 2013, the parties reached a mutually satisfactory settlement of the BMFEA Action. Pursuant to the settlement: (i) Skilled and SHC were dismissed from the case with prejudice; (ii) EHRC pled no contest to a single misdemeanor count of elder endangerment under Penal Code Section 368(c) and agreed to pay a statutory fine of $680, pay $145,000 to the California Attorney General for its costs of investigation, and to serve two (2) years of summary probation; and (iii) the California Attorney General granted Skilled, SHC, and twenty-five (25) of their affiliates who currently or formerly operated skilled nursing facilities in California, a release of any potential liability to the California Attorney General under certain civil statutes based upon conduct occurring through the effective date of the settlement (including the FCA theories discussed under Humboldt County Litigation above). The court accepted EHRC's misdemeanor plea and the other relevant terms of the settlement on February 15, 2013. Notwithstanding EHRC's no contest plea to the single misdemeanor charge, the Company, SHC and EHRC continue to deny any liability for the allegations in the BMFEA Action. The release granted by the California Attorney General may not apply to the DOJ should it choose to pursue action against us.

Pursuant to the settlement, Skilled, SHC and their twenty (20) affiliated current California skilled nursing facility operators also agreed to a 2-year staffing agreement (the “2013 Staffing Agreement”) with the California Attorney General that essentially continues the requirements of the staffing-related injunction that was in effect until December 2012 as a result of the September 2010 settlement of the Humboldt County Action. Similar to the former staffing-related injunction, the 2013 Staffing Agreement requires the applicable nursing facility operators to provide a minimum of 3.2 nursing hours per patient day as required by applicable California regulation and to adhere to related regulatory requirements, as well as to submit to periodic compliance audits of the same. Unlike the former staffing-related injunction, however, the 2013 Staffing Agreement does not provide for early termination based on demonstrated compliance and does not contain a minimum spend requirement. To date the 2013 Staffing Agreement has not, and the Company does not believe it will, require the Company or its affected affiliates to incur any material staffing or other costs beyond what they would otherwise incur in the ordinary course of business.

Insurance

The Company maintains various insurance and self insurance for property and casualty including workers' compensation and general and professional liability. The Company believes that its insurance programs are adequate and appropriate, and where there has not been a direct transfer of risk to the insurance carrier, the Company recognizes a liability in the consolidated financial statements.

Workers' Compensation. The Company has maintained workers' compensation insurance where statutorily required. The commercial workers' compensation insurance purchased is loss sensitive in nature. As a result, the Company is responsible for adverse loss development. The Company self-insures the first unaggregated $1.0 million per workers' compensation claim for all operations. The Company has elected not to carry workers' compensation insurance in Texas as a qualified non-subscriber and may be liable for negligence claims that are asserted against it by its Texas-based employees. The Company recognizes a liability in its financial statements for its estimated self-insured workers' compensation risks. Historically, estimated liabilities have been sufficient to cover actual claims. Effective January 1, 2014 the Company self-insures its workers compensation for all its business operations, other than those based in Texas, through its wholly-owned insurance company based on actuarily determined estimates.

General and Professional Liability. The Company's services subject it to certain liability risks. Malpractice and similar claims may be asserted against the Company if its services are alleged to have resulted in patient injury or other harm. The Company is subject to malpractice and similar claims and other litigation in the ordinary course of business.

The Company purchases excess liability policies for claims in excess of its unaggregated self insured retention for all businesses. The Company also self-insures professional liability claims through its wholly-owned insurance company.

The Company's Hospice and home health businesses are insured under a separate general and professional liability insurance policy. The excess liability coverage referenced above is also applicable to this policy.

17

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Actuarial Analysis. Changes in actuarial estimates are reviewed on a quarterly basis for professional and general liability claims and semi-annually for workers compensation claims. Variances in expected ultimate liabilities are recognized accordingly.

Employee Medical Insurance. Medical preferred provider option programs are offered as a component of the Company's employee benefits. The Company retains a self-insured amount up to a contractual stop loss amount of $0.25 million deductible for its preferred provider organization plan. All other employee medical plans are guaranteed cost plans.

A summary of the liabilities related to insurance risks are as follows (dollars in thousands):

	As of June 30, 2014:											As of December 31, 2013
	General and Professional			Employee Medical			Workers’ Compensation			Total		General and Professional			Employee Medical			Workers’ Compensation			Total
Current	$	7,620	(1)	$	2,079	(2)	$	6,213	(2)	$	15,912	$	8,228	(1)	$	2,446	(2)	$	3,178	(2)	$	13,852
Non-current	14,530			—			14,702			29,232		12,762			—			16,772			29,534
	$	22,150		$	2,079		$	20,915		$	45,144	$	20,990		$	2,446		$	19,950		$	43,386

(1) Included in accounts payable and accrued liabilities.

(2) Included in employee compensation and benefits.

Hallmark Indemnification

Hallmark, the Company's rehabilitation services subsidiary, provides physical, occupational and speech therapy services to various unaffiliated skilled nursing facilities. These unaffiliated skilled nursing facilities are reimbursed for these services from the Medicare Program and other third-party payors. Hallmark has indemnified these unaffiliated skilled nursing facilities from a portion of certain disallowances of these services. Additionally, to the extent a Recovery Auditor ("RA") or other regulatory authority or contractor is successful in making a claim for recoupment of revenue from any of these skilled nursing facilities, Hallmark will typically be required to indemnify them against their charges associated with this loss. No material indemnification payments were required to be made in the three and six months ended June 30, 2014 or 2013.

Financial Guarantees

Substantially of all Skilled's wholly-owned subsidiaries guarantee the Company's first lien senior secured credit facility, excluding the subsidiaries that are pledged as collateral for the ten mortgage loans insured by the U.S. Department of Housing and Urban Development Program ("HUD") and the ten facilities pledged to MidCap Financial as collateral for the MidCap Financial credit facility. These loans are discussed in Note 11, "Debt", below. The aforementioned guarantees are full and unconditional and joint and several. Other subsidiaries of Skilled that are not guarantors are considered minor.

9. Stockholders' Equity

Accumulated Other Comprehensive Income

Accumulated other comprehensive income refers to gains and losses that are recorded as an element of stockholders' equity but are excluded from net (loss) income. The Company's other comprehensive (loss) income consists of net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and gains and losses from investments available for sale. Details of other comprehensive (loss) income are included in the accompanying condensed consolidated Statements of Comprehensive (Loss) Income.

2007 Incentive Award Plan

During the six months ended June 30, 2014, the Company granted performance stock awards covering 512,475 shares of common stock. Each of the stock awards is subject to market-based vesting criteria. In order for the shares to vest, the Company must attain various average stock prices, each over a thirty-day period. There were no such market-based awards issued in the six months ended June 30, 2013.

During the year ended June 30, 2014, the following occurred with respect to restricted stock awards, restricted stock units, and performance stock awards under the Company’s existing plans (number of shares in thousands):

18

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Number of Shares		Weighted- Average Grant Date Fair Value
Non-vested balance at January 1, 2014	2,256		$	6.42
Granted	872		4.75
Vested	(322	)	4.51
Forfeited	(582	)	5.44
Non-vested balance at June 30, 2014	2,224		$	6.30

As of June 30, 2014, there was approximately $5.4 million of total unrecognized compensation costs related to restricted stock awards, restricted stock units and performance stock awards. These costs have a weighted-average remaining recognition period of 1.9 years as of June 30, 2014. The total fair value of shares vested during the period ended June 30, 2014 was $1.5 million.

The following table summarizes stock option activity during the six months ended June 30, 2014 under the Skilled Healthcare Group, Inc. Amended and Restated 2007 Incentive Award Plan:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2014	794,645		$	8.54
Granted	—		$	—
Exercised	(160,548	)	$	5.91
Forfeited or cancelled	(157,083	)	$	9.55
Outstanding at June 30, 2014	477,014		$	9.09	4.65	$	—
Fully vested and expected to vest at June 30, 2014	475,956		$	9.10	4.65	$	—
Exercisable at June 30, 2014	456,491		$	9.15	4.53	$	—

As of June 30, 2014, there was $0.1 million of unrecognized compensation cost related to outstanding stock options, net of estimated forfeitures. This amount is expected to be recognized over a weighted-average period of 1.4 years. To the extent the forfeiture rate is different than the Company has anticipated, stock-based compensation related to these awards will be different from the Company's expectations.

Aggregate intrinsic value represents the value of Skilled's closing stock price on the New York Stock Exchange on the last trading day of the fiscal period in excess of the exercise price, multiplied by the number of options outstanding or exercisable.

Compensation related to stock option grants and stock awards included in general and administrative expenses was $0.6 million and $0.1 million for the three months ended June 30, 2014 and 2013, respectively. The amount of compensation included in general and administrative expense was $1.2 million and $0.9 million for the six months ended June 30, 2014 and 2013, respectively. The amount of compensation included in cost of services was $0.2 million for both the three months ended June 30, 2014 and 2013, respectively. The amount of compensation included in cost of services was $0.2 million and $0.8 million for the six months ended June 30, 2014 and 2013.

10. Fair Value Measurements

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following table summarizes the valuation of the Company’s marketable securities and contingent consideration as of June 30, 2014 (dollars in thousands) and December 31, 2013:

19

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	June 30, 2014						December 31, 2013
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Available for sale securities	$	—	$	—	$	—	$	—	$	1,046	$	—
Trading securities	$	—	$	8,526	$	—	$	—	$	—	$	—
Contingent consideration – acquisitions	$	—	$	—	$	1,329	$	—	$	—	$	1,736

The Company's wholly-owned offshore captive insurance company is required by regulatory agencies to set aside assets to comply with the laws of the jurisdiction in which it operates. These assets consist of restricted cash and trading securities, which are included in restricted assets in the Company's consolidated June 30, 2014 condensed balance sheet. The unrealized holding gain included in (loss) income on the Company's trading securities was negligible for the three and six months ended June 30, 2014 and 2013.

On July 1, 2011, a wholly-owned subsidiary of the Company acquired Altura Homecare & Rehab ("Altura"). The acquisition included contingent earn-out consideration which can be earned based on the acquired business's achievement of an EBITDA threshold. The contingent consideration is up to $1.5 million over a period of 3 years following the closing. The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The fair value of the earn-out was $0.5 million at June 30, 2014 and December 31, 2013.

On October 24, 2011, a wholly-owned subsidiary of the Company acquired substantially all of the assets of Cornerstone Hospice, Inc. ("Cornerstone"). The acquisition included contingent earn-out consideration which can be earned based on the acquired business's achievement of an EBITDA threshold. The contingent consideration is up to $1.5 million over a period of 5 years following the closing. The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The fair value of the earn-out at December 31, 2013 was $1.1 million and at June 30, 2014 was $0.8 million which reflects payments of $0.3 million to the seller and a fair value adjustment of less than $0.1 million.

As discussed above, EBITDA is the basis for calculating the contingent consideration. The unobservable inputs to the determination of the fair value of the contingent consideration include assumptions as to the ability of the acquired businesses to meet their EBITDA targets and discount rates used in the calculation. Should the actual EBITDA generated by the acquired businesses increase or decrease as compared to our assumptions, the fair value of the contingent consideration obligations would increase or decrease, up to the contracted limit, as applicable. As the timing of contingent payments go further into the future, discount rate assumptions increase due to the increased uncertainty of the EBITDA that may be generated in those periods.

The Company's assumptions range from the acquired businesses achieving none, a portion, or all of the consideration, and discount rates range from 2%- 5%.

Below is a table listing the Level 3 rollforward as of June 30, 2014 (in thousands):

Level 3 Rollforward
Value at January 1, 2014	$	1,736
Change in fair value	(107		)
Payout	(300		)
Value at June 30, 2014	$	1,329

Long Term Debt

At June 30, 2014 and December 31, 2013, the aggregate fair value of the Company's term loan due 2016, the revolving credit facility due 2015, the HUD insured loans due in 2043 and 2048, the mortgage term loan due 2016, and the asset based revolving credit facility due 2016, using Level 2 inputs, approximated the carrying value. The carrying value of the debt was approximately $410.2 million and $419.1 million at June 30, 2014 and December 31, 2013 respectively. Fair value was estimated based on current yield rates plus the Company's estimated credit spread available for loan products with similar terms and maturities.

20

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

11. Debt

The Company’s long-term debt is summarized as follows (dollars in thousands):

	As of June 30, 2014			As of December 31, 2013
Term Loan, due April 2016, interest rate based on LIBOR (subject to a 1.50% floor) plus 5.50%, or 7.00%, at June 30, 2014 and LIBOR (subject to a 1.50% floor) plus 5.25%, or 6.75%, at December 31, 2013; collateralized by substantially all assets of the Company excluding the skilled nursing facilities that collateralize the HUD insured mortgage loans and the skilled nursing facilities that collateralize the MidCap Financial credit facility	$	243,953		$	243,953
Term Loan original issue discount	(973		)	(1,254		)
Revolving Credit Facility due April 2015, interest rate comprised of the Prime rate of 3.25% plus 3.50%, or 6.75%, at December 31, 2013	—			11,000
Revolving Credit Facility due April 2016, interest rate comprised of LIBOR plus 5.50%, or 5.74%, at June 30, 2014	7,308			—
Revolving Credit Facility due April 2015, interest rate comprised of LIBOR plus 4.50%, or 4.74%, at June 30, 2014 and December 31, 2013	4,692			7,057
HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively	86,668			87,314
Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities	61,262			62,000
Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities	5,000			5,000
Note payable due December 2018, interest rate fixed at 6.50%, payable in monthly installments, collateralized by a first priority deed of trust	875			959
Insurance premiums financed	1,395			2,990
Other	54			106
Total long-term debt	410,234			419,125
Less amounts due within one year	(10,198		)	(7,630		)
Long-term debt, less current portion	$	400,036		$	411,495

Term Loan and Revolving Credit Facility

On April 9, 2010, the Company entered into an up to $360.0 million senior secured term loan and a $100.0 million revolving credit facility (the "Prior Credit Agreement") that amended and restated the senior secured term loan and revolving credit facility that were set to mature in June 2012. On April 12, 2012, the Company entered into an Amendment and Restatement and Additional Term Loan Assumption Agreement (“Restated Credit Agreement”) that amended and restated the Prior Credit Agreement and pursuant to which, among other things, the size of the Company's existing senior secured term loan was increased by $100.0 million (hereinafter referred to as the incremental senior secured term loan).

On June 6, 2013, the Company entered into an amendment to the Restated Credit Agreement that increased the maximum leverage ratio by 0.50 throughout the life of the Restated Credit Agreement. The amendment additionally permits the Company to make future offers to the lenders under the revolving credit facility to extend the maturity date of all or a portion of the revolving credit facility. The credit arrangements provided under the Restated Credit Agreement are collectively referred to herein as the Company's senior secured credit facility.

In connection with the June 2013 modification, the Company paid fees totaling $2.5 million, of which $1.1 million was recorded as debt modification costs in the consolidated statement of operations, and $1.4 million was recorded as other assets in the consolidated balance sheet. Substantially all of the Company's assets, except those skilled nursing facilities securing the HUD and MidCap mortgage loans, are pledged as collateral under the senior secured credit facility. Amounts borrowed under the senior secured term loan may be prepaid at any time without penalty, except for LIBOR breakage costs. The senior secured term loan matures on April 9, 2016.

21

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On June 23, 2014, the Company entered into an Amendment No. 2 and Loan Modification Agreement ("Amendment No. 2") to our Fourth Amended and Restated Credit Agreement dated April 12, 2012, as previously amended on June 6, 2013. Amendment No. 2 increased the maximum leverage ratio to 5.25 and decreased the fixed charge coverage ratio to 1.85, both up to but not including June 30, 2015. Amendment No. 2 increased the interest rate by 0.25% to the London Interbank Offered Rate ("LIBOR") (subject to a floor of 1.50%) plus a margin of 5.50 or the prime rate (subject to a floor of 2.50%) plus a margin of 4.50%. Amendment No. 2 extended the maturity date of the revolving credit facility to April 9, 2016 and reduced the commitments of any extending revolving lenders by 25%. After giving effect to Amendment No. 2, the extended revolving credit facility commitments are $50.6 million and the non-extended revolving credit facility commitments are $32.5 million, for a total capacity of $83.1 million. The capacity of the revolving credit facility will decrease to $50.6 million on April 9, 2015 until its maturity. Lenders that take an assignment of non-extended commitments may subsequently agree to extend those commitments in accordance with Amendment No. 2. Amendment No. 2 also modified the interest rate for the extended revolving credit commitments to be, at the Company’s option, LIBOR plus a margin between 5.25% and 5.50% (based upon consolidated leverage) or the prime rate plus a margin between 4.25% and 4.50% (based upon consolidated leverage). The interest rates on the non-extended revolving credit facility commitments remain, at the Company’s option, at LIBOR plus a margin of between 4.25% and 4.50% (based upon consolidated leverage) or the prime rate plus a margin between 3.25% and 3.50% (based upon consolidated leverage). In connection with the June 2014 modification, the Company paid fees totaling $2.0 million of which $0.8 million were recorded as debt modification costs in the condensed consolidated statements of operations, and $1.2 million was recorded as other assets in the condensed consolidated balance sheet.

Pursuant to the Restated Credit Agreement, the quarterly term loan amortization payments increased to $2.6 million beginning June 30, 2012 compared to $0.9 million under the Prior Credit Agreement. Due to the principal reductions made in 2013 made in association with the HUD insured financings, no amortization payments are due until December 2014, at which time the quarterly principal payments due will be $1.6 million. Additionally, the maximum portion of the annual Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement) to be applied to term debt reductions increased to 75% from 50%, subject to stepdowns to 50% and 25% based on consolidated leverage. The Company has also increased its ability to refinance a portion of its credit facility with U.S. Department of Housing and Urban Development ("HUD") insured debt up to $250 million, subject to certain credit facility covenants. Any HUD insured borrowings beyond $250 million would necessitate either refinancing the senior secured credit facility in full or otherwise seeking a waiver or amendment from the senior secured lenders.

Under the senior secured credit facility, the Company must maintain compliance with specified financial covenants measured on a quarterly basis. The senior secured credit facility also includes certain additional affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, liens, investments in other businesses and capital expenditures. Also under the senior secured credit facility, subject to certain exceptions and minimum thresholds, the Company is required to apply all of the proceeds from any issuance of debt, as much as half of the proceeds from any issuance of equity, as much as 75% of the Company's annual Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement), and amounts received in connection with any sale of the Company's assets to repay the outstanding amounts under the Restated Credit Agreement. The Company believes that it is in compliance with its debt covenants as of June 30, 2014. As of June 30, 2014, the fixed charge coverage ratio was 2.18, which compares to a minimum requirement of 1.85 and the leverage ratio was 4.72, as compared to an allowed maximum of 5.25.

HUD Insured Loans and Other Mortgage Loans

In 2013, the Company received funding of 10 loans insured by HUD. The loans have a combined aggregate original principal balance of $87.6 million and are secured by 10 skilled nursing facilities. The HUD insured loans have an average all in interest rate of approximately 5.3% and an amortization term of 30 to 35 years. As of June 30, 2014 the HUD insured loans have a combined aggregate principal balance of $86.7 million.

Accordingly, as of June 30, 2014, the Company has 10 mortgages insured by HUD, which are each secured by a skilled nursing facility. These mortgages have an average remaining term of 33 years with fixed interest rates ranging from 3.4% to 4.6% and a weighted average interest rate of 4.2%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required. As all $87.6 million of the HUD insured mortgage loans were originated in 2013, none of the loans could be prepaid at June 30, 2014. Any further HUD insured mortgages will require additional HUD approval.

All HUD-insured mortgages are non-recourse loans to the Company. All mortgages are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of June 30, 2014, the Company has escrow reserve funds of $1.6 million with the loan servicer that are reported within other current assets, and replacement reserve funds of $3.0 million in

22

SKILLED HEALTHCARE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

other assets. The net proceeds of the HUD insured loans were required to be used to pay down term debt under the Restated Credit Agreement. In 2013, $87.6 million of HUD insured loan proceeds were used to pay down term debt.

As of June 30, 2014 the Company has 10 additional skilled nursing facilities securing a $61.3 million mortgage loan and a $5.0 million asset based revolving credit facility with MidCap Financial. Both loans have an interest rate of LIBOR plus a margin of 5.95% with a LIBOR floor of 0.75%. The mortgage loan amortizes over 25 years with the remaining principal due December 1, 2016. There are additional quarterly principal payments of $0.3 million beginning after six months, $0.4 million in year two and $0.5 million in year three. The mortgage loan has a debt service coverage ratio and a minimum debt coverage ratio, both of which were met at June 30, 2014. The asset based revolving credit facility is secured by the accounts receivable of the 10 skilled nursing facilities. In 2013, $65.0 million of mortgage loan and asset based revolving credit facility proceeds were used to pay down term debt.

12. Investment in Joint Venture

Since 1996, the Company had a 50% equity interest in APS - Summit Care Pharmacy, LLC, or APS - Summit Care, which is a company that serves the pharmaceutical needs of a limited number of the Company's affiliated Texas operations, as well as a number of other unaffiliated customers. The remaining 50% equity interest in APS - Summit Care is owned by an unaffiliated third party. APS - Summit Care operates a pharmacy in Austin, Texas, through which the Company's affiliated operations pay market value for prescription drugs and receives a 50% share of the net income related to the joint venture. The Company’s investment balance at June 30, 2014 and 2013 of $5.1 million and $6.0 million, respectively, is included in other assets in the accompanying condensed consolidated balance sheets. The following tables provide summarized information from the balance sheet and statement of earnings for APS - Summit Care as of June 30, 2014:

Statement of Earnings

(In thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Sales, Net	$	3,391	$	4,267	$	6,082	$	6,941
Gross Profit	473		1,409		1,439		2,134
Net Income	$	75	$	897	$	802	$	1,563

Balance Sheet

(In thousands)

	June 30, 2014		December 31, 2013
Current Assets	$	2,485	$	3,518
Non-Current Assets	1,088		1,078
Current Liabilities	129		96
Non-Current Liabilities	$	—	$	—

23

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented. Historical results may not indicate future performance. Our forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 and our subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission (the “SEC”). As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the words, “we,” “our,” and “us” refer to Skilled Healthcare Group, Inc. and its wholly-owned subsidiaries. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes included in this report.

Our selected historical consolidated statements of operations have been recast to reflect our disposal of two skilled nursing facilities on December 1, 2013, as discontinued operations for the quarters ended June 30, 2014 and June 30, 2013. Please refer to the information set forth below in conjunction with other sections of this report, including our consolidated historical financial statements and related notes included elsewhere in this report.

Business Overview

Skilled Healthcare Group, Inc. ("Skilled") is a holding company that owns subsidiary companies that in turn own and operate skilled nursing facilities, assisted living facilities, hospices, home health providers and a rehabilitation therapy business. As used in this report, the terms "we," "us," "our" and the "Company," and similar terms, refer collectively to Skilled and its consolidated wholly-owned subsidiaries, unless the context requires otherwise. We have an administrative service company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. We currently also have one such service agreement with an unaffiliated skilled nursing facility operator. All of our subsidiaries focus on providing high-quality care to the people we serve, and our skilled nursing facility subsidiaries, which comprise the largest portion of our consolidated business, have a strong commitment to treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy, whom we refer to as high-acuity patients. As of June 30, 2014, we owned or leased 73 skilled nursing facilities and 22 assisted living facilities, together comprising 10,275 licensed beds. We also lease five skilled nursing facilities in California to an unaffiliated third party operator. Our skilled nursing and assisted living facilities are located in California, Texas, Iowa, Kansas, Missouri, Nebraska, Nevada and New Mexico, and are generally clustered in large urban or suburban markets. We owned 77% of these facilities as of June 30, 2014. As of June 30, 2014 we provided hospice and home health services in Arizona, California, Idaho, Montana, Nevada, and New Mexico. We also provided private duty care services in Idaho, Montana, and Nevada. For the six months ended June 30, 2014, we generated approximately 74% of our revenue from our skilled nursing facilities, including our integrated rehabilitation therapy services at these facilities. The remainder of our revenue is generated from our assisted living services, rehabilitation therapy services provided to third-party facilities, hospice care, home health, and private duty care services.

In June 2014, the Company commenced operations at its state-of-the-art skilled nursing facility in Kansas City, Kansas. The facility is co-located within the University of Kansas' acute rehabilitation hospital adjacent to the medical school. This facility added 96 licensed beds to the Company's long term care operations. As of June 30, 2014, the newly leased facility was not at full operation.

Industry Trends

Medicare and Medicaid Reimbursement

In an effort to mitigate the cost of providing healthcare benefits, third party payors including Medicare, Medicaid, managed care providers, insurance companies and others have increasingly encouraged the treatment of patients in lower-cost care settings. As a result, in recent years skilled nursing facilities, which typically have significantly lower cost structures than acute care hospitals and certain other post-acute care settings, have generally been serving larger populations of higher-acuity patients than in the past. Despite this growth in demand, uncertainty over Medicare and Medicaid reimbursement rates persists as rates have often been reduced or been increased in lesser amounts than expected. Medicare and Medicaid reimbursement rates are subject to change from time to time and, because revenue derived directly or indirectly from Medicare and Medicaid reimbursement has historically comprised the most significant portion of our consolidated revenue, a reduction or slow growth in rates could materially and adversely impact our revenue, particularly in times of increased regulation and related expenses.

24

Medicare reimburses our skilled nursing facilities under a prospective payment system ("PPS") for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, for certain services based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group ("RUG") category that is based upon each patient's acuity level. In October 2010, the number of RUG categories was expanded from 53 to 66 as part of the implementation of the RUGs IV system and the introduction of a revised and substantially expanded patient assessment tool called the minimum data set (MDS) version 3.0.

On July 1, 2014 CMS issued its proposed rule providing for a net decrease of 0.3% in PPS payments to home health agencies in calendar year 2015. The proposed decrease reflects the effects of the 2.2% home health payment update percentage and the rebasing adjustments to the national, standardized 60-day episode payment rate, the national per-visit payment rates, and the non-routine medical supplies conversion factor.

On July 31, 2014, CMS issued its final rule providing for, among other things, a net increase of 2.0% in PPS payments to skilled nursing facilities for CMS fiscal year 2015 (which begins October 1, 2014) as compared to the PPS payments in CMS fiscal year 2014 (which ends September 30, 2014). The 2.0% increase is on a net basis, after the application of a 2.5% market basket increase reduced by a 0.5% multi-factor productivity adjustment required by the PPACA. There was no forecast error adjustment.

On August 4, 2014 CMS issued its final rule providing for a net increase of 1.4% for payments to hospices serving Medicare beneficiaries for CMS' fiscal year 2015. The hospice payment increase would be the net result of a proposed payment update to the hospice per diem rates of 2.1% market basket increase less a 0.7% decrease in payments to hospices due to updated wage data and the sixth year of CMS' seven-year-phase-out of its wage index budget neutrality adjustment factor.

Should future changes in PPS include reduced rates or increased standards for reaching certain reimbursement levels (including as a result of automatic cuts tied to federal deficit cut efforts or otherwise), our Medicare revenues derived from our skilled nursing facilities (including rehabilitation therapy services provided at our skilled nursing facilities) could be reduced, with a corresponding adverse impact on our financial condition and results of operation. Furthermore, reimbursement rates could grow at a slower rate than our expenses increase. Our rehabilitation therapy, hospice and home health care businesses are also to a large degree directly or indirectly dependent on (and therefore affected by changes in) Medicare and Medicaid reimbursement rates. For example, our rehabilitation therapy business may have difficulty increasing or maintaining the rates it has negotiated with third party nursing facilities in light of the reduced PPS reimbursement rates that took effect on October 1, 2011 or future reductions in (or slow growth of) reimbursement rates.

We also derive a substantial portion of our consolidated revenue from Medicaid reimbursement, primarily through our skilled nursing business. Medicaid programs are administered by the applicable states and financed by both state and federal funds. Medicaid spending nationally has increased substantially in recent years, becoming an increasingly significant component of state budgets. This, combined with slower state revenue growth and other state budget demands, has led both the federal government and many states, including California and other states in which we operate, to institute measures aimed at controlling the growth of Medicaid spending (and in some instances reducing it).

Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

Federal Health Care Reform

In addition to the matters described above affecting Medicare and Medicaid participating providers, PPACA enacted several reforms with respect to skilled nursing facilities, home health agencies and hospices, including payment measures to realize significant savings of federal and state funds by deterring and prosecuting fraud and abuse in both the Medicare and Medicaid programs. While some of the provisions of PPACA will not take effect for several years or are subject to further refinement through the promulgation of regulations, some key provisions of PPACA are presently effective.

• Enhanced CMPs and Escrow Provisions. PPACA includes expanded civil monetary penalty ("CMP") and related provisions applicable to all Medicare and Medicaid providers. CMS rules adopted to implement applicable provisions of PPACA also provide that assessed CMPs may be collected and placed in whole or in part into an escrow pending final disposition of the applicable administrative and judicial appeals processes. To the extent our businesses are assessed large CMPs that are collected and placed into an escrow account pending lengthy appeals, such actions could adversely affect our liquidity and results of operations.

• Nursing Home Transparency Requirements. In addition to expanded CMP provisions, PPACA imposes new transparency requirements for Medicare-participating nursing facilities. In addition to previously required

25

disclosures regarding a facility's owners, management and secured creditors, PPACA expanded the required disclosures to include information regarding the facility's organizational structure, additional information on officers, directors, trustees and "managing employees" of the facility (including their names, titles, and start dates of services), and information regarding certain parties affiliated with the facility. The transparency provisions could result in the potential for greater government scrutiny and oversight of the ownership and investment structure for skilled nursing facilities, as well as more extensive disclosure of entities and individuals that comprise part of skilled nursing facilities' ownership and management structure.

• Face-to-Face Encounter Requirements. PPACA imposes new patient face-to-face encounter requirements on home health agencies and hospices to establish a patient's ongoing eligibility for Medicare home health services or hospice services, as applicable. A certifying physician or other designated health care professional must conduct the face-to-face encounters within specified timeframes, and failure of the face-to-face encounter to occur and be properly documented during the applicable timeframes could render the patient's care ineligible for reimbursement under Medicare.

• Suspension of Payments During Pending Fraud Investigations. PPACA provides the federal government with expanded authority to suspend Medicare and Medicaid payments if a provider is investigated for allegations or issues of fraud. This suspension authority creates a new mechanism for the federal government to suspend both Medicare and Medicaid payments for allegations of fraud, independent of whether a state exercises its authority to suspend Medicaid payments pending a fraud investigation. To the extent the suspension of payments provision is applied to one of our businesses for allegations of fraud, such a suspension could adversely affect our liquidity and results of operations.

• Overpayment Reporting and Repayment; Expanded False Claims Act Liability. PPACA enacted several important changes that expand potential liability under the federal False Claims Act. Overpayments related to services provided to both Medicare and Medicaid beneficiaries must be reported and returned to the applicable payor within specified deadlines, or else they are considered obligations of the provider for purposes of the federal False Claims Act. This new provision substantially tightens the repayment and reporting requirements generally associated with operations of health care providers to avoid False Claims Act exposure.

• Home and Community Based Services. PPACA provides that states can provide home and community-based attendant services and supports through the Community First Choice State plan option. States choosing to provide home and community based services under this option must make them available to assist with activities of daily living, instrumental activities of daily living and health related tasks under a plan of care agreed upon by the individual and his/her representative. PPACA also includes additional measures related to the expansion of community and home based services and authorizes states to expand coverage of community and home-based services to individuals who would not otherwise be eligible for them. The expansion of home-and-community based services could reduce the demand for the facility based services that we provide.

• Health Care-Acquired Conditions. PPACA provides that the Secretary of Health and Human Services must prohibit payments to states for any amounts expended for providing medical assistance for certain medical conditions acquired during the patient's receipt of health care services. The CMS regulation implementing this provision of PPACA prohibits states from making payments to providers under the Medicaid program for conditions that are deemed to be reasonably preventable. It uses Medicare's list of preventable conditions in inpatient hospital settings as the base (adjusted for the differences in the Medicare and Medicaid populations) and provides states the flexibility to identify additional preventable conditions and settings for which Medicaid payment will be denied.

• Value-Based Purchasing. PPACA requires the Secretary of Health and Human Services to develop a plan to implement a value-based purchasing (“VBP”) program for payments under the Medicare program for skilled nursing facilities and to submit a report containing the plan to Congress. The intent of the provision is to potentially reconfigure how Medicare pays for health care services, moving the program towards rewarding better value, outcomes, and innovations, instead of volume. According to the plan submitted to Congress in June 2012, the funding for the VBP program could come from payment withholds from poor-performing skilled nursing facilities or by holding back a portion of the base payment rate or the annual update for all skilled nursing facilities. If a VBP program is ultimately implemented, it is uncertain what effect it would have upon skilled nursing facilities, but its funding or other provisions could negatively affect skilled nursing facilities.

• Anti-Kickback Statute Amendments. PPACA amended the Anti-Kickback Statute so that (i) a claim that includes items or services violating the Anti-Kickback Statute also would constitute a false or fraudulent claim under the federal False Claims Act and (ii) the intent required to violate the Anti-Kickback Statute is

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lowered such that a person need not have actual knowledge or specific intent to violate the Anti-Kickback Statute in order for a violation to be deemed to have occurred. These modifications of the Anti-Kickback Statute could expose us to greater risk of inadvertent violations of the statute and to related liability under the federal False Claims Act.

The provisions of PPACA discussed above are examples of recently enacted federal health reform provisions that we believe may have a material impact on the long-term care profession generally and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that other provisions of PPACA may be interpreted, clarified, or applied to our businesses in a way that could have a material adverse impact on our business, financial condition and results of operations. Similar federal and/or state legislation that may be adopted in the future could have similar effects.

Revenue

Revenue by Service Offering

We operate our business in three reportable operating segments: (i) long-term care services, which includes the operation of skilled nursing and assisted living facilities and is the most significant portion of our business; (ii) our rehabilitation therapy services business; and (iii) our hospice and home health businesses. Our reporting segments are business units that offer different services, and that are managed separately due to the nature of services provided.

In our long-term care services segment, we derive the majority of our revenue by providing skilled nursing care and integrated rehabilitation therapy services to residents in our affiliated skilled nursing facilities. The remainder of our long-term care segment revenue is generated by our assisted living facilities, by our administration of an unaffiliated third party skilled nursing facility, and from our leasing of five skilled nursing facilities to an unaffiliated third party operator. In our therapy services segment, we derive revenue by providing rehabilitation therapy services to third-party facilities. In our hospice and home health services segment, we provide hospice and home health services.

The following table shows the revenue and percentage of our total revenue generated by each of these segments for the periods presented (dollars in thousands):

	Three Months Ended June 30,
	2014				2013
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage		Increase/(Decrease)
									Dollars			Percentage
Long-term care services:
Skilled nursing facilities	$	154,472	74.6	%	$	150,376	71.5	%	$	4,096		2.7	%
Assisted living facilities	7,584		3.7		6,983		3.3		601			8.6
Administration of third party facility	208		0.1		153		0.1		55			35.9
Facility lease revenue	807		0.4		787		0.4		20			2.5
Total long-term care services	163,071		78.8		158,299		75.3		4,772			3.0
Therapy services:
Third-party rehabilitation therapy services	23,076		11.1		26,637		12.7		(3,561		)	(13.4	)
Total therapy services	23,076		11.1		26,637		12.7		(3,561		)	(13.4	)
Hospice & home health services:
Hospice	14,676		7.1		18,386		8.7		(3,710		)	(20.2	)
Home health	6,156		3.0		6,870		3.3		(714		)	(10.4	)
Total hospice & home health services	20,832		10.1		25,256		12.0		(4,424		)	(17.5	)
Total	$	206,979	100.0	%	$	210,192	100.0	%	$	(3,213	)	(1.5	)%

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	Six Months Ended June 30,
	2014				2013
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage		Increase/(Decrease)
									Dollars			Percentage
Long-term care services:
Skilled nursing facilities	$	307,634	74.3	%	$	304,187	71.5	%	$	3,447		1.1	%
Assisted living facilities	14,872		3.6		14,109		3.3		763			5.4
Administration of third party facility	344		0.1		312		0.1		32			10.3
Facility lease revenue	1,594		0.3		1,548		0.4		46			3.0
Total long-term care services	324,444		78.3		320,156		75.3		4,288			1.3
Therapy services:
Third-party rehabilitation therapy services	46,143		11.1		53,744		12.7		(7,601		)	(14.1	)
Total therapy services	46,143		11.1		53,744		12.7		(7,601		)	(14.1	)
Hospice & home health services:
Hospice	30,882		7.5		37,370		8.7		(6,488		)	(17.4	)
Home health	12,811		3.1		13,980		3.3		(1,169		)	(8.4	)
Total hospice & home health services	43,693		10.6		51,350		12.0		(7,657		)	(14.9	)
Total	$	414,279	100.0	%	$	425,250	100.0	%	$	(10,971	)	(2.6	)%

Sources of Revenue

The following table sets forth revenue consolidated by state in dollars and as a percentage of total revenue for the periods presented (dollars in thousands):

	Three Months Ended June 30,
	2014				2013
	Revenue Dollars		Percentage of Revenue		Revenue Dollars		Percentage of Revenue
California	$	86,135	41.6	%	$	86,144	41.0	%
Texas	38,994		18.8		41,214		19.6
New Mexico	24,949		12.1		24,199		11.5
Kansas	15,284		7.4		14,938		7.1
Missouri	15,269		7.4		14,520		6.9
Nevada	13,637		6.6		14,914		7.1
Montana	3,394		1.6		3,535		1.7
Iowa	2,677		1.3		2,213		1.1
Idaho	2,467		1.2		2,792		1.3
Arizona	2,425		1.2		3,793		1.8
Nebraska	1,748		0.8		1,461		0.7
Indiana	—		—		469		0.2
Total	$	206,979	100.0	%	$	210,192	100.0	%

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	Six Months Ended June 30,
	2014				2013
	Revenue Dollars		Percentage of Revenue		Revenue Dollars		Percentage of Revenue
California	$	168,269	40.6	%	$	173,427	40.8	%
Texas	80,898		19.5		84,099		19.8
New Mexico	49,278		11.9		48,473		11.4
Missouri	30,897		7.5		29,602		7.0
Kansas	30,355		7.3		30,343		7.1
Nevada	28,535		6.9		29,827		7.0
Montana	6,739		1.6		7,087		1.7
Arizona	5,651		1.4		8,181		1.9
Iowa	5,095		1.2		4,766		1.1
Idaho	4,971		1.2		5,524		1.3
Nebraska	3,591		0.9		2,942		0.7
Indiana	—		—		979		0.2
Total	$	414,279	100.0	%	$	425,250	100.0	%

Long-Term Care Services Segment

Skilled Nursing Facilities. Within our skilled nursing facilities, we generate our revenue from Medicare, Medicaid, managed care providers, insurers, private pay and other sources. We believe that our skilled mix, which we define as the number of Medicare and non-Medicaid managed care patient days at our skilled nursing facilities divided by the total number of patient days at our skilled nursing facilities for any given period, is an important indicator of our success in attracting high-acuity patients because it represents the percentage of our patients who are reimbursed by Medicare and managed care payors, for whom we receive higher reimbursement rates. Most of our skilled nursing facilities include our Express Recovery^TM program. This program uses a dedicated unit within a skilled nursing facility to deliver a comprehensive rehabilitation and recovery regimen in accommodations specifically designed to serve high-acuity patients.

Assisted Living Facilities. Within our assisted living facilities, which are mostly in Kansas, we generate our revenue primarily from private pay sources, with a small portion earned from Medicaid or other state-specific programs.

Leased Facility Revenue. We lease five skilled nursing facilities in California to an unaffiliated third party operator. For additional information on the lease arrangement, see Note 6 - "Property and Equipment," to the interim financial statements.

Therapy Services Segment

As of June 30, 2014, we provided rehabilitation therapy services to a total of 177 healthcare facilities, including 63 of our facilities, as compared to 194 facilities, including 64 of our facilities, as of June 30, 2013. In addition, we have contracts to manage the rehabilitation therapy services for our 10 healthcare facilities in New Mexico. The net decrease of 17 facilities serviced was comprised of 15 new facilities serviced, net of 32 cancellations. Rehabilitation therapy revenue derived from servicing patients at our own facilities is included in our revenue from skilled nursing facilities. Our rehabilitation therapy business receives payment for services from the third-party facilities that it serves based on negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered. As of June 30, 2014, we provided rehabilitation therapy services to facilities in California, Arizona, Nevada, Texas, Missouri, Nebraska, Iowa, and Kansas. CMS announced on February 18, 2014 that it is in the procurement process for the next round of Recovery Audit Program contracts and it will “pause” RA activities.  This “pause” in RA activities will allow the current RA contractors time to complete all outstanding claim reviews by the end of their specific contract dates. Since February 28, 2014, prepayment reviews have not been conducted; instead all claims will undergo post-payment reviews after the new contracts are in place. At this time CMS has not indicated when the new RAC contracts will be awarded.  However, when they are awarded, the new Recovery Auditor’s will be able to go back to March 2014 and conduct Part B MMR reviews on a Post Payment basis.  This means that the RACs will have the ability and jurisdiction to review claims that were paid during the Recovery Audit Pause. Going forward under the new Recovery Auditor’s contract MMR reviews will continue to be conducted on a post payment basis.

Hospice and Home Health Services Segment

Hospice. As of June 30, 2014, we provided hospice care in Arizona, California, Idaho, Montana, Nevada and New Mexico. We derive substantially all of the revenue from our hospice business from Medicare, Medicaid, and managed care reimbursement.

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For a Medicare beneficiary to qualify for the Medicare hospice benefit, two physicians must certify that, in their best judgment, the beneficiary has less than six months to live, assuming the beneficiary’s disease runs its normal course. In addition, the Medicare beneficiary must affirmatively elect hospice care and waive any rights to other Medicare benefits related to his or her terminal illness. Each benefit period, a physician must re-certify that the Medicare beneficiary’s life expectancy is six months or less in order for the beneficiary to continue to qualify for and to receive the Medicare hospice benefit. The first two benefit periods are measured at 90-day intervals and subsequent benefit periods are measured at 60-day intervals. There is no limit on the number of periods that a Medicare beneficiary may be re-certified. A Medicare beneficiary may revoke his or her election at any time and begin receiving traditional Medicare benefits.

Medicare reimburses us for hospice care. We receive one of four predetermined daily or hourly rates based on the level of care we furnish to the beneficiary. These rates are subject to annual adjustments based on inflation and geographic wage considerations.

We are subject to two limitations on Medicare payments for hospice services. First, if inpatient days of care provided to patients at a hospice exceed 20% of the total days of hospice care provided for an annual period beginning on November 1st, then payment for days in excess of this limit are paid for at the routine home care rate. None of our hospice programs exceeded the payment limits on inpatient services for 2009 through June 30, 2014.

Second, overall payments made by Medicare to us on a per hospice program basis are also subject to a cap amount calculated by the Medicare fiscal intermediary at the end of the hospice cap period. The Medicare revenue paid to a hospice program from November 1 to October 31 may not exceed the annual aggregate cap amount. Up to the 2011 fiscal cap year, which began on November 1, 2010, this annual aggregate cap amount is calculated by multiplying the number of first time Medicare hospice beneficiaries during the year by the Medicare per beneficiary cap amount, resulting in that hospice’s aggregate cap, which is the allowable amount of total Medicare payments that hospice can receive for that cap year. This method is known as the streamlined method. Beginning with the 2011 fiscal cap year, unless an agency elected to stay with the streamlined method, the hospice cap amount is calculated under the proportional method, which spreads the hospice patient's cap allowance over the period for which the patient is under hospice care. For a hospice agency to estimate its cap exposure under the proportional method, the agency must estimate how long patients will stay on service. If a hospice exceeds its aggregate cap, then the hospice must repay the excess back to Medicare. The Medicare cap amount is reduced proportionately for patients who transferred in and out of our hospice services. The Medicare cap amount is adjusted annually for inflation, but is not adjusted for geographic differences in wage levels, although hospice per diem payment rates are wage indexed. For the six month periods ended June 30, 2014 and June 30, 2013 we estimated and recorded a cap reserve of $0.9 million and $2.9 million. See Item 1A of this report, “Risk Factors—We are subject to a Medicare cap amount for our hospice business. Our net patient service revenue and profitability could be adversely affected by limitations on Medicare payments.”

Home Health. We provided home health care in Arizona, Idaho, Montana, Nevada and New Mexico as of June 30, 2014. We derive the majority of the revenue from our home health business from Medicare. The payment is adjusted for the health condition and care needs of the beneficiary. The payment is also adjusted for the geographic differences in wages for home health agencies across the country. The adjustment for the health condition, or clinical characteristics, and service needs of the beneficiary is referred to as the case-mix adjustment. The home health PPS will provide home health agencies with payments for each 60-day episode of care for each beneficiary. If a beneficiary is still eligible for care after the end of the first episode, a second episode can begin. There are no limits to the number of episodes a beneficiary who remains eligible for the home health benefit can receive. While payment for each episode is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate payment for those beneficiaries that have the most expensive care needs.

Regulatory and Other Governmental Actions Affecting Revenue

We derive a substantial portion of our revenue from government Medicare and Medicaid programs. In addition, our rehabilitation therapy services, for which we receive payment from private payors, is significantly dependent on Medicare and Medicaid funding, as those private payors are primarily funded or reimbursed by these programs. The following table summarizes the amount of revenue that we received from each of our payor classes by segment in the periods presented (dollars in thousands):

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	Three Months Ended June 30,
	2014										2013
	Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Total Revenue		Revenue Percentage		Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Total Revenue		Revenue Percentage
Medicare Part A	$	39,791	$	—	$	17,049	$	56,840	27.5	%	$	40,096	$	—	$	21,658	$	61,754	29.4	%
Medicare Part B	3,994		—		—		3,994		1.9		3,345		—		—		3,345		1.6
Medicaid	67,408		—		1,082		68,490		33.1		64,470		—		726		65,196		31.0
Subtotal Medicare and Medicaid	111,193		—		18,131		129,324		62.5		107,911		—		22,384		130,295		62.0
Managed Care Part A	26,040		—		1,498		27,538		13.3		24,468		—		1,418		25,886		12.3
Managed Care Part B	541		—		—		541		0.3		586		—		—		586		0.3
Private pay and other	25,297		23,076		1,203		49,576		24.0		25,334		26,637		1,454		53,425		25.4
Total	$	163,071	$	23,076	$	20,832	$	206,979	100.0	%	$	158,299	$	26,637	$	25,256	$	210,192	100.0	%

	Six Months Ended June 30,
	2014										2013
	Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Total Revenue		Revenue Percentage		Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Total Revenue		Revenue Percentage
Medicare Part A	$	78,948	$	—	$	36,276	$	115,224	27.8	%	$	83,401	$	—	$	44,323	$	127,724	30.0	%
Medicare Part B	7,802		—		—		7,802		1.9		7,652		—		—		7,652		1.8
Medicaid	133,501		—		1,942		135,443		32.7		128,265		—		1,383		129,648		30.5
Subtotal Medicare and Medicaid	220,251		—		38,218		258,469		62.4		219,318		—		45,706		265,024		62.3
Managed Care Part A	53,293		—		2,984		56,277		13.6		49,125		—		2,780		51,905		12.2
Managed Care Part B	1,011		—		—		1,011		0.2		1,150		—		—		1,150		0.3
Private pay and other	49,889		46,143		2,491		98,523		23.8		50,563		53,744		2,864		107,171		25.2
Total	$	324,444	$	46,143	$	43,693	$	414,280	100.0	%	$	320,156	$	53,744	$	51,350	$	425,250	100.0	%

Medicare. Medicare is a federal program that provides certain healthcare benefits to beneficiaries who are 65 years of age or older, blind, disabled or qualify for Medicare’s End Stage Renal Disease program. Medicare provides health insurance benefits in two primary parts for services that we provide:

• Part A. Medicare Part A is hospital insurance, which provides reimbursement for inpatient services for hospitals, skilled nursing facilities, hospices, home health and certain other healthcare providers and patients requiring daily professional skilled nursing and other rehabilitative care. Coverage in a skilled nursing facility is limited for a period of up to 100 days, if medically necessary, after the individual has qualified for Medicare coverage as a result of a three-day or longer hospital stay. Medicare pays for the first 20 days of stay in a skilled nursing facility in full and the next 80 days, to the extent above a daily coinsurance amount. Covered services include supervised nursing care, room

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and board, social services, pharmaceuticals and supplies as well as physical, speech and occupational therapies and other necessary services provided by nursing facilities. Medicare Part A also covers hospice care and some home health care. Skilled nursing facilities are paid under Medicare Part A on the basis of a prospective payment system, or PPS. The PPS payment rates are adjusted for case mix and geographic variation in wages and cover all costs of furnishing covered skilled nursing facilities services (routine, ancillary, and capital-related costs). The amount to be paid is determined by classifying each patient into a resource utilization group ("RUG"), category, which is based upon the patient's acuity level. CMS generally evaluates and adjusts payment rates on an annual basis.

• Part B. Medicare Part B is supplemental medical insurance, which requires the beneficiary to pay monthly premiums, covers physician services, limited drug coverage and other outpatient services, such as physical, occupational and speech therapy services, enteral nutrition, certain medical items and X-ray services received outside of a Part A covered inpatient stay.

Medicaid. Medicaid is a state-administered medical assistance program for the indigent, operated by the individual states with the financial participation of the federal government. Each state has relatively broad discretion in establishing its Medicaid reimbursement formulas and coverage of service, which must be approved by the federal government in accordance with federal guidelines. All states in which we operate cover long-term care services for individuals who are Medicaid eligible and qualify for institutional care. Providers must accept the Medicaid reimbursement level as payment in full for services rendered. Medicaid programs generally make payments directly to providers, except in cases where the state has implemented a Medicaid managed care program, under which providers receive Medicaid payments from managed care organizations ("MCOs") that have subcontracted with the Medicaid program. PPACA provides for increased financial participation by the federal government in a state's Medicaid program if the state chooses to expand its Medicaid program as contemplated by PPACA. However, states are not required to expand their Medicaid programs and it is uncertain as to which states, including states in which we operate, will ultimately expand their programs.

Managed Care. Our managed care patients consist of individuals who are insured by a third-party entity, typically called a senior Health Maintenance Organization ("HMO") plan, or are Medicare beneficiaries who assign their Medicare benefits to a senior HMO plan.

Private Pay and Other. Private pay and other sources consist primarily of individuals or parties who directly pay for their services or are beneficiaries of the Department of Veterans Affairs. In addition, the revenue related to the five leased properties is also included as part of the other payor sources.

Critical Accounting Estimates

There has been no change in our critical accounting policies and estimates as included under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which we filed with the SEC on February 10, 2014.

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Results of Operations

The following table summarizes some of our key performance indicators, along with other statistics, for each of the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Occupancy statistics (skilled nursing facilities):
Available beds in service at end of period	8,670			8,587			8,670			8,587
Available patient days(a)	780,542			782,151			1,552,882			1,556,123
Actual patient days	637,981			641,656			1,274,873			1,283,427
Occupancy percentage(a)	81.7		%	82.0		%	82.1		%	82.5		%
Average daily number of patients	7,011			7,051			7,044			7,091
Hospice average daily census	1,032			1,324			1,058			1,330
Home health episodic-based admissions	1,921			2,091			4,160			4,333
Home health episodic-based recertifications	478			476			913			966
Revenue per patient day (skilled nursing facilities prior to intercompany eliminations)
LTC only Medicare (Part A)	$	520		$	519		$	521		$	520
Medicare blended rate (Part A & B)	572			563			572			568
Managed care (Part A)	407			390			405			386
Managed care blended rate (Part A & B)	415			400			413			395
Medicaid	168			163			167			162
Private and other	178			171			178			174
Weighted-average for all	$	243		$	236		$	242		$	238
Patient days by payor (skilled nursing facilities):
Medicare	76,452			77,226			151,557			160,297
Managed care	64,051			62,680			131,668			127,149
Total skilled mix days	140,503			139,906			283,225			287,446
Private pay and other	96,509			105,690			190,972			206,516
Medicaid	400,969			396,060			800,676			789,465
Total days	637,981			641,656			1,274,873			1,283,427
Patient days as a percentage of total patient days (skilled nursing facilities):
Medicare	12.0		%	12.0		%	11.9		%	12.5		%
Managed care	10.0			9.8			10.3			9.9
Skilled Mix	22.0			21.8			22.2			22.4
Private pay and other	15.1			16.5			15.0			16.1
Medicaid	62.9			61.7			62.8			61.5
Total	100.0		%	100.0		%	100.0		%	100.0		%
Revenue for total company:
Medicare	29.4		%	31.0		%	29.7		%	31.8		%
Managed care, private pay, and other	37.6			38.0			37.6			37.7
Quality mix	67.0			69.0			67.3			69.5
Medicaid	33.0			31.0			32.7			30.5
Total	100.0		%	100.0		%	100.0		%	100.0		%

^(a) Does not reflect available days related to newly open facility not at full operation.

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The following table sets forth details of our revenue, expenses, and net income and other items as a percentage of total revenue for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue	100.0		%	100.0		%	100.0		%	100.0		%
Expenses:
Cost of services (exclusive of rent cost of revenue and depreciation and amortization shown below)	86.3			87.0			86.7			86.8
Rent cost of revenue	2.4			2.2			2.3			2.2
General and administrative	3.5			3.3			3.2			3.1
Change in fair value of contingent consideration	(0.1		)	(1.1		)	—			(0.5		)
Depreciation and amortization	2.9			2.8			2.9			2.8
Governmental investigation expense	2.9			—			1.4			—
Impairment of long-lived assets	—			—			—			—
Loss on disposal of asset	—			—			—			—
	98.0			94.2			96.6			94.4
Other (expense) income:
Interest expense	(3.8		)	(4.2		)	(3.9		)	(4.1		)
Interest income	0.2			0.1			0.1			0.1
Other income (expense), net	—			—			—			—
Equity in earnings of joint venture	—			0.2			0.2			0.2
Debt modification/retirement costs	(0.4		)	(0.5		)	(0.2		)	(0.3		)
Total other (expenses) income, net	(4.0		)	(4.4		)	(3.8		)	(4.1		)
(Loss) income from continuing operations, before (benefit) provision for income taxes	(2.0		)	1.4			(0.4		)	1.5
(Benefit) provision for income taxes	(0.6		)	0.5			—			0.3
(Loss) income from continuing operations	(1.3		)%	0.8			(0.4		)%	1.2		%
Loss from discontinued operations, net of tax	—		%	(0.1		)	—		%	(0.1		)%
Net (loss) income	(1.3		)%	0.7		%	(0.4		)%	1.1		%
Adjusted EBITDA(1)	8.8		%	8.7		%	8.7		%	8.8		%
Adjusted EBITDAR(2)	11.2		%	10.9		%	11.1		%	11.0		%
	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Reconciliation from net (loss) income to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR (in thousands):
Net (loss) income	$	(2,780	)	$	1,523		$	(1,486	)	$	4,593
Interest expense, net of interest income	7,643			8,622			15,639			17,185
(Benefit) provision for income taxes	(1,345		)	1,139			(3		)	1,384
Depreciation and amortization expense	6,034			5,902			12,120			11,800
EBITDA(1)	9,552			17,186			26,270			34,962
Rent cost of revenue	4,922			4,685			9,696			9,354
EBITDAR(2)	14,474			21,871			35,966			44,316
EBITDA(1)	9,552			17,186			26,270			34,962
Change in fair value of contingent consideration	(121		)	(2,244		)	(107		)	(2,161		)
Organization restructure costs	631			1,549			1,071			1,549
Exit costs related to divested facilities	(27		)	—			340			—
Professional fees related to non-routine matters	1,205			457			1,519			1,393
Governmental investigation expense	6,000			—			6,000			—
Debt modification/retirement costs	822			1,088			822			1,088
Losses at skilled nursing facility not at full operation	133			—			133			—

34

Impairment of long-lived assets	82		—		82		—
Discontinued Operations	—		265		—		529
Adjusted EBITDA(1)	18,277		18,301		36,130		37,360
Rent cost of revenue	4,922		4,685		9,696		9,354
Adjusted EBITDAR(2)	$	23,199	$	22,986	$	45,826	$	46,714

(1) We define EBITDA as net (loss) income before depreciation, amortization and interest expense (net of interest income) and the (benefit) provision for income taxes. Adjusted EBITDA is EBITDA adjusted for non-core business items, such as change in fair value of contingent consideration, organization restructuring costs, debt modification/retirement costs, impairment of long lived assets, losses at skilled nursing facility not at full operation, legal expense for non-routine matters, or the exit costs related to divested facilities.

(2) We define EBITDAR as net (loss) income before depreciation, amortization, interest expense (net of interest income), the (benefit) provision for income taxes and rent cost of revenue. Adjusted EBITDAR is EBITDAR adjusted for the non-core business items listed above for the definition of Adjusted EBITDA (each to the extent applicable in the appropriate period.)

We believe that the presentation of EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR provides useful information regarding our operational performance because they enhance the overall understanding of the financial performance and prospects for the future of our core business activities.

Specifically, we believe that a report of EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR provides consistency in our financial reporting and provides a basis for the comparison of results of core business operations between our current, past and future periods. EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are primary indicators management uses for planning and forecasting in future periods, including trending and analyzing the core operating performance of our business from period-to-period without the effect of expenses, revenues and gains (losses) that we believe are unrelated to the day-to-day performance of our business but are required to be reported in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). We also use EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR to benchmark the performance of our business against expected results, analyzing year-over-year trends as described below and to compare our operating performance to that of our competitors.

Management, including operating company based management, uses EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR to assess the performance of our core business operations, to prepare operating budgets and to measure our performance against those budgets on a consolidated and segment level. Segment management uses these metrics to measure performance on a business unit by business unit basis. We typically use Adjusted EBITDA and Adjusted EBITDAR for these purposes on a consolidated basis as the adjustments to EBITDA and EBITDAR are not generally allocable to any individual business unit and we typically use EBITDA and EBITDAR to compare the operating performance of each skilled nursing facility, assisted living facility, or other business unit as well as to assess the performance of our operating segments. EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are useful in this regard because they do not include such costs as interest expense (net of interest income), income taxes, depreciation and amortization expense, rent cost of revenue (in the case of EBITDAR and Adjusted EBITDAR) and special charges, which may vary from business unit to business unit and period-to-period depending upon various factors, including the method used to finance the business, the amount of debt that we have determined to incur, whether a facility is owned or leased, the date of acquisition of a facility or business, the original purchase price of a facility or business unit or the tax law of the state in which a business unit operates. We believe these types of charges are dependent on factors unrelated to the underlying business unit performance. As a result, we believe that the use of EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR provides a meaningful and consistent comparison of our underlying business units between periods by eliminating certain items required by U.S. GAAP which have little or no significance to their day-to-day operations.

Finally, we use Adjusted EBITDA to determine compliance with our debt covenants and assess our ability to borrow additional funds and to finance or expand operations. Our senior secured credit facility uses a measure substantially similar to Adjusted EBITDA as the basis for determining compliance with our financial covenants, specifically our minimum interest coverage ratio and our maximum total leverage ratio, and for determining the interest rate of our first lien term loan. For example, the senior secured credit facility includes adjustments to EBITDA for (i) gain or losses on sale of assets, (ii) the write-off of deferred financing costs of extinguished debt, (iii) pro forma adjustments for acquisitions to show a full year of EBITDA and interest expense, (iv) sponsorship fees paid to Onex which totals $0.5 million annually, (v) non-cash stock compensation and (vi) impairment of long-lived assets. Our noncompliance with these financial covenants could lead to acceleration of amounts due under our senior secured credit facility.

Despite the importance of these measures in analyzing our underlying business, maintaining our financial requirements, designing incentive compensation and for our goal setting both on an aggregate and individual business level basis, EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are non-GAAP financial measures that have no standardized meaning

35

defined by U.S. GAAP. Therefore, our EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

• they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

• they do not reflect changes in, or cash requirements for, our working capital needs;

• they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

• they do not reflect any income tax payments we may be required to make;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements;

• they are not adjusted for all non-cash income or expense items that are reflected in our consolidated statements of cash flows;

• they do not reflect the impact on earnings of charges resulting from certain matters we consider not to be indicative of our ongoing operations; and

• other companies in our industry may calculate these measures differently than we do, which may limit their usefulness as comparative measures.

We compensate for these limitations by using EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR only to supplement net income on a basis prepared in conformance with U.S. GAAP in order to provide a more complete understanding of the factors and trends affecting our business. Furthermore, the non-GAAP financial measures that we present may be different from the presentation of similar measures by other companies, so the comparability of the measures among companies may be limited. We strongly encourage investors to consider net income determined under U.S. GAAP as compared to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR, and to perform their own analysis, as appropriate.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue. Revenue decreased by $3.2 million, or 1.5%, to $207.0 million in the three months ended June 30, 2014 from $210.2 million in the three months ended June 30, 2013.

Long term care services

	Three Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage		Dollars		Percentage
	(dollars in millions)
Skilled nursing facilities	$	154.5	74.6	%	$	150.4	71.5	%	$	4.1	2.7	%
Assisted living facilities	7.6		3.7		7.0		3.3		0.6		8.6
Administration of third party facility	0.2		0.1		0.1		0.1		0.1		35.9
Leased facility revenue	0.8		0.4		0.8		0.4		—		—
Total long-term care services	$	163.1	78.8	%	$	158.3	75.3	%	$	4.8	3.0	%

The $4.1 million increase in skilled nursing facilities revenue in the second quarter of 2014 as compared to the second quarter of 2013 was primarily due to an increase in our average revenue per patient day ("PPD") driven by an increase in payor rates. The overall increase in PPD resulted in increased revenue of $4.6 million in the second quarter 2014 as compared to the second quarter 2013. Also contributing to the increase to revenue in the second quarter of 2014 as compared to the second quarter of 2013 was an increase in census for both Medicaid and Managed Care representing $0.8 million and $0.6 million, respectively. The increase Medicaid and Managed Care census was partially offset by a volume decrease in Medicare, Private, and Other average daily census ("ADC") days, leading to declines in revenue of $0.5 million, $1.0 million, and $0.6 million, respectively, for the three months ended June 30, 2014. A $0.1 million increase in revenue was the result of the Company's participation in an inter-governmental payment program in the state of Texas that provides supplemental Medicaid payments with federal matching funds for skilled nursing facilities that are affiliated with county owned hospitals.  Company subsidiaries entered into transactions with county owned hospital districts to provide for the management of two Company-owned skilled nursing facilities under this program beginning June 2014, and presently twelve of the Company’s Texas facilities are participating in the program.  The Company expects to add additional nursing centers during the remainder of 2014. 

36

The increase of $0.6 million at our assisted living facilities in the second quarter of 2014 as compared to the second quarter of 2013 was due primarily to a rate and volume increase of $0.3 million and $0.3 million, respectively. Rates were increased during October 2013.

Therapy services

	Three Months Ended June 30,
	2014					2013					Increase/(Decrease)
	Revenue Dollars			Revenue Percentage		Revenue Dollars			Revenue Percentage		Dollars			Percentage
	(dollars in millions)
Rehabilitation therapy services	$	37.1		17.9	%	$	40.6		19.3	%	$	(3.5	)	(8.6	)%
Intersegment elimination of services related to affiliated entities	(14.1		)	(6.8	)	(14.0		)	(6.7	)	(0.1		)	0.7
Third party therapy services	$	23.0		11.1	%	$	26.6		12.7	%	$	(3.6	)	(13.4	)%

Hallmark revenue for third party therapy services decreased by $3.6 million in the second quarter of 2014 as compared to the second quarter of 2013. $3.4 million of which was attributable to a net decrease of 17 third party contracts from June 30, 2013 to June 30, 2014 and approximately $0.2 million of which was attributable to two discontinued owned contracts.

Hospice & Home Health services

	Three Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage		Dollars			Percentage
	(dollars in millions)
Hospice	$	14.7	7.1	%	$	18.4	8.7	%	$	(3.7	)	(20.2	)%
Home Health	6.1		3.0		6.9		3.3		(0.7		)	(10.4	)
Total hospice & home health services	$	20.8	10.1	%	$	25.3	12.0	%	$	(4.4	)	(17.5	)%

The $3.7 million decrease in hospice revenue in the second quarter of 2014 as compared to the second quarter of 2013 was a result of a 23.4% reduction in ADC, leading to a revenue reduction of $4.2 million, partially offset by an increase in our average PPD of $0.5 million for the second quarter of 2014 as compared to the second quarter of 2013. Medicare sequestration, which went into effect on April 1, 2013, reduced rates by 2%, and negatively impacted revenue for the three months ended June 30, 2014. Revenue for the second quarter of 2014 and 2013 was net of $0.9 million and $1.4 million of hospice cap reserves, respectively. Of the $0.9 million recorded in the three months ended June 30, 2014, $0.5 million was related to the 2014 cap year and $0.4 million was related to the 2013 cap year. Of the $1.4 million recorded in the three months ended June 30, 2013, $0.7 million was related to the 2013 cap year and $0.7 million was related to the 2012 cap year. The hospice cap reserves recorded in the quarter ended June 30, 2014 were the result of a combination of continued long stay patients and a decline in admissions in the quarter.

The $0.7 million decrease in our home health revenue in the second quarter of 2014 as compared to the second quarter of 2013 was the result of a reduction in ADC of approximately $0.4 million and a reduction in our average rates of $0.3 million. For the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013, we experienced a reduction in episodic-based admissions of approximately 8%.

37

Cost of Services. Cost of services decreased $4.3 million, or 2.3%, to $178.5 million, or 86.3% of revenue, in the three months ended June 30, 2014, from $182.8 million, or 87.0% of revenue, in the three months ended June 30, 2013.

Long term care services

	Three Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue		Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue
									Dollars			Percentage
	(dollars in millions)
Skilled nursing facilities	$	130.9	84.7	%	$	126.5	84.1	%	$	4.4		3.5	%
Assisted living facilities	5.2		69.1		5.1		72.6		0.2			3.3
Regional operations support	4.5		n/a		5.1		n/a		(0.6		)	(12.2	)
Total long-term care services	$	140.6	86.2	%	$	136.7	86.3	%	$	3.9		2.9	%

Cost of services expenses at our skilled nursing facilities increased $4.4 million in the second quarter of 2014 as compared to the second quarter of 2013. The $4.4 million increase was primarily the result of an increase of $1.9 million in salaries and wages, incremental bad debt expense of $1.0 million, $0.1 million in exit costs related to divested facilities, and increased other expenses of $1.7 million comprised of increases in supplies, food, utilities, therapy, pharmacy, legal expense, insurance, and other expense. During April 2014, there was a one-time wage increase, which accounts for the change in salaries and wages in the second quarter of 2014 as compared to the second quarter of 2013. These increased expenses were partially offset by a decrease of $0.8 million in employee benefit costs, primarily due to lower than expected self-insured medical utilization.

Cost of services at our assisted living facilities increased $0.2 million in the second quarter of 2014 as compared to the second quarter of 2013. The increase was due to $0.1 million increase in salaries and wages and an increase in other expenses of $0.1 million.

Cost of services in regional operations support decreased $0.6 million in the second quarter of 2014 as compared to the second quarter of 2013 primarily due to headcount reductions effective in the third quarter of 2013.

Therapy services

	Three Months Ended June 30,
	2014						2013						Increase/(Decrease)
	Revenue (prior to intersegment eliminations)		Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue		Revenue (prior to intersegment eliminations)		Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue
													Dollars			Percentage
	(dollars in millions)
Rehabilitation therapy services	$	37.1	$	33.0	88.9	%	$	40.6	$	37.8	93.1	%	$	(4.8	)	(12.7	)%
Total therapy services	$	37.1	$	33.0	88.9	%	$	40.6	$	37.8	93.1	%	$	(4.8	)	(12.7	)%

Rehabilitation therapy costs of services as a percentage of revenue decreased by 4.2 percentage points. The decrease was the result of improved efficiencies in labor management, decreased utilization of contract labor, and a decrease in employee benefit costs, primarily due to lower than expected self-insured medical utilization. The remainder of the decrease in costs of service is attributable to the decline in revenue from period to period.

Hospice and home health services

38

	Three Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Cost of Service Dollars		Percentage of Revenue		Cost of Service Dollars		Percentage of Revenue
									Dollars			Percentage
	(dollars in millions)
Hospice	$	13.6	92.6	%	$	16.3	88.9	%	$	(2.7	)	(16.8	)%
Home Health	5.8		93.9		6.7		96.9		(0.9		)	(13.1	)
Total hospice & home health services	$	19.4	93.0	%	$	23.0	91.1	%	$	(3.6	)	(15.7	)%

Cost of services expenses related to our hospice business decreased $2.7 million in the second quarter of 2014 as compared to the second quarter of 2013, primarily due to the revenue reduction. PPD costs increased from $134.88 to $144.76, an increase of 7.3 percentage points, reflecting the time necessary for the Company to align labor costs to the decline in census.

Cost of services related to our home health business decreased $0.9 million in the second quarter of 2014 as compared to the second quarter of 2013. The decrease was primarily due to a decrease of $0.7 million in salaries and benefits for employees due to the decrease in census.

Rent Cost of Revenue. Rent cost of revenue increased $0.2 million, or 5.1%, to $4.9 million, or 2.4% of revenue, in the three months ended June 30, 2014 from $4.7 million, or 2.2% of revenue, in the three months ended June 30, 2013.

General and Administrative Services Expenses. Our general and administrative services expenses increased $0.5 million, or 6.6%, to $7.3 million, or 3.5% of revenue, in the three months ended June 30, 2014 from $6.8 million, or 3.3% of revenue, in the three months ended June 30, 2013. After adjusting for the effect of one-time restructuring charges of $1.5 million and $0.6 million for the second quarters of 2013 and 2014, respectively, general and administrative expense increased $1.4 million for the three months ended June 30, 2014. The $1.4 million increase was primarily related to an increase in stock compensation expense of $0.5 million, incentive compensation expense of $0.3 million, and professional fees related to non-routine matters of $0.6 million for the three months ended June 30, 2014.

Government Investigation Expense. In the three month period ended June 30, 2014, we accrued an estimated $6.0 million contingent liability in connection with discussions with the government to resolve their investigation of our Creekside Hospice agency in Las Vegas, Nevada. It could ultimately cost more than the accrued amount to resolve the matter. For additional information regarding the Creekside Hospice investigation, see Note 8, "Commitments and Contingencies", in Item 1 of this report.

Depreciation and Amortization. Depreciation and amortization increased $0.1 million to $6.0 million, or 2.9% of revenue, in the three months ended June 30, 2014 and 2.8% of revenue for the three months ended June 30, 2013.

Change in fair value of contingent consideration. The change in fair value of contingent consideration increased by $2.1 million, to negative $0.1 million in the three months ended June 30, 2014 from negative $2.2 million in the three months ended June 30, 2013. The increase is related to the change in fair value, during the three months ended June 30, 2013, of the contingent consideration related to the 2010 hospice and home health acquisition due to reductions in forecasted EBITDA, which reduces the likelihood of the business achieving their EBITDA target necessary for the earn-out to be paid in future periods.

Interest Expense. Interest expense decreased by $0.8 million, or 9.2%, to $7.9 million, or 3.8% of revenue, in the three months ended June 30, 2014 from $8.7 million, or 4.2% of revenue, in the three months ended June 30, 2013. The decrease is related to the decrease in average debt outstanding from $445.3 million for the three months ended June 30, 2013 to $420.1 million for the three months ended June 30, 2014. Also, our average interest rate reduced from 6.74% for the three months ended June 30, 2013 to 6.14% for the three months ended June 30, 2014.

Equity in Earnings of Joint Venture. Equity earnings of our pharmacy joint venture decreased $0.4 million, or 80.5%, from $0.5 million for the three months ended June 30, 2013 to $0.1 million for the three months ended June 30, 2014. The decrease was due to a decrease in the joint venture's net income.

(Benefit) Provision for Income Taxes. We recorded a tax benefit of $1.3 million, or 32.6% of pre-tax earnings, for the three months ended June 30, 2014, as compared to a tax expense of $1.1 million, or 38.9% of pre-tax earnings, for the three months ended June 30, 2013. The reduction in the tax expense was primarily due to the decrease in revenue for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, offset by $0.3 million of tax expense related to stock compensation for shares that vested at a lower price than the grant value.

39

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue. Revenue decreased by $11.0 million, or 2.6%, to $414.3 in the six months ended June 30, 2014 from $425.3 million in the six months ended June 30, 2013.

Long term care services

	Six Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage		Dollars		Percentage
	(dollars in millions)
Skilled nursing facilities	$	307.6	74.3	%	$	304.2	71.5	%	$	3.4	1.1	%
Assisted living facilities	14.9		3.6		14.1		3.3		0.8		5.4
Administration of third party facility	0.3		0.1		0.3		0.1		—		10.3
Leased facility revenue	1.6		0.3		1.5		0.4		—		3.0
Total long-term care services	$	324.4	78.3	%	$	320.2	75.3	%	$	4.3	1.3	%

The $3.4 million increase in skilled nursing facilities revenue in the first six months of 2014 as compared to the first six months of 2013 was primarily due to an increase in Medicaid and Managed Care ADC resulting in an increase in revenue of $5.2 million and $4.2 million, respectively. A $0.1 million increase in revenue was the result of the Company's participation in an inter-governmental payment program in the state of Texas that provides supplemental Medicaid payments with federal matching funds for skilled nursing facilities that are affiliated with county owned hospitals.  Company subsidiaries entered into transactions with county owned hospital districts to provide for the management of two Company-owned skilled nursing facilities under this program beginning June 2014, and presently twelve of the Company’s Texas facilities are participating in the program.  The Company expects to add additional nursing centers during the remainder of 2014.  The increase in Medicaid and Managed Care ADC was partially offset by a decrease in Medicare volume, which resulted in a revenue reduction of $4.3 million. A decrease in Private and Other ADC resulted in a net decrease in revenue of $1.8 million. Additionally, our average revenue per patient day improved to $241.96 for the first six months of 2014 from $237.94 for the first six months of 2013 as the improved Medicare, Medicaid, and Managed Care rates offset the decrease in Medicare volume.

The increase of $0.8 million at our assisted living facilities in the first six months of 2014 as compared to the first six months of 2013 was due primarily to a 2.0% increase in ADC coupled with a 3.2% increase in the PPD rate.

Therapy services

	Six Months Ended June 30,
	2014					2013					Increase/(Decrease)
	Revenue Dollars			Revenue Percentage		Revenue Dollars			Revenue Percentage		Dollars			Percentage
	(dollars in millions)
Rehabilitation therapy services	$	74.0		18.0	%	$	82.9		19.5	%	$	(8.9	)	(10.7	)%
Intersegment elimination of services related to affiliated entities	(27.9		)	(6.7	)	(29.2		)	(6.9	)	1.3			(4.5	)
Third party therapy services	$	46.1		11.2	%	$	53.7		12.7	%	$	(7.6	)	(14.0	)%

Hallmark revenue for third party therapy services decreased by $7.6 million for the first six months of 2014 as compared to the first six months of 2013. This decrease was related to a decrease in third party contracts from June 30, 2013 to June 30, 2014.

Hospice & Home Health services

	Six Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Revenue Dollars		Revenue Percentage		Revenue Dollars		Revenue Percentage		Dollars			Percentage
	(dollars in millions)
Hospice	$	30.9	7.5	%	$	37.4	8.7	%	$	(6.5	)	(17.4	)%
Home Health	12.8		3.1		14.0		3.3		(1.2		)	(8.4	)
Total hospice & home health services	$	43.7	10.6	%	$	51.4	12.0	%	$	(7.7	)	(14.9	)%

40

The $6.5 million decrease in hospice revenue in the first six months of 2014 as compared to the first six months of 2013 was a result of a reduction in ADC resulting in a decrease of approximately $8.4 million. The decrease in revenue was partially offset by an increase in our average PPD rate resulting in an increase of $1.5 million and an increase in revenue of $0.4 million from the addition of a new unit in the first six months of 2014 as compared to the first six months of 2013. Revenue in the first six months of 2014 and 2013 was net of $0.9 million and $2.9 million of hospice cap reserves, respectively. Of the $0.9 million recorded in the first six months ended June 30, 2014, $0.5 million was related to the 2014 cap year and $0.4 million was related to the 2013 cap year. Of the $2.9 million recorded in the six months ended June 30, 2013, $0.7 million was related to the 2013 cap year, $2.0 million was related to the 2012 cap year, and $0.2 million was related to the 2011 cap year. The hospice cap reserves recorded for the first six months ended June 30, 2014 were the result of a combination of continued long stay patients and a decline in admissions for the first six months ended June 30, 2014.

The $1.2 million decrease in our home health revenue in the first six months of 2014 as compared to the first six months of 2013 was the result of a volume decrease of $0.6 million coupled with a rate decrease of $0.6 million. For the first six months of 2014 we experienced a decrease in admissions of approximately 4.3%.

Cost of Services. Cost of services decreased $10.2 million, or 2.8%, to $358.8 million, or 86.6% of revenue, in the first six months ended June 30, 2014, from $369.1 million, or 86.8% of revenue, in the first six months ended June 30, 2013.

Long term care services

	Six Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue		Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue
									Dollars			Percentage
	(dollars in millions)
Skilled nursing facilities	$	261.7	85.1	%	$	255.4	84.0	%	$	6.4		2.5	%
Assisted living facilities	10.8		72.3		10.2		72.0		0.6			6.2
Regional operations support	9.1		n/a		11.2		n/a		(2.1		)	(18.8	)
Total long-term care services	$	281.6	86.8	%	$	276.8	86.4	%	$	4.8		1.8	%

Cost of services at our skilled nursing facilities increased $6.4 million in the first six months of 2014 as compared to the first six months of 2013. The increase was primarily the result of an increase of $3.1 million in salaries and wages, incremental bad debt expense of $1.6 million, $0.3 million in exit costs related to divested facilities, $0.1 million of expenses incurred at a facility not at full operation, and increased other expenses of $3.7 million comprised of increases in: supplies, food, utilities, purchased services, and other expense. This was partially offset by decreases in employee benefits expense of $0.6 million, professional liability and general liability insurance expense of $1.5 million, and tax expense of $0.3 million.

Cost of services at our assisted living facilities increased $0.6 million in the first six months of 2014 as compared to the first six months of 2013. The increase was due to $0.4 million increase in salaries and wages, an increase in utilities costs of $0.1 million, an increase in purchased services of $0.1 million, and increased other expenses of $0.2 million as compared to the first six months ended June 31, 2013.

Cost of services in regional operations support decreased $2.1 million in the first six months of 2014 as compared to the first six months of 2013 primarily due to headcount reductions effective in the third quarter of 2013.

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Therapy services

	Six Months Ended June 30,
	2014						2013						Increase/(Decrease)
	Revenue (prior to intersegment eliminations)		Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue		Revenue (prior to intersegment eliminations)		Cost of Service Dollars (prior to intersegment eliminations)		Percentage of Revenue
													Dollars			Percentage
	(dollars in millions)
Rehabilitation therapy services	$	74.0	$	66.5	89.9	%	$	82.9	$	76.9	92.8	%	$	(10.4	)	(13.5	)%
Total therapy services	$	74.0	$	66.5	89.9	%	$	82.9	$	76.9	92.8	%	$	(10.4	)	(13.5	)%

Rehabilitation therapy costs of services as a percentage of revenue decreased by $10.4 million or 13.5% for the six months ended June 30, 2014, as compared to the same period in 2013, commensurate with the revenue reduction.

Hospice and home health services

	Six Months Ended June 30,
	2014				2013				Increase/(Decrease)
	Cost of Service Dollars		Percentage of Revenue		Cost of Service Dollars		Percentage of Revenue
									Dollars			Percentage
	(dollars in millions)
Hospice	$	27.4	88.8	%	$	32.5	87.0	%	$	(5.1	)	(15.6	)%
Home Health	12.1		94.9		13.2		94.6		(1.1		)	(8.3	)
Total hospice & home health services	$	39.5	90.5	%	$	45.7	89.0	%	$	(6.2	)	(13.5	)%

Cost of services related to our hospice business decreased $5.1 million or 15.6% in the first six months of 2014 as compared to the first six months of 2013, commensurate with the revenue reduction. PPD costs increased from $134.20 to $143.06, an increase of 6.6 percentage points, reflecting the time necessary for the Company to align labor costs to the decline in census.

Cost of services related to our home health business decreased $1.1 million in the first six months of 2014 as compared to the first six months of 2013, primarily due to the reduction in episodes.

Rent Cost of Revenue. Rent cost of revenue increased $0.3 million, or 3.7%, to $9.7 million, or 2.3% of revenue, in the six months ended June 30, 2014 from $9.4 million, or 2.2% of revenue, in the six months ended June 30, 2013.

General and Administrative Services Expenses. Our general and administrative services expenses increased $0.1 million, or 0.6%, to $13.4 million, or 3.2% of revenue, in the six months ended June 30, 2014 from $13.3 million, or 3.1% of revenue, in the six months ended June 30, 2013. After adjusting for the effect of one-time restructuring charges of $1.5 million and $1.1 million for the six months ended June 30, 2013 and June 30, 2014, respectively, general and administrative services expense increased $0.5 million for the first six months of 2014. The increase was primarily due to $0.6 million in professional fees related to non-routine matters offset by $0.1 million in headcount reductions.

Government Investigation Expense. In the three month period ended June 30, 2014, we accrued an estimated $6.0 million contingent liability in connection with discussions with the government to resolve their investigation of our Creekside Hospice agency in Las Vegas, Nevada. It could ultimately cost more than the accrued amount to resolve the matter. For additional information regarding the Creekside Hospice investigation, see Note 8, "Commitments and Contingencies", in Item 1of this report.

Depreciation and Amortization. Depreciation and amortization increased $0.3 million to $12.1 million, or 2.9% of revenue, in the six months ended June 30, 2014 compared to 2.8% of revenue for the six months ended June 30, 2013.

Change in fair value of contingent consideration. The change in fair value of contingent consideration increased $2.1 million, or 95.0%, to negative $0.1 million in the six months ended June 30, 2014 from negative $2.2 million in the six months

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ended June 30, 2013. The increase is related to the change in fair value, during the six months ended June 30, 2013, of the contingent consideration related to the 2010 hospice and home health acquisition due to reductions in forecasted EBITDA, which reduces the likelihood of the business achieving their EBITDA target necessary for the earn-out to be paid in future periods.

Interest Expense. Interest expense decreased by $1.4 million, or 8.2%, to $16.0 million, or 3.9% of revenue, for the six months ended June 30, 2014 from $17.4 million, or 4.1% of revenue, for the six months ended June 30, 2013. The decrease is related to the decrease in average debt outstanding from $447.0 million for the six months ended June 30, 2013 to $421.2 million for the six months ended June 30, 2014. Also, our average interest rate reduced from 6.74% for the six months ended June 30, 2013 to 6.20% for the six months ended June 30, 2014.

Equity in Earnings of Joint Venture. Equity earnings of our pharmacy joint venture decreased by $0.3 million, or 33.5%, to $0.6 million, or 0.2% of revenue, in the six months ended June 30, 2014 from $0.9 million, or 0.2%, for the six months ended June 30, 2013. The decrease was related due to a decrease in the joint venture's net income.

Provision for Income Taxes. We recorded a tax expense of less than $0.1 million, or 0.2% of pre-tax loss, for the six months ended June 30, 2014, as compared to a tax expense of $1.4 million, or 21.3% of pre-tax earnings, for the six months ended June 30, 2013. The reduction in the tax expense was primarily due to the decrease in pre-tax earnings offset by an increase to a shortfall resulting from stock compensation for the six month period June 30, 2014 as compared to the six month period June 30, 2013, the decrease in pre-tax earnings for the six month period June 30, 2014 as compared to the six month period June 30, 2013.

Liquidity and Capital Resources

The following table presents selected data from our condensed consolidated statements of cash flows (in thousands):

	Six Months Ended June 30,
	2014			2013
Cash Flows from Continuing Operations
Net cash provided by operating activities	$	21,214		$	13,789
Net cash used in investing activities	(5,201		)	(5,981		)
Net cash used in financing activities	(12,230		)	(7,792		)
Net increase in cash and cash equivalents	3,783			16
Cash and cash equivalents at beginning of period	4,177			2,003
Cash and cash equivalents at end of period	$	7,960		$	2,019

Based upon our current level of operations, we believe that cash generated from operations, cash on hand and borrowings available to us will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for at least the next twelve months. One element of our business strategy is to selectively pursue acquisitions and strategic alliances. Any acquisitions or strategic alliances may result in our incurrence or assumption of additional indebtedness. We assess our capital needs on an ongoing basis and may from time to time seek additional financing through a variety of methods, including through an extension of our senior secured credit facility, or by accessing available debt and equity markets, and participation in U.S. Department of Housing and Urban Development ("HUD") or other government insured loan programs, as considered necessary to fund capital expenditures and potential acquisitions, refinance existing debt, or for other purposes. Our future operating performance will be subject to future economic conditions and to financial, business, regulatory and other factors, many of which are beyond our control. For additional discussion, see "Other Factors Affecting Liquidity and Capital Resources" below.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

At June 30, 2014, we had cash and cash equivalents of $8.0 million. Our available cash is held in accounts at third-party financial institutions. We have periodically invested in AAA-rated money market funds. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash or cash equivalents will not be impacted by adverse conditions in the financial markets.

Net cash provided by operating activities in the six months ended June 30, 2014 was $21.2 million, compared to $13.8 million in the six months ended June 30, 2013.  The increase in net cash provided by operating activities was primarily the result of a $14.8 million improvement in changes in operating assets and liabilities and a $1.2 million net decrease in adjustments for non-cash items offset by a decrease in net income of $6.1 million. The $14.8 million improvement in operating cash flows from operating assets and liabilities for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was the result of a decrease in the change in accounts receivable of $8.4 million, a $6.1 million increase in

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employee compensation and benefits due to timing of payments, a decrease in other current and non-current assets of $3.6 million, and an increase in accounts payable and accrued liabilities of $0.5 million partially offset by a decrease in insurance liability risks of $2.5 million, a $0.7 million decrease in other long-term liabilities, and a $0.7 million decrease in notes receivable payments.

Net cash used in investing activities in the six months ended June 30, 2014 was $5.2 million, compared to $6.0 million in the six months ended June 30, 2013. The net change is primarily due to proceeds from maturity of investments of $1.1 million partially offset by a net increase in capital expenditures of $0.3 million for the six months ended June 30, 2014.

Net cash used in financing activities in the six months ended June 30, 2014 was $12.2 million, compared to the $7.8 million net cash used in the six months ended June 30, 2013. The change was primarily due to an increase in mandatory and voluntary repayments under the line of credit of $2.0 million and a reduction in cash provided by borrowings under the line of credit of $8.0 million. We continue to pay down debt and have incurred costs related to the June 2014 debt amendment and the origination of the MidCap insured loans in the six months ended June 30, 2014.

Principal Debt Obligations

Our primary sources of liquidity are our cash on hand, our cash flows from operations and borrowing under our senior secured credit facility, which is subject to the satisfaction of certain financial covenants therein. Our primary liquidity requirements are for debt service on our first lien senior secured term loan, capital expenditures and working capital.

We are significantly leveraged. As of June 30, 2014, we had $410.2 million in aggregate indebtedness outstanding, consisting of $243.0 million first lien senior secured term loan (net of the unamortized portion of the original issue discount ("OID") of $1.0 million), $12.0 million principal amount outstanding under our $83.1 million revolving credit facility, HUD insured loans of $86.7 million, $5.0 million outstanding under our asset based revolving credit facility, $61.3 million term debt mortgage loan, and other debt of approximately $2.3 million. Furthermore, we had $5.5 million in outstanding letters of credit against our $83.1 million revolving credit facility, leaving approximately $65.6 million of additional borrowing capacity under our senior secured credit facility as of June 30, 2014. Substantially all of our subsidiaries, except for the HUD insured loan subsidiaries and the skilled nursing facilities that collateralize the MidCap Financial credit facility, guarantee the first lien senior secured term loan and our revolving credit facility.

If our remaining ability to borrow under our revolving credit facility is insufficient for our capital requirements, we will be required to seek additional sources of financing, including issuing equity, which may be dilutive to our current stockholders, or incurring additional debt. Our ability to incur additional debt is subject to the restrictions in our senior secured credit facility. We cannot assure you that the restrictions contained in the senior secure credit facility will permit us to borrow the funds that we need to finance our operations, or that additional debt will be available to us on commercially reasonable terms or at all. If we are unable to obtain funds sufficient to finance our capital requirements, we may have to forego opportunities to expand our business, including the acquisition of additional facilities.

Term Loan and Revolving Credit Facility

On April 9, 2010, the Company entered into an up to $360.0 million senior secured term loan and a $100.0 million revolving credit facility (the "Prior Credit Agreement") that amended and restated the senior secured term loan and revolving credit facility that were set to mature in June 2012. On April 12, 2012, the Company entered into an Amendment and Restatement and Additional Term Loan Assumption Agreement (“Restated Credit Agreement”) that amended and restated the Prior Credit Agreement and pursuant to which, among other things, the size of the Company's existing senior secured term loan was increased by $100.0 million (hereinafter referred to as the incremental senior secured term loan).

On June 6, 2013, the Company entered into an amendment to the Restated Credit Agreement that increased the maximum leverage ratio by 0.50 throughout the life of the Restated Credit Agreement. The amendment additionally permits the Company to make future offers to the lenders under the revolving credit facility to extend the maturity date of all or a portion of the revolving credit facility. The credit arrangements provided under the Restated Credit Agreement are collectively referred to herein as the Company's senior secured credit facility.

In connection with the June 2013 modification, the Company paid fees totaling $2.5 million, of which $1.1 million was recorded as debt modification costs in the consolidated statement of operations, and $1.4 million was recorded as other assets in the consolidated balance sheet. Substantially all of the Company's assets, except those skilled nursing facilities securing the HUD and MidCap mortgage loans, are pledged as collateral under the senior secured credit facility. Amounts borrowed under the senior secured term loan may be prepaid at any time without penalty, except for LIBOR breakage costs. The senior secured term loan matures on April 9, 2016.

On June 23, 2014, the Company entered into an Amendment No. 2 and Loan Modification Agreement ("Amendment No. 2") to our Fourth Amended and Restated Credit Agreement dated April 12, 2012, as previously amended on June 6, 2013. Amendment No. 2 increased the maximum leverage ratio to 5.25 and decreased the fixed charge coverage ratio to 1.85, both up to but not including June 30, 2015. Amendment No. 2 increased the interest rate by 0.25% to the London Interbank Offered Rate

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("LIBOR") (subject to a floor of 1.50%) plus a margin of 5.50 or the prime rate (subject to a floor of 2.50%) plus a margin of 4.50%. Amendment No. 2 extended the maturity date of the revolving credit facility to April 9, 2016 and reduced the commitments of any extending revolving lenders by 25%. After giving effect to Amendment No. 2, the extended revolving credit facility commitments are $50.6 million and the non-extended revolving credit facility commitments are $32.5 million, for a total capacity of $83.1 million. The capacity of the revolving credit facility will decrease to $50.6 million on April 9, 2015 until its maturity. Lenders that take an assignment of non-extended commitments may subsequently agree to extend those commitments in accordance with Amendment No. 2. Amendment No. 2 also modified the interest rate for the extended revolving credit commitments to be, at the Company’s option, LIBOR plus a margin between 5.25% and 5.50% (based upon consolidated leverage) or the prime rate plus a margin between 4.25% and 4.50% (based upon consolidated leverage). The interest rates on the non-extended revolving credit facility commitments remain, at the Company’s option, at LIBOR plus a margin of between 4.25% and 4.50% (based upon consolidated leverage) or the prime rate plus a margin between 3.25% and 3.50% (based upon consolidated leverage). In connection with the June 2014 modification, the Company paid fees totaling 2.0 of which $0.8 million were recorded as debt modification costs in the condensed consolidated statements of operations, and $1.2 million was recorded as other assets in the condensed consolidated balance sheet.

Pursuant to the Restated Credit Agreement, the quarterly term loan amortization payments increased to $2.6 million beginning June 30, 2012 compared to $0.9 million under the Prior Credit Agreement. Due to the principal reductions made in 2013 made in association with the HUD insured financings, no amortization payments are due until December 2014, at which time the quarterly principal payments due will be $1.6 million. Additionally, the maximum portion of the annual Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement) to be applied to term debt reductions increased to 75% from 50%, subject to stepdowns to 50% and 25% based on consolidated leverage. The Company has also increased its ability to refinance a portion of its credit facility with U.S. Department of Housing and Urban Development ("HUD") insured debt up to $250 million, subject to certain credit facility covenants. Any HUD insured borrowings beyond $250 million would necessitate either refinancing the senior secured credit facility in full or otherwise seeking a waiver or amendment from the senior secured lenders.

Under the senior secured credit facility, the Company must maintain compliance with specified financial covenants measured on a quarterly basis. The senior secured credit facility also includes certain additional affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, liens, investments in other businesses and capital expenditures. Also under the senior secured credit facility, subject to certain exceptions and minimum thresholds, the Company is required to apply all of the proceeds from any issuance of debt, as much as half of the proceeds from any issuance of equity, as much as 75% of the Company's annual Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement), and amounts received in connection with any sale of the Company's assets to repay the outstanding amounts under the Restated Credit Agreement. The Company believes that it is in compliance with its debt covenants as of June 30, 2014. As of June 30, 2014, the fixed charge coverage ratio was 2.18, which compares to a minimum requirement of 1.85 and the leverage ratio was 4.72, as compared to an allowed maximum of 5.25.

HUD Insured and Other Mortgage Loans

In 2013, the Company received funding of 10 loans insured by HUD. The loans have a combined aggregate original principal balance of $87.6 million and are secured by 10 skilled nursing facilities. The HUD insured loans have an average all in interest rate of approximately 5.3% and amortization term 30 to 35 years. As of June 30, 2014 the HUD insured loans have a combined aggregate principal balance of $86.7 million.

Accordingly, as of June 30, 2014, the Company has 10 mortgages insured by HUD, which are each secured by a skilled nursing facility. These mortgages have an average remaining term of P33Y with fixed interest rates ranging from 3.4% to 4.6% and a weighted average interest rate of 4.23%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required. As all $87.6 million of the HUD insured mortgage loans were originated in 2013, none of the loans could be prepaid at June 30, 2014. Any further HUD insured mortgages will require additional HUD approval.

All HUD-insured mortgages are non-recourse loans to the Company. All mortgages are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of June 30, 2014, the Company has escrow reserve funds of $1.6 million with the loan servicer that are reported within other current assets, and replacement reserve funds of $3.0 million in other assets. The net proceeds of the HUD insured loans were required to be used to pay down term debt under the Restated Credit Agreement. In 2013, $87.6 million of HUD insured loan proceeds were used to pay down term debt.

As of June 30, 2014 the Company has 10 additional skilled nursing facilities securing a $61.3 million mortgage loan and a $5.0 million asset based revolving credit facility with MidCap Financial. Both loans have an interest rate of LIBOR plus a margin of 5.95% with a LIBOR floor of 0.75%. The mortgage loan amortizes over 25 years with the remaining principal due December 1, 2016. There are additional quarterly principal payments of $0.3 million beginning after six months, $0.4 million in year two and $0.5 million in year three. The mortgage loan has a debt service coverage ratio and a minimum debt coverage

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ratio, both of which were met at June 30, 2014. The asset based revolving credit facility is secured by the accounts receivable of the 10 skilled nursing facilities. In 2013, $65.0 million of mortgage loan and asset based revolving credit facility proceeds were used to pay down term debt.

Capital Expenditures

We intend to invest in the maintenance and general upkeep of our facilities on an ongoing basis. We also expect to perform renovations of our existing facilities every five to ten years to remain competitive. Combined, we expect that these activities will amount to approximately $1,500 per bed.

We anticipate that we will have capital expenditures in 2014 of approximately $14.0 million to $17.0 million. We will continue to assess our capital spending plans on an ongoing basis.

Other Factors Affecting Liquidity and Capital Resources

Medical and Professional Malpractice and Workers' Compensation Insurance. Our skilled nursing facilities and other businesses, like physicians, hospitals and other healthcare providers, are subject to a significant number of legal actions alleging malpractice, negligence or related legal theories. Many of these actions involve large claims and significant defense costs. To protect ourselves from the cost of these claims, we maintain professional liability and general liability as well as workers' compensation insurance in amounts and with deductibles that we believe to be sufficient for our operations. Historically, unfavorable pricing and availability trends emerged in the professional liability and workers' compensation insurance market and the insurance market in general that caused the cost of these liability coverages to generally increase dramatically. Many insurance underwriters became more selective in the insurance limits and types of coverage they would provide as a result of rising settlement costs and the significant failures of some nationally known insurance underwriters. As a result, we experienced substantial changes in our professional liability insurance program beginning in 2001. Specifically, we were required to assume substantial self-insured retentions for our professional liability claims. A self-insured retention is a minimum amount of damages and expenses (including legal fees) that we must pay for each claim. We use actuarial methods to estimate the value of the losses that may occur within this self-insured retention level and we are required under our workers' compensation insurance agreements to post a letter of credit or set aside cash in trust funds to securitize the estimated losses that we may incur. Because of the high retention levels, we cannot predict with certainty the actual amount of the losses we will assume and pay.

We estimate our self-insured general and professional liability reserves on a quarterly basis and our self-insured workers' compensation reserve on a semiannual basis, based upon actuarial analyses using the most recent trends of claims, settlements and other relevant data from our own and our industry's loss history. Based upon these analyses, at June 30, 2014, we had reserved $22.2 million net of $0.4 million in insurance recoveries for known or unknown or potential self-insured general and professional liability claims and $20.9 million for self-insured workers' compensation claims. Of these reserves, we estimate that a total of $13.8 million, consisting of approximately $7.6 million for self-insured general and professional liability claims based on historical experience and current claims activity and $6.2 million for self-insured workers' compensation claims, will be payable within 12 months; however, there are no set payment schedules and there can be no assurance that the payment amount in the next 12 months will not be significantly larger or smaller. To the extent that subsequent claims information varies from loss estimates, the liabilities will be adjusted to reflect current loss data. There can be no assurance that in the future general and professional liability or workers' compensation insurance will be available at a reasonable price and that we will not have to further increase our levels of self-insurance. For additional information on our general and professional liability and workers’ compensation reserve, see "Business — Insurance" in Part 1, Item 1 in our Annual Report on Form 10-K filed with the SEC on February 10, 2014.

Inflation. We derive a substantial portion of our revenue from the Medicare program. We also derive revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state's fiscal year for the Medicaid programs and in each October for the Medicare program. However, there can be no assurance that these adjustments will continue in the future and, if received, will reflect the actual increase in our costs for providing healthcare services.

Labor and supply expenses make up a substantial portion of our operating expenses. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. We cannot assure you that we will be successful in offsetting future cost increases.

Recent Accounting Standards

The information required by this item is incorporated herein by reference to Note 3, "Summary of Significant Accounting Policies," to the unaudited condensed consolidated financial statements included under Part I, Item 1 of this report.

Off-Balance Sheet Arrangements

We had outstanding letters of credit of $5.5 million under our $83.1 million revolving credit facility as of June 30, 2014.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates. To the extent these interest rates increase, our interest expense will increase, which will make our interest payments and funding our other fixed costs more expensive, and our available cash flow may be adversely affected. We routinely monitor our risks associated with fluctuations in interest rates and consider the use of derivative financial instruments to hedge these exposures. We do not enter into derivative financial instruments for trading or speculative purposes nor do we enter into energy or commodity contracts.

Interest Rate Exposure—Interest Rate Risk Management

Our first lien credit agreement and our MidCap credit facility expose us to variability in interest payments due to changes in interest rates. Our HUD insured mortgage loans are fixed rate fully amortizing loans.

The table below presents the principal amounts, weighted-average interest rates and fair values by year of expected maturity to evaluate our expected cash flows and sensitivity to interest rate changes (dollars in thousands):

	Twelve Months Ending June 30, (1)
	2014			2015			2016			2017			2018			Thereafter			Total		Fair Value
Fixed-rate debt	$	2,958		$	1,576		$	1,646		$	1,720		$	1,684		$	79,408		$	88,992	$	89,642
Average interest rate	3.6		%	4.4		%	4.4		%	4.4		%	4.3		%	4.2		%
Variable-rate debt(2)	$	3,961		$	9,682		$	308,572		$	—		$	—		$	—		$	322,215	$	322,215
Average interest rate(1)	6.4		%	6.4		%	7.9		%	—		%	—		%	—		%

(1) Based on implied forward three-month LIBOR rates in the yield curve as of June 30, 2014.

(2) Excludes unamortized original issue discount of $1.0 million on our first lien senior secured term loan debt.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes 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 was required to apply its judgment in evaluating and implementing possible controls and procedures.

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer have concluded that, as of end of the period covered by this report, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

Changes in Internal Control Over Financial Reporting

Management determined that there were no changes in our internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1.Legal Proceedings

For information regarding certain pending legal proceedings to which we are a party or our property is subject, see Note 8, "Commitments and Contingencies—Legal Matters," to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

Item 1A. Risk Factors

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute "forward-looking statements" within the meaning of Section 21 of the Exchange Act. Statements that use words such as "believe," "anticipate," "estimate," "intend," "could," "plan," "expect," "project" or the negative of these, as well as similar expressions, are intended to identify forward-looking statements. These forward-looking statements are necessarily estimates and expectations reflecting the best judgment of our senior management based on our current estimates, expectations, forecasts and projections, and include comments that express our current opinions about trends and factors that may impact future operating results. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements, expressed or implied by such forward-looking statements. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our business and other matters including, without limitation, the risk factors discussed below. We expressly disclaim any duty to update the forward-looking statements and other information contained in this report, except as required by law.

We operate in a rapidly changing and highly regulated environment that involves a number of risks and uncertainties, some of which are highlighted below and others are discussed elsewhere in this report. These risks and uncertainties could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. The following risk factors are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as employment relations, natural disasters, general economic conditions and geopolitical events. Further, additional risks not currently known to us or that we currently believe are immaterial may in the future materially and adversely affect our business, operations, liquidity and stock price.

Risks Related to Our Business

Reductions in Medicare reimbursement rates, or changes in the rules governing the Medicare program could have a material adverse effect on our revenue, financial condition and results of operations.

Medicare is our largest source of revenue, accounting for 29.4% of our consolidated revenue during the three month period ended June 30, 2014 and 31.0% in the same period for 2013. For the six months ended June 30, 2014 and 2013, Medicare revenue accounted for 29.7% and 31.8% of our consolidated revenue, respectively. In addition, many private payors base their reimbursement rates on the published Medicare rates or, in the case of our rehabilitation therapy services customers, are themselves reimbursed by Medicare for the services we provide. Accordingly, if Medicare reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicare program that are disadvantageous to our business or industry, our business and results of operations will be adversely affected.

The Medicare program and its reimbursement rates and rules are subject to frequent change. These include statutory and regulatory changes, rate adjustments (including retroactive adjustments), administrative or executive orders and government funding restrictions, all of which may materially adversely affect the rates at which Medicare reimburses us for our services. For example, CMS implemented a net 11.1% reduction in its reimbursement rates to skilled nursing facilities effective October 1, 2011. Furthermore, due to the federal sequestration, an automatic 2% reduction in Medicare spending took effect beginning in April 2013 and will remain in effect unless Congress takes action to terminate the automatic reduction or authorize spending increases. Budget pressures often lead the federal government to reduce or place limits on reimbursement rates under Medicare. Implementation of these and other types of measures has in the past and could in the future result in substantial reductions in our revenue and operating margins. Prior reductions in governmental reimbursement rates partially contributed to our predecessor's bankruptcy filing under Chapter 11 of the United States Bankruptcy Code in October 2001.

In addition, the federal government often changes the rules governing the Medicare program, including those governing reimbursement. Changes that could adversely affect our business include:

• administrative or legislative changes to base rates or the bases of payment;

• limits on the services or types of providers for which Medicare will provide reimbursement;

• changes in methodology for patient assessment and/or determination of payment levels;

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• the reduction or elimination of annual rate increases; or

• an increase in co-payments or deductibles payable by beneficiaries.

Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, we may not continue to receive reimbursement rates from Medicare that sufficiently compensate us for our services or, in some instances, cover our operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenue, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

We expect the federal and state governments to continue their efforts to contain growth in Medicaid expenditures, which could adversely affect our revenue and profitability.

We receive a significant portion of our revenue from Medicaid, which accounted for 33.0% of our consolidated revenue for the three months ended June 30, 2014 compared to 31.0% for the same period in 2013. For the six months ended June 30, 2014 and 2013, Medicaid revenue accounted for 32.7% and 30.5% of our consolidated revenue, respectively. Medicaid is a state-administered program financed by both state funds and matching federal funds. Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states (including California and Texas, where significant portions of our Medicaid-related business is located) to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. We expect these state and federal efforts to continue for the foreseeable future. Furthermore, not all of the states in which we operate, most notably Texas, have elected to expand Medicaid as part of federal healthcare reform legislation. If Medicaid reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicaid program that are disadvantageous to our businesses, our business and results of operations could be materially and adversely affected.

Recent federal government proposals could limit the states' use of provider tax programs to generate revenue for their Medicaid expenditures, which could result in a reduction in our reimbursement rates under Medicaid.

To generate funds to pay for the increasing costs of the Medicaid program, many states utilize financial arrangements commonly referred to as "provider taxes." Under provider tax arrangements, states collect taxes from healthcare providers and then use the revenue to pay the providers as a Medicaid expenditure, which allows the states to then claim additional federal matching funds on the additional reimbursements. Current federal law provides for a cap on the maximum allowable provider tax as a percentage of the provider's total revenue. There can be no assurance that federal law will continue to provide matching federal funds on state Medicaid expenditures funded through provider taxes, or that the current caps on provider taxes will not be reduced. Any discontinuance or reduction in federal matching of provider tax-related Medicaid expenditures could have a significant and adverse effect on states' Medicaid expenditures, and as a result could have a material and adverse effect on our financial condition and results of operations.

Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction or repayment.

Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because either adequate or additional documentation was not provided or because certain services were not covered or deemed to not be medically necessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with investigative audits by regulatory and governmental authorities, could adversely affect our financial condition and results of operations.

Additionally, from time to time we become aware, either based on information provided by third parties and/or the results of internal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the service provided. Overpayments may result from a variety of factors, including insufficient documentation supporting the services rendered or medical necessity of the services, other failures to document the satisfaction of the necessary conditions of payment, or in some cases for providing services that are deemed to be worthless. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by the law could lead to significant fines and penalties being imposed on us. Furthermore, our initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction of any other conditions of payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties, including pursuant to the Federal False Claims Act ("FFCA") and the Federal Civil Monetary Penalties Law ("FCMPL"). Violations of the FFCA could lead to any combination of a variety of criminal, civil and administrative fines and penalties. The FFCA provides for civil fines ranging from $5,500 to $11,000 per claim plus treble damages. The Civil Monetary Penalties Law similarly provides for civil monetary penalties of up to $10,000 per claim plus up

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to treble damages. We and/or certain of our operating companies could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law. Our repayment of any such amounts, as well as any fines, penalties or other sanctions that we may incur, could be significant and could have a material and adverse effect on our results of operations and financial condition.

From time to time we are also involved in various external governmental investigations, audits and reviews. Reviews, audits and investigations of this sort can lead to government actions, which can result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. For example, the Office of the Inspector General (“OIG”) conducts a variety of routine, regular and special investigations, audits and reviews across our industry. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our results of operations and financial condition. Furthermore, becoming subject to these governmental investigations, audits and reviews can also require us to incur significant legal and document production expenses as we cooperate with the government authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues. For example, as discussed under “Creekside Hospice Investigation” in Note 8, "Commitments and Contingencies", included elsewhere in this report, the government has investigated and has elected to intervene in two pending qui tam actions that allege violations of the FFCA and the Nevada False Claims Act in connection with the operations of our affiliated Las Vegas, Nevada hospice. We have accrued $6.0 million as a contingent liability in connection with the matter, but it could ultimately cost more than that amount to settle or otherwise resolve it, including to satisfy any judgment that might be rendered against us if our litigation defense were ultimately unsuccessful.

Our success is dependent upon retaining key personnel.

Our senior management team has extensive experience in the healthcare industry. We believe that they have been instrumental in guiding our businesses, instituting valuable performance and quality monitoring, and driving innovation. Accordingly, our future performance is substantially dependent upon the continued services of our senior management team. The loss of the services of any of these persons could have a material adverse effect upon us.

Health reform legislation could adversely affect our revenue and financial condition.

In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for, the availability of and reimbursement for, healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including the provision of comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs. The PPACA was enacted in 2010 and is among the most comprehensive and notable of these legislative efforts. The impact of PPACA remains uncertain to a large degree due to various implementation, timing, cost and regulatory requirements imposed by the legislation. The content or timing of any future health reform legislation, and its impact on us is impossible to predict. However, it is likely that certain provisions in PPACA will impose significant costs on us or that will otherwise negatively affect our operations. For instance, the requirement to offer full time employees “affordable” healthcare insurance that meets specified coverage minimums (or alternatively pay a per-employee penalty to the federal government) will likely significantly increase our annual healthcare costs or could damage employee morale and/or cause other employee-related issues that are harmful to our operations. If significant reforms are made to the U.S. healthcare system, those reforms may have an adverse effect on our financial condition and results of operations.

In addition, we incur considerable administrative costs in monitoring the changes made within the various reimbursement programs in which we participate, determining the appropriate actions to be taken in response to those changes, and implementing the required actions to meet the new requirements and minimize the repercussions of the changes to our organization, reimbursement rates and costs

Annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary may negatively affect our results of operations.

Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a fee schedule. There are annual caps that limit, subject to certain exceptions, the amounts that can be paid (including deductible and coinsurance amounts) for rehabilitation therapy services rendered to any Medicare beneficiary under Medicare Part B. There is a combined cap for physical therapy and speech-language pathology and a separate cap for occupational therapy that apply subject to certain exceptions. The discontinuation or change in the current cap exception process or future modifications of the Medicare Part B cap structure could have an adverse effect on the revenue that we generate through our rehabilitation therapy business.  This could in turn have a negative effect on our financial condition and results of operations. For example, the Medicare Part B therapy pre-approval provisions (MMR) and multiple procedure payment reduction ("MPPR") rate reductions that took effect October 1, 2012, have continued to negatively impact our therapy business through the six months ended June 30, 2014.

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The MMR requirement generally provides that, on a per beneficiary basis and subject to limited exceptions, services above $3,700 for physical therapy and speech-language pathology services combined and/or $3,700 for occupational therapy services are subject to manual medical review (typically on a pre-payment basis) by the applicable Medicare contractors.  Challenges in obtaining a timely response from the applicable contractors and other difficulties with the MMR system have added significant uncertainty as to whether beneficiary will have access to the applicable therapy services that are over the cap amount, and whether the provider will be reimbursed for those services.  Under the MPPR policy, when physical therapy, occupational therapy and speech-language pathology services are performed on the same day for the same patient and paid under Medicare Part B, then Medicare effectively makes a full reimbursement payment for only one of the procedures and the reimbursements for the other procedures are at a reduced rate.  The application of the MPPR policy has negatively affected our therapy business and will continue to do so as long as the policy is in effect.

We are subject to a Medicare cap amount for our hospice business. Our net patient service revenue and profitability could be adversely affected by limitations on Medicare payments.

Overall payments made by Medicare to us on a per hospice basis are subject to an annual cap amount. Total Medicare payments received for services rendered during the applicable Medicare hospice cap year by each of our Medicare-certified hospice programs during this period are compared to the cap amount for the relevant period. Payments in excess of the cap are subject to recoupment by Medicare.

We monitor the Medicare cap amount and seek to implement corrective measures as necessary. We maintain what we believe are adequate allowances in the event that our individual hospice agencies exceed the Medicare hospice cap in any given fiscal year. However, many of the variables involved in estimating the Medicare hospice cap contractual adjustment are beyond our control, and we cannot assure you that we will not increase or decrease our estimated contractual allowance in the future, or that we will not be required to surrender amounts we received from Medicare that were in excess of the Medicare hospice cap for any particular period(s).

For the three months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $1.4 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the three months ended June 30, 2014, $0.5 million was related to the 2014 cap year and $0.4 million was related to the 2013 cap year. Of the $1.4 million recorded in the three months ended June 30, 2013, $0.7 million was related to the 2013 cap year and $0.7 million was related to the 2012 cap year. For the six months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $2.9 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the six months ended June 30, 2014, $0.5 million was related to the 2014 cap year and$0.4 million was related to the 2013 cap year. Of the $2.9 million recorded in the six months ended June 30, 2013, $0.7 million was related to the 2013 cap year, $2.0 million was related to the 2012 cap year, and $0.2 million was related to the 2011 cap year. This adjustment related primarily to patients staying on service longer than estimated which results in the patients' cap allowances being stretched over multiple cap years. Our ability to comply with the cap limitation depends on a number of factors relating to a given hospice program, including number of admissions, average length of stay, mix in level of care and Medicare patients that transfer into and out of our hospice programs. Our revenue and profitability may be materially reduced if we are unable to comply with this and other Medicare payment limitations. We cannot assure you that our hospice programs will not exceed the cap amount in the future or that our estimate of the Medicare cap contractual adjustment will not differ materially from the actual Medicare cap amount.

We are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance.

We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

• licensure and certification;

• adequacy and quality of healthcare services;

• qualifications of healthcare and support personnel;

• quality of medical equipment;

• confidentiality, maintenance and security issues associated with medical records and claims processing;

• relationships with physicians and other referral sources and recipients;

• constraints on protective contractual provisions with patients and third-party payors;

• operating policies and procedures;

• addition of facilities and services; and

• billing for services.

Many of these laws and regulations are expansive, and we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In addition, many of these laws and regulations evolve to include additional obligations and restrictions, and sometimes with retroactive effect. Certain other regulatory developments, such as

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revisions in the building code requirements for assisted living and skilled nursing facilities, mandatory increases in scope and quality of care to be offered to residents, revisions in licensing and certification standards, mandatory staffing levels, regulations regarding conditions for payment and regulations restricting those we can hire, could also have a material adverse effect on us. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

One development potentially restricting those we may hire was a decision on November 3, 2010 by the Physical Therapy Board of California ("PT Board") to rescind a 1990 PT Board resolution which determined that the offering of physical therapy services by a corporation, not organized as a professional corporation, was permitted by the Physical Therapy Practice Act, which is the California statute governing the provision of physical therapy within the state. This rescission purports to prohibit employment of a physical therapist to provide physical therapy services by any professional corporation except those owned by physical therapists and Naturopaths. Lay corporations that hold themselves out as physical therapy corporations would be similarly prohibited. We have a subsidiary that employs physical therapists in California, but is not owned by physical therapists. Our subsidiary contracts with nursing facilities to provide the facilities with personnel who are licensed to provide rehabilitation therapy services, including physical therapy, occupational therapy and/or speech language pathology services. Our therapists then provide rehabilitation therapy services to the nursing facilities' patients under the skilled nursing facilities' licenses that authorize the provision of physical therapy (and other rehabilitation therapy services, if applicable). In this relationship, the nursing facilities retain the patient relationship, remain professionally responsible for the healthcare services including therapy, and bill the patient and/or third party payors for the services rendered to their patients. We are unaware of any enforcement actions by the PT Board to date and it is not clear whether the applicable law would ultimately be interpreted to mean that our rehabilitation therapy subsidiary cannot employ and provide physical therapists to nursing facilities in California as it currently does.   Nevertheless, the PT Board could seek an enforcement action against our rehabilitation therapy subsidiary and its physical therapist employees and we may have to significantly restructure our California rehabilitation therapy operations to conform to the PT Board's revised interpretation of the law. 

In addition, federal and state government agencies have increased and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, including skilled nursing facilities, home health agencies and hospice agencies. This includes investigations of:

• fraud and abuse;

• quality of care;

• financial relationships with referral sources; and

• the medical necessity of services provided.

We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, the intensity of federal and state enforcement actions or the extent and size of any potential sanctions, fines or penalties. Changes in the regulatory framework, our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements, the suspension or revocation of our licenses or our disqualification from participation in federal and state reimbursement programs, or the imposition of other enforcement sanctions, fines or penalties could have a material adverse effect upon our results of operations, financial condition and liquidity. Furthermore, should we lose licenses or certifications for a number of our facilities or other businesses as a result of regulatory action, legal proceedings such as those described in Note 8, "Commitments and Contingencies-Legal Matters," or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding indebtedness and the report of such issues at one of our facilities could harm our reputation for quality care and lead to a reduction in our patient referrals and ultimately our revenue and operating income.

We face reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business.

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits. We also periodically conduct internal audits and reviews of our regulatory compliance. An adverse inspection, review, audit or investigation could result in:

• refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from managed care payors;

• state or federal agencies imposing fines, penalties and other sanctions on us;

• temporary suspension of payment for new patients to the facility or agency;

• decertification or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;

• self-disclosure of violations to applicable regulatory authorities;

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• damage to our reputation;

• the revocation of a facility's or agency's license; and

• loss of certain rights under, or termination of, our contracts with managed care payors.

We have in the past and will likely in the future be required to refund amounts we have been paid and/or pay fines and penalties, as a result of these inspections, reviews, audits and investigations. If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results. Furthermore, the legal, document production and other costs associated with complying with these inspections, reviews, audits or investigations could be significant.

Significant legal actions, which are commonplace in our professions, could subject us to increased operating costs and substantial uninsured liabilities, which would materially and adversely affect our results of operations, liquidity and financial condition.

The long-term care profession has experienced an increasing trend in the number and severity of litigation claims involving punitive damages and settlements. We believe that this trend is endemic to the industry and is a result of a variety of factors, including the number of large judgments, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiffs' lawyers of potentially large recoveries. While some states have enacted tort reform legislation that limits plaintiffs' recoveries in some respects, should our professional liability and general liability increase significantly in the future, we may not be able to increase our revenue sufficiently to cover the cost increases, our operating income could suffer, and we may not be able to meet our obligations to repay our liabilities. For a discussion of recent litigation claims against us, including the Humboldt County Action, see Note 8, "Commitments and Contingencies-Legal Matters" in the notes to the consolidated financial statements included elsewhere in this report.

We also may be subject to lawsuits under the FFCA and comparable state laws for submitting allegedly fraudulent or otherwise inappropriate bills for services to the Medicare and Medicaid programs. These lawsuits, which may be initiated by regulatory authorities as well as private party whistleblowers, can involve significant monetary damages, fines, attorney fees and the award of bounties to private plaintiffs who successfully bring these suits, as well as to the government programs. In recent years, government oversight and law enforcement have become increasingly active and aggressive in investigating and taking legal action against potential fraud and abuse.

We may incur significant liabilities in conjunction with legal actions against us, including as a result of damages, fines and penalties that may be assessed against us, as well as a result of the sometimes significant commitments of financial and management resources that are often required to defend against such legal actions. The incurrence of such liabilities and related commitments of resources could materially and adversely affect our business, financial condition and results of operations.

We could face significant financial difficulties as a result of one or more of the risks discussed in this report, which could cause us to significantly alter our business and/or seek protection under bankruptcy laws or could cause our creditors or government authorities to have a receiver appointed on our behalf.

We could face significant financial difficulties if Medicare or Medicaid reimbursement rates are reduced, patient demand for our services is reduced or we incur unexpected liabilities or expenses, including in connection with legal actions, sanctions, penalties or fines or the other risks discussed in this report. This financial difficulty could cause us to significantly alter our business and/or seek protection under bankruptcy laws or could cause our creditors or government authorities to have a receiver appointed on our behalf.

A significant portion of our business is concentrated in certain geographical markets, and an economic downturn or changes in the laws affecting our business in those markets could have a material adverse effect on our operating results.

For the six months ended June 30, 2014, we received approximately 40.6% of our consolidated revenue from operations in California and 19.5% from Texas. We expect to continue to receive significant portions of our consolidated revenue from those states in the future as well. Accordingly, economic conditions and changes in state healthcare spending prevailing in either of these markets or other markets in which we have significant concentrations could affect the ability of our patients and third-party payors to reimburse us for our services, either through a reduction of the tax base used to generate state funding of Medicaid programs, an increase in the number of indigent patients eligible for Medicaid benefits, changes in state funding levels or healthcare programs or other factors. A continued or prolonged economic downturn, significant changes in state healthcare spending, or changes in the laws affecting our business in these markets could have a material adverse effect on our financial position, results of operations and cash flows.

Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.

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We produce our consolidated financial statements in accordance with the requirements of accounting principles generally accepted in the United States of America ("U.S. GAAP"). Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting.

Testing and maintaining our internal control over financial reporting can be expensive and divert our management's attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with applicable law, or our independent registered public accounting firm may not be able or willing to issue an unqualified attestation report if we conclude that our internal control over financial reporting is not effective. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.

Changes in the acuity mix of patients as well as payor mix and payment methodologies may significantly reduce our profitability or cause us to incur losses.

Our revenue is affected by our ability to attract a favorable patient acuity mix, and by our mix of payment sources. Changes in the type of patients we attract, as well as our payor mix among private payors, managed care companies, Medicare (both traditional Medicare and "managed" Medicare/Medicare Advantage) and Medicaid, significantly affect our profitability because not all payors reimburse us at the same rates. Particularly, if we fail to maintain our proportion of high-acuity patients or if there is any significant increase in the percentage of our population for which we receive Medicaid reimbursement, our financial position, results of operations and cash flow may be adversely affected. Furthermore, in recent periods we have continued to see a shift from “traditional” fee-for-service Medicare patients to “managed” Medicare (Medicare Advantage) patients.  Reimbursement rates are generally lower for services provided to Medicare Advantage patients than they are for the same services provided traditional fee-for-service Medicare patients.  This trend may continue in future periods.  Our financial results have been negatively affected by this shift to date.  Our financial results will continue to be negatively affected if the trend towards Medicare Advantage continues, and particularly if it accelerates.

It can be difficult to attract and retain qualified nurses, therapists, healthcare professionals and other key personnel, which can increase our costs related to these employees

Our employees are our most important asset. We rely on our ability to attract and retain qualified nurses, therapists and other healthcare professionals. The market for these key personnel is highly competitive, and we could experience significant increases in our operating costs due to shortages in their availability. Like other healthcare providers, we have at times experienced difficulties in attracting and retaining qualified personnel, especially facility administrators, nurses, therapists, certified nurses' aides and other important healthcare personnel. We may continue to experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to them through wage freezes and similar means may have limited effectiveness and may lead to increased turnover and other challenges

Tight labor markets and high demand for such employees can contribute to high turnover among clinical professional staff. A shortage of qualified personnel at a facility could result in significant increases in labor costs and increased reliance on overtime and expensive temporary staffing agencies, and could otherwise adversely affect operations at the affected facilities. If we are unable to attract and retain qualified professionals, our ability to adequately provide services to our residents and patients may decline and our ability to grow may be constrained.

If we are unable to comply with state minimum staffing requirements at one or more of our facilities, we could be subject to fines or other sanctions.

Increased attention to the quality of care provided in skilled nursing facilities has caused several states to mandate, and other states to consider mandating, staffing laws that require minimum nursing hours of direct care per resident per day. These minimum staffing requirements further increase the gap between demand for and supply of qualified professionals, and lead to higher labor costs.

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We operate a number of facilities in California, which enacted legislation aimed at establishing minimum staffing requirements for facilities operating in that state. This legislation required that the California Department of Public Health ("DPH"), promulgate regulations requiring each skilled nursing facility to provide a minimum of 3.2 nursing hours per patient day. The DPH finalized regulations in 2009 that required three 8-hour shifts for nurse-to-patient staffing, described documentation and notice requirements, and specified procedures for obtaining a waiver from per-shift staffing requirements at skilled nursing facilities. Although DPH finalized the regulations, initial implementation of the statute authorizing the regulations is contingent on an appropriation in the state's annual budged legislation or another statute. Because no appropriation was made and no additional statutes were enacted, the regulations did not become operational. Therefore, DPH will continue its practice of determining a facility's compliance with the 3.2 hour of nursing services per patient day measure in accordance with its internal policy and through on-site reviews conducted during periodic licensing and certification surveys and in response to complaints. If the DPH determines that a facility is out of compliance with this staffing measure, the DPH may issue a notice of deficiency, or a citation, depending on the impact on patient care. A citation carries with it the imposition of significant monetary fines. DPH has issued guidelines, implementing the provisions of newly enacted California laws, for state audits that verify compliance with the 3.2 nursing hours per patient day staffing requirements. If DPH determines under an audit that a facility has failed to meet the minimum staffing requirement for between 5% and 49% of the audited days, a significant administrative monetary penalty will be assessed. If DPH determines that a facility has failed to meet the minimum staffing requirement for more than 49% of the audited days, then a larger administrative monetary penalty will be assessed. The issuance of either a notice of deficiency or a citation requires the facility to prepare and implement an acceptable plan of correction. The Humboldt County Action included allegations that certain of our California skilled nursing facilities failed to meet state-mandated minimum staffing requirements. The Humboldt County Action resulted in a jury verdict against us and certain of our affiliated skilled nursing companies that awarded $677 million in damages. The case was ultimately settled in September 2010, pursuant to which we were required to deposit into escrow a total of $50 million to cover certain settlement costs. For more information regarding the Humboldt County Action and the settlement, as well as a description of our February 2013 settlement with the BMFEA which included a new staffing agreement and an ongoing investigation by the DOJ regarding related staffing considerations, see Note 8, "Commitments and Contingencies-Legal Matters" in the notes to the consolidated financial statements included elsewhere in this report.

Our ability to satisfy any minimum staffing requirements depends upon our ability to attract and retain qualified healthcare professionals, including nurses, certified nurse's assistants and other personnel. Attracting and retaining personnel is difficult, given a tight labor market for these professionals in many of the markets in which we operate. Furthermore, if states do not appropriate additional funds (through Medicaid program appropriations or otherwise) sufficient to pay for any additional operating costs resulting from minimum staffing requirements, our profitability may be materially adversely affected.

If we fail to attract patients and residents and to compete effectively with other healthcare providers, our revenue and profitability may decline and we may incur losses.

The healthcare services industry is highly competitive. Our skilled nursing facilities compete primarily on a local and regional basis with many long-term care providers, from national and regional chains to smaller providers owning as few as a single nursing center. We also compete under certain circumstances with inpatient rehabilitation facilities and long-term acute care hospitals. Our hospices and home health agencies also compete with local, regional and national companies. We anticipate additional competition in the future from accountable care organizations, as well as HMO's and similar healthcare systems that seek to provide a wider variety of healthcare services to their patients/members. Increased competition could limit our ability to attract and retain patients, maintain or increase rates and occupancy, or to expand our business. Our ability to compete successfully varies from location to location and depends on a number of factors, including the number of competitors in the local market, the types of services available, our local reputation for quality care of patients, achieve or maintain desired census levels, the commitment and expertise of our staff and physicians, our local service offerings and treatment programs, the cost of care in each locality, and the physical appearance, location, age and condition of our facilities. If we are unable to attract patients to our facilities and agencies, particularly high-acuity patients, then our revenue and profitability will be adversely affected. Some of our competitors may have greater recognition and be more established in their respective communities than we are, and may have greater financial and other resources than we have. Competing long-term care companies may also offer newer facilities or different programs or services than we do, which, combined with the foregoing factors, may result in our competitors being more attractive to our current patients, to potential patients and to referral sources. Furthermore, while we budget for routine capital expenditures at our facilities to keep them competitive in their respective markets, to the extent that competitive forces cause those expenditures to increase in the future our financial condition may be negatively affected.

Some of our competitors may accept lower profit margins than we do, which could present significant price competition, particularly for managed care and private pay patients. We believe we utilize a conservative approach in complying with laws prohibiting kickbacks and referral payments to referral sources. However, some of our competitors may use more aggressive methods than we do with this respect to obtaining patient referrals, and as a result competitors may from time to time obtain patient referrals that are not otherwise available to us.

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The primary competitive factors for our assisted living, rehabilitation therapy, hospice and home health care services are similar to those for our skilled nursing businesses and include reputation, the cost of services, the quality of services, responsiveness to patient/resident needs and the ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping. Furthermore, given the relatively low barriers to entry and continuing healthcare cost containment pressures, we expect that the markets we service will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain patients and residents, maintain or increase our fees, or expand our business.

Insurance coverage may become increasingly expensive and difficult to obtain for health care companies, and our self-insurance may expose us to significant losses.

It may become more difficult and costly for us to obtain coverage for patient care liabilities and certain other risks, including property and casualty insurance. Insurance carriers may require health care companies to significantly increase their self-insured retention levels and/or pay substantially higher premiums for reduced coverage for most insurance coverages, including workers' compensation, employee healthcare and patient care liability.

We self-insure a significant portion of our potential liabilities for several risks, including certain types of professional and general liability, workers' compensation and employee healthcare benefits. Due to our self-insured retentions under many of our professional and general liability, workers' compensation and employee healthcare benefits programs, including our election to self-insure against workers' compensation claims in Texas, there is no limit on the maximum number of claims or amount for which we can be liable in any policy period. We base our loss estimates and related accruals on actuarial analyses, which determine expected liabilities on an undiscounted basis, including incurred but not reported losses, based upon the available information on a given date. It is possible, however, for the ultimate amount of losses to exceed our estimates and related accruals, as well as our insurance limits as applicable. In the event our actual liability exceeds our estimates for any given period, our results of operations and financial condition could be materially adversely impacted. Additionally, we may from time to time need to increase our accruals as a result of future actuarial reviews and claims that may develop. Such increases could have an adverse impact on our business and results of operations. An adverse determination in legal proceedings, whether currently asserted or arising in the future, could have a material adverse effect on our business and results of operations.

If our referral sources fail to view us as an attractive health care provider, our patient base would likely decrease.

We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the communities in which we deliver our services to attract the kinds of patients we target. Our referral sources are not obligated to refer business to us and generally also refer business to other healthcare providers. We believe many of our referral sources refer business to us as a result of the quality of our patient service and our efforts to establish and build a relationship with them. If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships or if we are perceived by our referral sources for any reason as not providing high quality patient care, our volume of referrals would likely decrease, the quality of our patient mix could suffer and our revenue and results of operations could be adversely affected.

If we do not achieve or maintain a reputation for providing high quality of care, our business may be negatively affected.

Our ability to achieve and maintain a reputation for providing high quality of care to our patients at each of our skilled nursing and assisted living facilities, or through our rehabilitation therapy, hospice and home health businesses, is important to our ability to attract and retain patients, particularly high-acuity patients. In some instances, our referral sources are affiliated with health care systems that may have affiliated businesses that offer services that compete with ours, and the frequency of this occurring may increase in the future as accountable care organizations are formed in the markets we serve. We believe that the perception of our quality of care by a potential patient or potential patient's family seeking to contract for our services is influenced by a variety of factors, including doctor and other healthcare professional referrals, community information and referral services, newspapers and other print and electronic media, results of patient surveys, recommendations from family and friends, and quality care statistics or rating systems compiled and published by CMS or other industry data. Through our focus on retaining high quality staffing, reviewing feedback and surveys from our patients and referral sources to highlight areas of improvement and integrating our service offerings at each of our facilities, we seek to maintain and improve on the outcomes from each of the factors listed above in order to build and maintain a strong reputation at our facilities. If any of our companies fail to achieve or maintain a reputation for providing high-quality care, or is perceived to provide a lower quality of care than competitors within the same geographic area, our ability to attract and retain patients would be adversely affected. If our businesses fail to maintain a strong reputation in the areas in which we operate, our business, revenue and profitability could be adversely affected.

We may be unable to reduce costs to offset decreases in our patient census levels or other expenses completely.

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We depend on implementing adequate cost management initiatives in response to fluctuations in levels of patient census in our businesses in order to maintain our current cash flow and earnings levels. Fluctuation in our patient census levels may become more common as we continue our emphasis in our skilled nursing facilities on patients with shorter stays but higher acuities. A decline in patient census levels would likely result in decreased revenue. If we are unable to put in place corresponding reductions in costs in response to decreases in our patient census or other revenue shortfalls, our financial condition and operating results could be adversely affected.

We may not be fully reimbursed for all services that our skilled nursing facilities are able to bill through Medicare's consolidated billing requirements.

Skilled nursing facilities are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients and residents, regardless of the amount or costs of services that the patients and residents actually receive. The consolidated billing requirement essentially confers on the skilled nursing facility itself the Medicare billing responsibility for the entire package of care that its residents receive in these situations. Federal law also requires that post-hospitalization skilled nursing services be “bundled” into the hospital's Diagnostic Related Group ("DRG") payment in certain circumstances. Where this rule applies, the hospital and the skilled nursing facility must, in effect, divide the payment which otherwise would have been paid to the hospital alone for the patient's treatment, and no additional funds are paid by Medicare for skilled nursing care of the patient. This requirement may, in instances where it is applicable, have a negative effect on skilled nursing facility utilization/census and payments, either because hospitals may find it difficult to place patients in skilled nursing facilities which will not be paid as they previously were, or because hospitals are reluctant to discharge patients to skilled nursing facilities and lose a portion of the payment that the hospital would otherwise receive. This bundling requirement could be extended to more DRGs in the future, which could exacerbate the potentially negative impact on skilled nursing facility utilization/census and payments. As a result of the bundling requirements we may not be fully reimbursed for all services that a facility bills through consolidated billing, which could adversely affect our results of operations and financial condition.

Consolidation of managed care organizations and other third-party payors or reductions in reimbursement from these payors may adversely affect our revenue and income or cause us to incur losses.

Managed care organizations and other third-party payors have in many instances consolidated in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. These organizations have become an increasingly important source of revenue and referrals for us. To the extent that such organizations terminate us as a preferred provider or engage our competitors as a preferred or exclusive provider, our business could be materially adversely affected.

In addition, private third-party payors, including managed care payors, are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization reviews, or reviews of the propriety of, and charges for, services provided, and greater enrollment in managed care programs and preferred provider organizations. As these private payors increase their purchasing power, they are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk associated with the provision of care. Significant reductions in reimbursement from these sources could materially adversely affect our business and financial condition.

Delays in reimbursement may cause liquidity problems.

If we have information systems problems or payment or other issues arise with Medicare, Medicaid or other payors that affect the amount or timeliness of reimbursements, we may encounter delays in our payment cycle. Any significant payment timing delay could cause us to experience working capital shortages. As a result, working capital management, including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and liquidity. Our working capital management procedures may not successfully mitigate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

Our rehabilitation and other related healthcare services are also subject to delays in reimbursement, as we act as vendors to other providers who in turn must wait for reimbursement from other third-party payors. Each of these customers is therefore subject to the same potential delays to which our nursing homes are subject, meaning any such delays would further delay the date we would receive payment for the provision of our related healthcare services. To the extent we grow and expand the rehabilitation and other complementary services that we offer to third parties, we may incur increasing delays in payment for these services, and these payment delays could have an adverse effect on our liquidity and financial condition. We may also experience delays in reimbursement related to change of ownership applications for our acquired facilities, as well as changes in fiscal intermediaries.

Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.

We intend to selectively pursue acquisitions of skilled nursing facilities, assisted living facilities, home health companies, hospice agencies and other related healthcare operations. Acquisitions may involve significant cash expenditures,

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debt incurrence, operating losses and additional expenses that could have a material adverse effect on our financial position, results of operations and liquidity. Acquisitions involve numerous risks, including:

• difficulties integrating acquired operations, personnel and accounting and information systems, or in realizing projected efficiencies and cost savings;

• diversion of management's attention from other business concerns;

• potential loss of key employees or customers of acquired companies;

• entry into markets in which we may have limited or no experience;

• increasing our indebtedness and limiting our ability to access additional capital when needed;

• assumption of unknown liabilities or regulatory issues of acquired companies, including failure to comply with healthcare regulations or to establish internal financial controls; and

• straining of our resources, including internal controls relating to information and accounting systems, regulatory compliance, logistics and others.

 Furthermore, certain of the foregoing risks could be exacerbated when combined with other growth measures that we may pursue.

Global economic conditions may impact our ability to obtain additional financing on commercially reasonable terms or at all and our ability to expand our business may be harmed.

Global market and economic conditions continue to be very challenging. Ongoing concerns about the systemic impact of potential long-term and widespread economic recession or stagnation, energy costs, geopolitical issues, sovereign debt issues, the availability and cost of credit, and the global real estate and mortgage markets have contributed to increased market volatility, uncertainty and liquidity issues for both borrowers and investors. These conditions, combined with volatile prices for energy, food and other commodities, unstable business and consumer confidence, and significant unemployment, have contributed to pronounced economic volatility.

As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets, interest rate fluctuations and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers. These factors have led to a decrease in spending by businesses and consumers alike, and a corresponding decrease in global infrastructure spending. Continued turbulence in the U.S. and international markets and economies and prolonged declines or stagnation in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access the capital markets to meet liquidity needs. If we are not able to timely retire or refinance our senior secured credit facility on acceptable terms at or before its stated maturity, due to market conditions or otherwise, our liquidity, financial condition, business and operating results could be materially and adversely affected.

If our ability to borrow under our senior secured credit facility is insufficient for our capital requirements, we will be required to seek additional sources of financing, including issuing equity, which may be dilutive to our current stockholders or incurring additional debt. Our ability to incur additional debt is subject to the restrictions in our senior secured credit facility. There can be no assurance that the restrictions contained in our senior secured credit facility will permit us to borrow the funds that we need to finance our operations, or that additional debt will be available to us on commercially reasonable terms or at all. Furthermore, market conditions may impede our ability to secure additional sources of financing, whether through the extension of our existing senior secured credit facility or by accessing the debt and/or equity markets. If we are unable to obtain funds sufficient to finance our capital requirements, we may have to forego opportunities to expand our business, including the acquisition or development of additional or expanded facilities.

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our financial obligations.

We have now and will for the foreseeable future continue to have a significant amount of indebtedness. At June 30, 2014, our total indebtedness was approximately $410.2 million. Our substantial indebtedness could have important consequences. For example, it could:

• increase our vulnerability to adverse economic and industry conditions;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

• place us at a competitive disadvantage compared to our competitors that have less debt;

• increase the cost or limit the availability of additional financing, if needed or desired, to fund future working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our business plan;

• require us to maintain debt coverage and financial ratios at specified levels, reducing our financial flexibility; and

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• limit our ability to make strategic acquisitions and develop new or expanded facilities.

In addition, if we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required debt payments, or if we fail to comply with the various covenants and requirements of our senior secured credit facility or other existing or future indebtedness, we would be in default, which could permit the holders of our indebtedness, including our senior secured credit facility, to accelerate the maturity of indebtedness, as the case may be. Any default under our senior secured credit facility, or our other existing or future indebtedness, as well as any of the above-listed factors, could have a material adverse effect on our business, operating results, liquidity and financial condition.

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Despite our substantial indebtedness, we may still be able to incur more debt. This could intensify the risks associated with this indebtedness.

The terms of our senior secured credit facility contain restrictions on our ability to incur additional indebtedness. These restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these exceptions could be substantial. Accordingly, we could incur significant additional indebtedness in the future. The more we become leveraged, the more we become exposed to the risks described above under “Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our financial obligations.”

Floating rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.

Borrowings under our senior secured credit facility are subject to floating rates of interest over an interest rate floor of 1.5%. If interest rates increase over the floor, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows would correspondingly decrease. As of April 12, 2012, we increased the size of the term loan by $100.0 million. On June 23, 2014, the Company entered into an Amendment No. 2 and Loan Modification Agreement ("Amendment No. 2") to our Fourth Amended and Restated Credit Agreement dated April 12, 2012, as previously amended on June 6, 2013; further explained in "Debt" note contained elsewhere. Amendment No. 2 also modified the interest rate for the extended revolving credit facility commitments to be, at the Company’s option, LIBOR plus a margin between 5.25% and 5.50% (based upon consolidated leverage) or the prime rate plus a margin between 4.25% and 4.50% (based upon consolidated leverage). The interest rates on the non-extended revolving credit facility commitments remain at, at the Company’s option, LIBOR plus a margin of between 4.25% and 4.50% (based upon consolidated leverage) or the prime rate plus a margin between 3.25% and 3.50% (based upon consolidated leverage). The incremental term loan bears interest at LIBOR (subject to a floor of 1.50%) plus a margin of 5.50%. As part of the refinancing, the interest rate on the existing term loan was amended to match the interest rate of the incremental term loan.

Our operations are subject to environmental and occupational health and safety regulations, which could subject us to fines, penalties and increased operational costs.

We are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Regulatory requirements faced by healthcare providers such as us include those relating to air emissions, wastewater discharges, air and water quality control, occupational health and safety (such as standards regarding blood-borne pathogens and ergonomics), management and disposal of low-level radioactive medical waste, biohazards and other wastes, management of explosive or combustible gases, such as oxygen, specific regulatory requirements applicable to asbestos, lead-based paints, polychlorinated biphenyls and mold, other occupational hazards associated with our workplaces, and providing notice to employees and members of the public about our use and storage of regulated or hazardous materials and wastes. Failure to comply with these requirements could subject us to fines, penalties and increased operational costs. Moreover, changes in existing requirements or more stringent enforcement of them, as well as discovery of currently unknown conditions at our owned or leased facilities, could result in additional cost and potential liabilities, including liability for conducting cleanup, and there can be no guarantee that such increased expenditures would not be significant.

A portion of our workforce is unionized and our operations may be adversely affected by work stoppages, strikes or other collective actions.

As of June 30, 2014, approximately 570 of our approximately14,950 active employees were represented by unions and covered by collective bargaining agreements. In addition, certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. We cannot predict the effect that continued union representation or future organizational activities will have on our business or future operations. There can be no assurance that we will not experience a material work stoppage in the future.

Disasters and similar events may seriously harm our business.

Natural and man-made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes, floods and wildfires, may cause damage or disruption to us, our employees and our facilities, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our facilities, and the availability of employees to provide services at our facilities and other locations. If the delivery of goods or the ability of employees to reach our facilities and patients were interrupted in any material respect due to a natural disaster or other reasons, it would have a significant impact on our business. For example, in connection with Hurricane Katrina in New Orleans, several nursing home operators unaffiliated with us were accused of not properly caring for their residents, which resulted in, among other things, criminal charges being filed against the proprietors of those facilities. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more facilities, which would be costly and would involve risks, including potentially fatal risks, for the patients and employees. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our

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facilities, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

The operation of our business is dependent on effective and secure information systems.

We depend on several information technology systems for the efficient functioning of our business. The software programs supporting these systems are licensed to us by independent software developers. Our inability or the inability of these developers, to continue to maintain and upgrade these information systems and software programs could disrupt or reduce the efficiency of our operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Furthermore, while we budget for the changes and upgrades to our information technology systems that we anticipate needing over time, it is possible that we may underestimate the actual costs of those changes and upgrades. Failure to make necessary changes and upgrades due to financial or other concerns could negatively impact the effectiveness of our information technology systems, as well as our operations and financial performance.

Additionally, we maintain information necessary to conduct our business, including confidential and proprietary information as well as personal information regarding our patients, employees and others with whom we do business, in digital form. Data maintained in digital form is subject to the risk of tampering, theft and unauthorized access. We develop and maintain systems to prevent this from occurring, but the development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of tampering, theft and other unauthorized access cannot be eliminated entirely, and risks associated with each of these remain. If our information technology systems are compromised and personal or other protected information regarding patients, employees or others with whom we do business is stolen, tampered with or otherwise improperly accessed, our ability to conduct our business and our reputation may be impaired. If personal or other protected information of our patients, employees or others with whom we do business is tampered with, stolen or otherwise improperly accessed, and we may incur significant costs to remediate possible injury to the affected persons, compensate the affected persons, pay any applicable fines, or take other action with respect to judicial or regulatory actions arising out of the incident, including under HIPAA or the HITECH Act, as applicable.

Risks Related to Ownership of Our Class A Common Stock

We are controlled by Onex Corporation, whose interests may conflict with yours.

Our Class A common stock has one vote per share, while our Class B common stock has ten votes per share, on all matters voted on by our stockholders. As of June 30, 2014, Onex Corporation, its affiliates and certain of our directors and members of our senior management who are party to a voting agreement with an affiliate of Onex Corporation owned shares of common stock representing over 75.0% of the combined voting power of our outstanding common stock. Accordingly, Onex Corporation generally has the power to control the outcome of matters on which stockholders are entitled to vote. Such matters include the election and removal of directors, the adoption or amendment of our certificate of incorporation and bylaws, possible mergers, corporate control contests and significant transactions. Through its control of elections to our board of directors, Onex Corporation may also have the ability to appoint or replace our senior management and cause us to issue additional shares of our common stock or repurchase common stock, declare dividends or take other actions. Onex Corporation may make decisions regarding our company and business that are opposed to our other stockholders’ interests or with which they disagree. Onex Corporation may also delay or prevent a change of control of us, even if the change of control would benefit our other stockholders, which could deprive our other stockholders of the opportunity to receive a premium for their Class A common stock. The significant concentration of stock ownership and voting power may also adversely affect the trading price of our Class A common stock due to investors’ perception that conflicts of interest may exist or arise. To the extent that the interests of our public stockholders are harmed by the actions of Onex Corporation, the price of our Class A common stock may be harmed.

Additionally, Onex Corporation is in the business of making investments in companies and currently holds, and may from time to time in the future acquire, controlling interests in businesses engaged in the healthcare industries that complement or directly or indirectly compete with certain portions of our business. Further, if it pursues such acquisitions in the healthcare industry, those acquisition opportunities may not be available to us.

If our stock price is volatile, purchasers of our Class A common stock could incur substantial losses.

Our stock price has been and is likely to continue to be volatile. The stock market in general often experiences substantial volatility that is seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Class A common stock. The price for our Class A common stock may be influenced by many factors, including:

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• the depth and liquidity of the market for our Class A common stock;

• developments generally affecting the healthcare industry;

• investor perceptions of us and our business;

• actions by institutional or other large stockholders;

• strategic actions, such as acquisitions or restructurings, or the introduction of new services by us or our competitors;

• new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

• litigation and governmental investigations;

• changes in accounting standards, policies, guidance, interpretations or principles;

• adverse conditions in the financial markets, state and federal government or general economic conditions, including those resulting from statewide, national or global financial and deficit considerations, overall market conditions, war, incidents of terrorism and responses to such events;

• sales of Class B common stock by Onex, us or members of our management team;

• additions or departures of key personnel; and

• our results of operations, financial performance and future prospects.

These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our stock adversely or if our operating results do not meet their expectations, our stock price and trading volume could decline.

The trading market for our Class A common stock is significantly influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.

We do not intend to pay dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and to fund the operation and expansion of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant.

We are a “controlled company” within the meaning of NYSE rules and, as a result, qualify for and rely on exemptions from certain corporate governance requirements.

Onex Corporation and its affiliates control a majority of the voting power of our outstanding common stock. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including the requirements that:

• a majority of the board of directors consist of independent directors;

• the nominating and corporate governance committee be entirely composed of independent directors with a written charter addressing the committee’s purpose and responsibilities;

• the compensation committee be entirely composed of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

• there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

We elect to be treated as a controlled company and thus utilize some of these exemptions. In addition, although we currently have a board composed of a majority of independent directors and have adopted charters for our audit, corporate governance, quality and compliance and compensation committees, and intend to conduct annual performance evaluations for these committees, none of these committees are composed entirely of independent directors, except for our audit committee. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of NYSE corporate governance requirements.

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Our amended and restated certificate of incorporation, bylaws and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our Class A common stock.

In addition to the effect that the concentration of ownership and voting power in our significant stockholders may have, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may enable our management to resist a change in control. These provisions may discourage, delay or prevent a change in the ownership of our company or a change in our management, even if doing so might be beneficial to our stockholders. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our Class A common stock. The provisions in our amended and restated certificate of incorporation or amended and restated bylaws include:

• our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of our Class A common stock and Class B common stock;

• advance notice requirements for stockholders to nominate individuals to serve on our board of directors or to submit proposals that can be acted upon at stockholder meetings; provided, that prior to the date that the total number of outstanding shares of our Class B common stock is less than 10% of the total number of shares of common stock outstanding, which we refer to as the "Transition Date," no such requirement is required for holders of at least 10% of our outstanding Class B common stock;

• our board of directors is classified so not all of the members of our board of directors are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

• following the Transition Date, stockholder action by written consent will be prohibited;

• special meetings of the stockholders are permitted to be called only by the chairman of our board of directors, our chief executive officer or by a majority of our board of directors;

• stockholders are not permitted to cumulate their votes for the election of directors;

• newly created directorships resulting from an increase in the authorized number of directors or vacancies on our board of directors will be filled only by majority vote of the remaining directors;

• our board of directors is expressly authorized to make, alter or repeal our bylaws; and

• stockholders are permitted to amend our bylaws only upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

After the Transition Date, we will also be subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and rested certificate of incorporation, amended and restated bylaws and Delaware law could discourage acquisition proposals and make it more difficult or expensive for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delaying or impeding a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our Class A common stock to decline.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The table below sets forth information with respect to purchases of our Class A common stock made by us or on our behalf during the quarter ended June 30, 2014:

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchase as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 - 30, 2014	—	$	—	n/a	n/a
May 1 - 31, 2014	1,694	$	5.08	n/a	n/a
June 1 - 30, 2014
Total:	1,694	$	5.08	n/a	n/a

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(1) Reflects shares forfeited to us upon the vesting of restricted stock granted to participants in our 2007 Incentive Award Plan, to satisfy applicable tax withholding obligations with respect to such vesting. We did not have any publicly announced plans or programs to purchase our Class A common stock in the quarter ended June 30, 2014.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

Item  5.Other Information

None.

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Item 6.Exhibits

(a) Exhibits.

Number	Description
10.1*	Employment Agreement, dated April 10, 2014, with Paxton L. Wiffler
10.2*	Restricted Stock Agreement, dated May 8, 2014, with Paxton L. Wiffler
10.3	Amendment No. 2 and Loan Modification Agreement, dated as of June 23, 2014, to the Fourth Amended and Restated Credit Agreement, dated as of April 12, 2012, by and among Skilled Healthcare Group, Inc., certain subsidiary guarantors , Credit Suisse AG, Cayman Islands Branch, as administrative agent, Credit Suisse Securities (USA) LLC, as amendment arranger, and certain lenders and other parties thereto (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on June 27, 2014)
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 as filed with the SEC on August 11, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at June 30, 2014 and December 31, 2013, and (ii) the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and June 30, 2013, and (iii) the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and June 30, 2013, and (iv) the condensed consolidated statements of cash flows the six months ended June 30, 2014 and June 30, 2013, and (v) the Notes to Condensed Consolidated Financial Statements.

 *    Management contract or compensatory plan or arrangement.

** Furnished herewith and not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

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

		SKILLED HEALTHCARE GROUP, INC.
Date:	August 11, 2014	By	/S/    ROBERT H. FISH
			Robert H. Fish
			Chief Executive Officer
Date:	August 11, 2014	By	/S/ CHRISTOPHER N. FELFE
			Christopher N. Felfe
			Chief Financial Officer
			(Principal Financial Officer, Principal Accounting Officer, and Authorized Signatory)

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EXHIBIT INDEX

Number	Description
10.1*	Employment Agreement, dated April 10, 2014, with Paxton L. Wiffler
10.2*	Restricted Stock Agreement, dated May 8, 2014, with Paxton L. Wiffler
10.3	Amendment No. 2 and Loan Modification Agreement, dated as of June 23, 2014, to the Fourth Amended and Restated Credit Agreement, dated as of April 12, 2012, by and among Skilled Healthcare Group, Inc., certain subsidiary guarantors , Credit Suisse AG, Cayman Islands Branch, as administrative agent, Credit Suisse Securities (USA) LLC, as amendment arranger, and certain lenders and other parties thereto (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on June 27, 2014)
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 as filed with the SEC on August 11, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the condensed consolidated balance sheets at June 30, 2014 and December 31, 2013, and (ii) the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and June 30, 2013, and (iii) the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and June 30, 2013, and (iv) the condensed consolidated statements of cash flows the six months ended June 30, 2014 and June 30, 2013, and (v) the Notes to Condensed Consolidated Financial Statements.

*        Management contract or compensatory plan or arrangement.        

 ** Furnished herewith and not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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EX-10.1

Exhibit 10.1

Employment Agreement

This Employment Agreement dated as of April 10, 2014 (the “Agreement”), is made by and between Skilled Healthcare, LLC, a Delaware limited liability company (together with Skilled Healthcare Group, Inc., a Delaware corporation (“Parent”), and any successor thereto, the “Company”) and Paxton Wiffler (the “Executive”).

RECITALS

A.    It is the desire of the Company to assure itself of the services of the Executive by entering into this Agreement.

B.    The Executive and the Company mutually desire that Executive provide services to the Company on the terms herein provided.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below the parties hereto agree as follows:

1. Employment.

(a) General. The Company shall employ the Executive and the Executive shall enter the employ of the Company, for the period set forth in Section 1(b), in the position set forth in Section 1(c), and upon the other terms and conditions herein provided.

(b) Employment Term. The initial term of employment under this Agreement (the “Initial Term”) shall be for the period beginning on May 8, 2014 (the “Effective Date”) and ending on (and including) the second anniversary thereof, unless earlier terminated as provided in Section 3. The employment term hereunder shall automatically be extended for successive one-year periods (“Extension Terms” and, collectively with the Initial Term, the “Term”) unless either party gives written notice of non-extension to the other no later than thirty (30) days and no more than ninety (90) days prior to the expiration of the then-applicable Term and subject to earlier termination as provided in Section 3.

(c) Position and Duties. The Executive shall serve as the Chief Operating Officer of the Company with such customary responsibilities, duties and authority as may from time to time be assigned to the Executive by the Chief Executive Officer of the Company, or the Board of Directors of the Company or by the Board of Directors of Parent (the “Board”). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company (which may include service to the Company and its direct and indirect subsidiaries). The Executive agrees to observe and comply with the rules and policies of the Company as adopted by or under the authority of the Board from time to time. During the Term, it shall not be a violation of this Agreement for the Executive to serve on industry trade, civic or charitable boards or committees and manage his personal investments and affairs, as long as such activities do not materially interfere with the performance of the Executive's duties and responsibilities as an employee of the Company. During his employment and following termination of his employment with the

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Company, the Executive agrees not to disparage the Company, any of its products or practices, or any of its directors, officers, agents, representatives, stockholders or affiliates, either orally or in writing.

(d) Location. The Executive acknowledges that the Company's principal executive offices are currently located at Foothill Ranch, California. The Executive shall operate principally out of such executive offices, as they may be moved from time to time within 40 miles of their current location in Foothill Ranch, California. The Company expects, and the Executive agrees, that the Executive shall be required to travel from time to time in order to fulfill his duties to the Company.

(e) Compliance with Applicable Policies, Standards, Rules and Regulations. Executive agrees that in all aspects of such employment, Executive shall comply in all material respects with all material policies, standards, rules and regulations of the Company, as well as applicable state and federal regulations, established from time to time, and shall perform Executive’s duties faithfully, to the best of Executive’s ability and in the best interest of the Company. The Company has adopted the Skilled Healthcare Group Code of Conduct, the Facility Code of Conduct Handbook, the Employee Handbook and the Employee Dispute Resolution Book (collectively, the “Company Policies”). The Company Policies are available online and Executive acknowledges hereby that he/she has been provided copies of the Company Policies and is required to review and abide by each of the Company Policies.

(f) No Conflict. Executive represents and warrants that Executive’s execution of this Agreement, Executive’s employment with the Company, and the performance of Executive’s proposed duties under this Agreement shall not violate any obligations Executive may have to any other employer, person or entity, including obligations with respect to proprietary or confidential information of any other person or entity.

2. Compensation and Related Matters.

(a) Annual Base Salary. During the Term, the Executive shall receive a base salary at a rate of $500,000 per annum (the “Annual Base Salary”), which shall be paid in accordance with the customary payroll practices of the Company, subject to upward adjustment as may be determined by the Board in its discretion. In the case of such upward adjustment, “Annual Base Salary” shall mean such increased base salary.

(b) Annual Bonus. During the Term, the Executive will be eligible to participate in an annual performance-based bonus plan that provides an opportunity of 75% of the Executive’s Annual Base Salary (pro rated for the first year of the Term, if a partial calendar year) on terms substantially the same as the bonus plan adopted by the Board for other senior officers of the Company. Executive will be entitled to receive any such bonus if he is employed with Company on the last day of the applicable performance period for which such bonus is earned, although payment of any annual bonus, to the extent any annual bonus becomes payable, shall be paid to the Executive on or prior to March 15 of the year immediately following the year in which such annual bonus is earned.

(c) Equity Plan. During the Term, the Executive shall be eligible to participate in the 2007 Equity Award Plan of Parent, or a successor plan thereto (the “Equity Plan”), pursuant to which, on the Effective Date, the Executive shall receive an award of 400,000 shares of restricted common stock

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of Parent (the “Restricted Stock Award”) in accordance with the terms of the award agreement attached hereto as Schedule 1.

(d) Benefits. During the Term, the Executive shall be entitled to participate in group medical insurance, 401(k) and other standard benefits provided by the Company, as may be amended from time to time, which are applicable to the senior officers of the Company.

(e) Vacation. During the Term, the Executive shall not participate in any Company sponsored vacation plan; however the Executive will be expected to work a minimum of forty-eight (48) weeks during each of the Initial Term and any Extension Term, which will allow four (4) weeks off, with pay, during each of the Initial Term and any Extension Term. The minimum work threshold is tied to the applicable Initial Term and/or Extension Term, and no rollover is permitted. Any vacation shall be taken at the reasonable and mutual convenience of the Company and the Executive.

(f) Expenses. During the Term, the Company shall reimburse the Executive for all reasonable travel and other business expenses incurred by him in the performance of his duties to the Company in accordance with the Company's expense reimbursement policy.

(g) Key Person Insurance. At any time during the Term, the Company shall have the right to insure the life of the Executive for the Company's sole benefit. The Company shall have the right to determine the amount of insurance and the type of policy. The Executive shall cooperate with the Company in obtaining such insurance by submitting to physical examinations, by supplying all information reasonably required by any insurance carrier, and by executing all necessary documents reasonably required by any insurance carrier. The Executive shall incur no financial obligation by executing any required document, and shall have no interest in any such policy.

(h) Annual Review. Approximately every 12 months during the Term, the Executive and the Chief Executive Officer shall meet to discuss the Executive's performance and terms of the Executive's employment by the Company.

3. Termination.

The Term and the Executive's employment hereunder may be terminated by the Company or the Executive, as applicable, without any breach of this Agreement only under the following circumstances:

(a) Circumstances.

(i) Death. The Term and the Executive's employment hereunder shall terminate upon his death.

(ii) Disability. If the Executive has incurred a Disability, the Company may terminate the Term and the Executive's employment hereunder.

(iii) Termination for Cause. The Company may terminate the Term and the Executive's employment hereunder for Cause.

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(iv) Termination without Cause. The Company may terminate the Term and the Executive's employment hereunder without Cause.

(v) Resignation by the Executive. The Executive may resign his employment and terminate the Term for any reason.

(vi) Non-extension of Term by the Company. The Company may give notice of non-extension of the Term to the Executive pursuant to Section 1(b).

(vii) Non-extension of Term by the Executive. The Executive may give notice of non-extension of the Term to the Company pursuant to Section 1(b).

(b) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive under this Section 3 (other than termination pursuant to paragraph (a)(i)) shall be communicated by a written notice to the other party indicating the specific termination provision in this Agreement relied upon, and specifying a Date of Termination which, if submitted by the Executive, shall be at least two weeks following the date of such notice (a “Notice of Termination”) or, such earlier date as the Company may prescribe. A Notice of Termination submitted by the Company may provide for a Date of Termination on the date the Executive receives the Notice of Termination, or any date thereafter elected by the Company in its sole discretion, provided that in the event of a termination pursuant to Section 3(a)(vi), the Date of Termination must be the date of expiration of the then-applicable Term.

(c) Company Obligations Upon Termination. Upon termination of the Executive's employment, the Executive (or the Executive's estate) shall be entitled to receive the sum of the Executive's Annual Base Salary through the Date of Termination not theretofore paid, any expenses owed to the Executive under Section 2(f), and, except as otherwise provided herein, any amount accrued and arising from the Executive's participation in, or benefits accrued under any employee benefit plans, programs or arrangements under Section 2(d), which amounts shall be payable in accordance with the terms and conditions of such employee benefit plans, programs or arrangements, and such other or additional benefits as may be, or become, due to him under the applicable terms of applicable plans, programs, agreements, corporate governance documents and other arrangements of the Company and its parent and subsidiaries (collectively, the “Company Arrangements”).

(d) Resignation of Directorships. Upon termination of the Executive's employment for any reason, the Executive shall be deemed to have resigned from all offices and directorships, if any, then held with the Company or any subsidiary or affiliate thereof, and, at the Company’s request, Executive shall execute such documents as the Company determines to be necessary or desirable to effectuate such resignations.

4. Severance Payments.

(a) Termination for Cause, Resignation by the Executive, Non-extension of Term bythe Executive or the Company, death or Disability. If the Executive's employment is terminated pursuant to Section 3(a)(iii) for Cause, pursuant to Section 3(a)(v) for Resignation by the Executive, or pursuant to Section 3(a)(vii) due to non-extension of the Term by the Executive, the Executive shall not be entitled to any severance payment or benefits. If the Executive's employment is terminated

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pursuant to Section 3(a)(i) as a result of Executive's death or pursuant to Section 3(a)(ii) as a result of the Executive's Disability, the Company shall, subject to the Executive or his estate, as applicable, signing, within twenty-one (21) days (or forty-five (45) days if necessary to comply with applicable law) following the Date of Termination, a separation and release agreement in the form attached hereto at Annex A (the “Release”) and not revoking the Release within seven (7) days thereafter, (i) pay to the Executive or his estate, as applicable, an amount equal to the product of (x) the bonus that the Executive would have earned during the calendar year in which the Date of Termination occurs, if any, and (y) a fraction, the numerator of which is the number of days that elapsed in such calendar year through the Date of Termination and the denominator of which is 365, payable when bonuses would have otherwise been payable had the Executive's employment not terminated, but in no event later than March 15 of the year following the year in which the Date of Termination occurs, (ii) pay (as taxable compensation), within sixty (60) days following the Date of Termination, a lump sum amount equal to the aggregate health insurance premium cost for the Executive (unless the Term was terminated pursuant to Section 3(a)(i)) and his spouse and dependents under the Company’s group health plans for a period of twelve (12) months, based on the premium level and coverage in effect for the Executive and his spouse and dependents as of the Date of Termination (the “Supplemental Amount”), and (iii) in the case of termination pursuant to Section 3(a)(ii) as a result of the Executive's Disability, pay to the Executive, in a lump sum within sixty (60) days following the Date of Termination, an amount equal to the excess, if any, of (x) the amount that would have been payable to the Executive pursuant to Section 4(b)(i) if the Executive had been terminated by the Company without Cause pursuant to Section 3(a)(iv) over (y) the present value of the benefits to be received by the Executive (or his beneficiaries) under any disability plan sponsored by the Company or its affiliates (for purposes of this clause (iii) the amounts in (x) and (y) shall be determined by the Company on an after-tax basis to the extent that their receipt by the Executive (or his beneficiaries) would be subject to tax and on actuarial assumptions satisfactory to the Company). If the Executive's employment is terminated pursuant to Section 3(a)(vi) due to non-extension of the Term by the Company, the Company shall, subject to the Executive signing the Release within twenty-one (21) days (or forty-five (45) days if necessary to comply with applicable law) following the Date of Termination and not revoking the Release within seven (7) days thereafter, (i) pay to the Executive an amount equal to the product of (x) the bonus that the Executive would have earned during the calendar year in which the Date of Termination occurs, if any, and (y) a fraction, the numerator of which is the number of days that elapsed in such calendar year through the Date of Termination and the denominator of which is 365, payable when bonuses would have otherwise been payable had the Executive's employment not terminated, but in no event later than March 15 of the year following the year in which the Date of Termination occurs, and (ii) pay to the Executive, in a lump sum within sixty (60) days following the Date of Termination, an amount equal to the Annual Base Salary that the Executive would have been entitled to receive if the Executive had continued his employment hereunder for a period of 12 months following the Date of Termination. Notwithstanding the foregoing, solely to the extent required by Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), in the event that the 60 day period that the Company has to pay certain of the severance amounts set forth above overlaps two calendar years, then such severance amounts shall not be paid until such second calendar year (but within such 60 day period).

(b) Termination without Cause. If the Executive's employment shall be terminated by the Company without Cause pursuant to Section 3(a)(iv), the Company shall, subject to the Executive signing the Release within twenty-one (21) days (or forty-five days (45) if necessary to comply with

5

applicable law) following the Date of Termination and not revoking the Release within seven (7) days thereafter:

(i) pay to the Executive, in a lump sum within sixty (60) days following the Date of Termination, an amount equal to the Annual Base Salary that the Executive would have been entitled to receive if the Executive had continued his employment hereunder for a period of 24 months following the Date of Termination;

(ii) pay to the Executive an amount equal to the product of (x) the bonus that the Executive would have earned during the calendar year in which the Date of Termination occurs, if any, and (y) a fraction, the numerator of which is the number of days that elapsed in such calendar year through the Date of Termination and the denominator of which is 365, payable when bonuses would have otherwise been payable had the Executive's employment not terminated, but in no event later than March 15 of the year following the year in which the Date of Termination occurs; and

(iii) pay (as taxable compensation), within sixty (60) days following the Date of Termination, the Supplemental Amount.

Notwithstanding the foregoing, solely to the extent required by Code Section 409A, in the event that the 60 day period that the Company has to pay certain of the severance amounts set forth above overlaps two calendar years, then such severance amounts shall not be paid until such second calendar year (but within such 60 day period).

(c) Survival. The expiration or termination of the Term shall not impair the rights or obligations of any party hereto, which shall have accrued prior to such expiration or termination.

(d) Section 409A Six-Month Delay. Notwithstanding anything to the contrary in this Section 4, no payments in this Section 4 will be paid during the six-month period following the Executive's termination of employment unless the Company determines, in its good faith judgment, that paying such amounts at the time or times indicated in this Section would not cause the Executive to incur an additional tax or penalties under Code Section 409A (in which case such amounts shall be paid at the time or times indicated in this Section). If the payment of any amounts are delayed as a result of the previous sentence, on the first day following the end of the six-month period, the Company will pay the Executive a lump-sum amount equal to the cumulative amounts that would have otherwise been previously paid to the Executive under this Section 4. Thereafter, payments will resume in accordance with this Section.

5. Executive’s Covenants.

(a) The Executive shall not, at any time during the Term directly or indirectly engage in, have any equity interest in, or manage or operate any person, firm, corporation, partnership or business (whether as director, officer, employee, agent, representative, partner, security holder, consultant or otherwise) that engages in any business (x) which competes with any business of the Company anywhere in the States of California, Kansas, Missouri, Nevada or Texas, (y) which competes with any business of the Company in any State in which the Company operated a facility at any time (whether before or after the date of this Agreement) that the Executive was employed by the Company or (z) which derives $500,000,000 or more in annual consolidated revenues from the operation of skilled nursing facilities in the United States; provided, however, that the Executive

6

shall be permitted to acquire a passive stock interest in such a business provided the stock acquired is publicly traded and is not more than five percent (5%) of the outstanding interest in such business.

(b) The Executive shall not at any time during the Term or during the two-year period following the Date of Termination, directly or indirectly, recruit or otherwise solicit or induce or encourage any employee of the Company to terminate his or her employment or relationship with the Company. The Executive shall not at any time during the Term or thereafter use any trade secret of the Company or its subsidiaries or affiliates to solicit, induce, or encourage any customer, client, contractor, supplier or other party doing business with the Company (i) to terminate its relationship therewith or transfer its business from the Company, (ii) to otherwise change its relationship with the Company, or (iii) to establish any relationship with the Executive or any other person, firm, corporation or other entity for any business purpose competitive with the business of the Company.

(c) In the event the terms of this Section 5 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too great a geographical area or by reason of its being too extensive in any other respect, it will be interpreted to extend only over the maximum period of time for which it may be enforceable, over the maximum geographical area as to which it may be enforceable, or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action.

(d) As used in this Section 5, the term “Company” shall include Parent, the Company and their respective direct or indirect subsidiaries.

6. Nondisclosure of Proprietary Information.

(a) Except in connection with the faithful performance of the Executive's duties hereunder or pursuant to Section 6(c), the Executive shall, in perpetuity, maintain in confidence and shall not directly, indirectly or otherwise, use, disseminate, disclose or publish, or use for his benefit or the benefit of any person, firm, corporation or other entity any confidential or proprietary information or trade secrets of or relating to the Company (including, without limitation, intellectual property in the form of patents, trademarks and copyrights and applications therefor, ideas, inventions, works, discoveries, improvements, information, documents, formulae, practices, processes, methods, developments, source code, modifications, technology, techniques, data, programs, other know-how or materials, owned, developed or possessed by the Company, whether in tangible or intangible form, information with respect to the Company's operations, processes, products, inventions, business practices, finances, principals, vendors, suppliers, customers, potential customers, marketing methods, costs, prices, contractual relationships, regulatory status, prospects and compensation paid to employees or other terms of employment), or deliver to any person, firm, corporation or other entity any document, record, notebook, computer program or similar repository of or containing any such confidential or proprietary information or trade secrets. The parties hereby stipulate and agree that as between them the foregoing matters are important, material and confidential proprietary information and trade secrets and affect the successful conduct of the businesses of the Company (and any successor or assignee of the Company). Confidential Information shall not include any information which has entered the public domain through no fault of the Executive.

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(b) Upon termination of the Executive's employment with the Company for any reason, the Executive will promptly deliver to the Company all correspondence, drawings, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, or any other documents concerning the Company's customers, business plans, marketing strategies, products or processes.

(c) The Executive may respond to a lawful and valid subpoena or other legal process but shall give the Company the earliest possible notice thereof, shall, as much in advance of the return date as possible, make available to the Company and its counsel the documents and other information sought and shall assist such counsel at Company's expense in resisting or otherwise responding to such process.

(d) As used in this Section 6 and Section 7, the term “Company” shall include the Company and its direct or indirect parents, if any, and subsidiaries.

(e) Nothing in this Agreement shall prohibit the Executive from (i) disclosing information and documents when required by law, subpoena or court order (subject to the requirements of Section 6(c) above), (ii) disclosing information and documents to his attorney or tax adviser on a confidential basis for the purpose of securing legal or tax advice, (iii) disclosing the post-employment restrictions in this Agreement in confidence to any potential new employer, or (iv) retaining, at any time, his personal correspondence, his personal rolodex and documents related to his own personal benefits, entitlements and obligations.

7. Inventions.

All rights to discoveries, inventions, improvements and innovations (including all data and records pertaining thereto) related to the business of the Company, whether or not patentable, copyrightable, registrable as a trademark, or reduced to writing, that the Executive may discover, invent or originate during the Term, either alone or with others and whether or not during working hours or by the use of the facilities of the Company (“Inventions”), shall be the exclusive property of the Company. The Executive shall promptly disclose all Inventions to the Company, shall execute at the request of the Company any assignments or other documents the Company may deem reasonably necessary to protect or perfect its rights therein, and shall assist the Company, upon reasonable request and at the Company's expense, in obtaining, defending and enforcing the Company's rights therein. The Executive hereby appoints the Company as his attorney-in-fact to execute on his behalf any assignments or other documents reasonably deemed necessary by the Company to protect or perfect its rights to any Inventions.

8. Injunctive Relief.

It is recognized and acknowledged by the Executive that a breach of the covenants contained in Sections 5, 6 and 7 will cause irreparable damage to Company and its goodwill, the exact amount of which will be difficult or impossible to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Executive agrees that in the event of a breach of any of the covenants contained in Sections 5, 6 and 7, in addition to any other remedy which may be available at law or in equity, the Company will be entitled to specific performance and temporary, preliminary and permanent injunctive relief.

9. Assignment and Successors.

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The Company may assign its rights and obligations under this Agreement to any successor to all or substantially all of the business or the assets of the Company (by merger or otherwise). This Agreement shall be binding upon and inure to the benefit of the Company, the Executive and their respective successors, assigns, personnel and legal representatives, executors, administrators, heirs, distributees, devisees, and legatees, as applicable. None of the Executive's rights or obligations may be assigned or transferred by the Executive, other than the Executive's rights to payments hereunder, which may be transferred only by will or operation of law. Notwithstanding the foregoing, the Executive shall be entitled, to the extent permitted under applicable law and applicable Company Arrangements, to select and change a beneficiary or beneficiaries to receive compensation hereunder following his death by giving written notice thereof to the Company.

10. Certain Definitions.

(a) Cause. The Company shall have “Cause” to terminate the Term and the Executive's employment hereunder upon:

(i) the Executive's failure to perform substantially his duties as an employee of the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which is not cured within 15 days after a written demand for performance is given to the Executive by the Board specifying in reasonable detail the manner in which the Executive has failed to perform substantially his duties as an employee of the Company;

(ii) the Executive's failure to carry out, or comply with, in any material respect any lawful and reasonable directive of the Board consistent with the terms of this Agreement that, if capable of cure, is not cured by the Executive within 15 days after written notice given to the Executive describing such failure in reasonable detail;

(iii) the Executive's conviction, plea of no contest, plea of nolo contendere, or imposition of unadjudicated probation for any felony or, to the extent involving fraud, dishonesty, theft, embezzlement or moral turpitude, any other crime;

(iv) the Executive's violation of a material regulatory requirement relating to the business of the Company and its subsidiaries that, in the good faith judgment of the Board, is injurious to the Company in any material respect;

(v) the Executive's unlawful use (including being under the influence) or possession of illegal drugs on the Company's premises or while performing the Executive's duties and responsibilities under this Agreement;

(vi) the Executive's breach of this Agreement in any material respect that, if capable of cure, is not cured by the Executive within 15 days after written notice given to the Executive describing such breach in reasonable detail; or

(vii) the Executive's commission of an act of fraud, embezzlement, misappropriation, willful misconduct, gross negligence or breach of fiduciary duty with respect to the Company or any of its affiliates;

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(b) Date of Termination. “Date of Termination” shall mean (i) if the Executive's employment is terminated by his death, the date of his death; (ii) if the Executive's employment is terminated pursuant to Section 3(a)(ii)-(v) either the date indicated in the Notice of Termination or the date specified by the Company pursuant to Section 3(b), whichever is earlier; (iii) if the Executive's employment is terminated pursuant to Section 3(a)(vi) or Section 3(a)(vii), the expiration of the then-applicable Term; or (iv) if Executive’s employment is terminated pursuant to Section 3(a)(viii), the date indicated in the Notice of Termination sent by Executive within the time periods described in Section 10(d) below.

(c) Disability. “Disability” shall mean, at any time the Company or any of its affiliates sponsors a long-term disability plan for the Company's employees in which the Executive participates, “disability” as defined in such long-term disability plan for the purpose of determining a participant's eligibility for benefits, provided, however, if the long-term disability plan contains multiple definitions of disability, “Disability” shall refer to that definition of disability which, if the Executive qualified for such disability benefits, would provide coverage for the longest period of time. The determination of whether the Executive has a Disability shall be made by the person or persons required to make disability determinations under the long-term disability plan. At any time the Company does not sponsor a long-term disability plan for its employees in which the Executive participates, Disability shall mean the Executive's inability to perform, with or without reasonable accommodation, the essential functions of his position hereunder for a total of six months during any 12-month period as a result of incapacity due to mental or physical illness as determined by a physician selected by the Board and acceptable to the Executive or the Executive's legal representative, such agreement as to acceptability not to be unreasonably withheld or delayed. Any refusal by the Executive to submit to a medical examination for the purpose of determining Disability shall be deemed to constitute conclusive evidence of the Executive's Disability.

11. Governing Law.

This Agreement shall be governed, construed, interpreted and enforced in accordance with its express terms, and otherwise in accordance with the substantive laws of the State of California, without reference to the principles of conflicts of law, and where applicable, the federal laws of the United States.

12. Validity.

The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

13. Notices.

Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be in writing and delivered personally or sent by facsimile or certified or registered mail, postage prepaid, or any nationally recognized overnight courier service with signature certification of receipt, as follows:

(a) If to the Company:

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Skilled Healthcare Group, Inc.
27442 Portola Parkway
Suite 200
Foothill Ranch, California 92610
Attn: General Counsel

(b) If to the Executive, to his most recent address on the Company’s books and records.

or at any other address as any party shall have specified by notice in writing to the other party.

14. Counterparts.

This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. Signatures delivered by facsimile shall be deemed effective for all purposes.

15. Entire Agreement.

The terms of this Agreement are intended by the parties to be the final expression of their agreement with respect to the employment of the Executive by the Company and supersede all prior understandings and agreements, whether written or oral. The parties further intend that this Agreement shall constitute the complete and exclusive statement of their terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding to vary the terms of this Agreement.

16. Amendments; Waivers.

This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Executive and a duly authorized officer of Company. By an instrument in writing similarly executed, the Executive or a duly authorized officer of the Company may waive compliance by the other party or parties with any specifically identified provision of this Agreement that such other party was or is obligated to comply with or perform; provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder preclude any other or further exercise of any other right, remedy, or power provided herein or by law or in equity. Except as otherwise set forth in this Agreement, the respective rights and obligations of the parties under this Agreement shall survive any termination of Executive's employment.

17. No Inconsistent Actions.

The parties hereto shall not voluntarily undertake or fail to undertake any action or course of action inconsistent with the provisions or essential intent of this Agreement. Furthermore, it is the intent of the parties hereto to act in a fair and reasonable manner with respect to the interpretation and application of the provisions of this Agreement.

18. Construction.

This Agreement shall be deemed drafted equally by both the parties. Its language shall be construed as a whole and according to its fair meaning. Any presumption or principle that the language is to be construed against any party shall not apply. The headings in this Agreement are only for convenience and are not intended to affect

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construction or interpretation. Any references to paragraphs, subparagraphs, sections or subsections are to those parts of this Agreement, unless the context clearly indicates to the contrary. Also, unless the context clearly indicates to the contrary, (a) the plural includes the singular and the singular includes the plural; (b) “and” and “or” are each used both conjunctively and disjunctively; (c) “any,” “all,” “each,” or “every” means “any and all,” and “each and every”; (d) “includes” and “including” are each “without limitation”; (e) “herein,” “hereof,” “hereunder” and other similar compounds of the word “here” refer to the entire Agreement and not to any particular paragraph, subparagraph, section or subsection; and (f) all pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the entities or persons referred to may require.

19. Arbitration.

Any controversy arising out of or relating to this Agreement, its enforcement or interpretation, or because of an alleged breach, default, or misrepresentation in connection with any of its provisions, or any other controversy arising out of the Executive's employment by the Company, including, but not limited to, any state or federal statutory claims, shall be submitted to arbitration in Los Angeles County, California, before a sole neutral arbitrator (the “Arbitrator”), mutually selected and agreeable to both parties and selected from Judicial Arbitration and Mediation Services, Inc., Los Angeles County, California, or its successor (“JAMS”), or if JAMS is no longer able to supply the Arbitrator, such Arbitrator shall be selected from the American Arbitration Association, and shall be conducted in accordance with the provisions of California Code of Civil Procedure §§ 1280 et seq. as the exclusive forum for the resolution of such dispute; provided, however, that provisional injunctive relief (including, but not limited to, temporary restraining orders and preliminary injunctions) may, but need not, be sought by either party to this Agreement in any court of competent jurisdiction while arbitration proceedings are pending, and any provisional injunctive relief granted by such court shall remain effective until the matter is finally determined by the Arbitrator; no bond or other security shall be required in connection therewith.

Final resolution of any dispute through arbitration may include any remedy or relief that the Arbitrator deems just and equitable, including any and all remedies provided by applicable state or federal statutes. At the conclusion of the arbitration, the Arbitrator shall issue a written decision that sets forth the essential findings and conclusions upon which the Arbitrator's award or decision is based. Any award or relief granted by the Arbitrator hereunder shall be final and binding on the parties hereto and may be enforced by any court of competent jurisdiction.

The parties acknowledge and agree that they are hereby waiving any rights to trial by jury in any action, proceeding or counterclaim brought by either of the parties against the other in connection with any matter whatsoever arising out of or in any way connected with this Agreement or the services rendered hereunder. The parties agree that the Company shall be responsible for payment of the forum costs of any arbitration hereunder, including the Arbitrator's fee. The Executive and the Company further agree that in any proceeding to enforce the terms of this Agreement, the prevailing party shall be entitled to its or her reasonable attorneys' fees and costs (other than forum costs associated with the arbitration) incurred by it or him in connection with resolution of the dispute up to a maximum of Fifty Thousand Dollars ($50,000.00) in addition to any other relief granted.

20. Enforcement.

If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a portion of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Furthermore, in

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lieu of such illegal, invalid or unenforceable provision there shall be added automatically as part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

21. Withholding.

The Company shall be entitled to withhold from any amounts payable under this Agreement any federal, state, local or foreign withholding or other taxes or charges which the Company is required to withhold. The Company shall be entitled to rely on an opinion of counsel if any questions as to the amount or requirement of withholding shall arise.

22. Indemnification.

The Company agrees that (a) if the Executive is made a party, or is threatened to be made a party, to any threatened or actual action, suit or proceeding whether civil, criminal, administrative, investigative, appellate or other (a “Proceeding”) by reason of the fact that he is or was a director, officer, employee, agent, manager, consultant or representative of the Company or (b) if any claim, demand, request, investigation, controversy, threat, discovery request or request for testimony or information (a “Claim”) is made, or threatened to be made, that arises out of or relates to the Executive's service in any of the foregoing capacities, then the Executive shall promptly be indemnified and held harmless by the Company to the fullest extent permitted by the laws of the state of incorporation of the Company, against any and all costs, expenses, liabilities and losses incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee, agent, manager, consultant or representative of the Company and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company may assume the defense of any Proceeding or Claim with counsel selected by the Company and reasonably satisfactory to the Executive and, if it does so, the Executive shall not be entitled to be reimbursed for any separate counsel he may retain in connection with such Proceeding or Claim.

Neither the failure of the Company (including its Board, independent legal counsel or stockholders) to have made a determination in connection with any request for indemnification that the Executive has satisfied any applicable standard of conduct, nor a determination by the Company (including its Board, independent legal counsel or stockholders) that the Executive has not met any applicable standard of conduct, shall create a presumption that the Executive has not met an applicable standard of conduct.

During the period of employment and for a period of time thereafter determined as provided below, the Company shall keep in place a directors and officers' liability insurance policy (or policies) providing coverage, or such coverage may be provided under a policy that provides coverage to Onex Corporation or Onex Partners LP and their affiliates, to the Executive if and to the extent that the Company provides such coverage to its directors and such coverage (or other directors and officers liability insurance coverage) shall continue after the termination of the period of employment if and for the period of time that such coverage is extended to the Company's former director, other than former directors who are employees of Onex Corporation, Onex Partners LP or their affiliates.

23. Code Section 409A.

(a) To the extent applicable, this Agreement shall be interpreted and applied consistent and in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder (“Section 409A”). If, however, the Company determines that any compensation or benefits payable under this Agreement may be or become subject to Section 409A, the Executive and the Company shall cooperate to adopt such amendments to this

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Agreement or to adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take such other actions, as are necessary or appropriate to (i) exempt the compensation and benefits payable under this Agreement from Section 409A and/or preserve the intended tax treatment of such compensation and benefits, or (ii) comply with the requirements of Section 409A; provided, however, that this Section 23 shall not create any obligation on the part of the Company to adopt any such amendment, policy or procedure or take any such other action. For purposes of Section 409A, each payment made under this Agreement shall be treated as a separate payment.

(b) Notwithstanding anything herein to the contrary, Executive acknowledges and agrees that in the event that any tax is imposed under Section 409A in respect of any compensation or benefits payable to Executive, whether under or in connection with this Agreement or otherwise, then (i) the payment of such tax shall be solely Executive’s responsibility, and (ii) neither the Company, its affiliates nor any of their respective past or present directors, officers, employees or agents shall have any liability for any such tax (unless caused by the Company’s intentional misconduct).

(c) To the extent that any payments or reimbursements provided to Executive under this Agreement are deemed to constitute compensation to which Treasury Regulation Section 1.409A-3(i)(1)(iv) would apply, such payments or reimbursements shall be made or provided in accordance with the requirements of Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.

24. Clawback.

The Executive agrees that all compensation paid or payable to the Executive pursuant to this Agreement shall be subject to the provisions of the Company’s claw-back policy (as it may be amended from time to time), or any claw-back policy adopted by the Company from time to time.

25. Cooperation in Litigation.

For a period of 10 years following the Date of Termination, the Executive promises and agrees that, following the date his employment by the Company terminates, he will reasonably cooperate with the Company in any litigation in which the Company is a party or otherwise involved which arises out of events occurring prior to the termination of his employment, including but not limited to, serving as a consultant (at a reasonable hourly rate) or witness and producing documents and information relevant to the case or helpful to the Company.

26. Employee Acknowledgement.

The Executive acknowledges that he has read and understands this Agreement, is fully aware of its legal effect, has not acted in reliance upon any representations or promises made by the Company other than those contained in writing herein, and has entered into this Agreement freely based on his own judgment.

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IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written.

SKILLED HEALTHCARE, LLC.
By:	/s/ Roland G. Rapp
	Name: Roland G. Rapp
	Title: General Counsel, Secretary and Chief Administrative Officer

EXECUTIVE
By:	/s/ Paxton Wiffler
	Name: Paxton Wiffler
	Title: Chief Operating Officer

ACKNOWLEDGED AND AGREED

SOLELY FOR PURPOSES OF SECTION 2(c)

SKILLED HEALTHCARE GROUP, INC.

/s/ Roland G. Rapp

Name: Roland G. Rapp

Title: General Counsel, Secretary and Chief Administrative Officer

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EX-10.2

Exhibit 10.2

SKILLED HEALTHCARE GROUP, INC.

AMENDED AND RESTATED 2007 INCENTIVE AWARD PLAN

RESTRICTED STOCK AWARD GRANT NOTICE

Skilled Healthcare Group, Inc., a Delaware corporation (the “Company”), pursuant to its Amended and Restated 2007 Incentive Award Plan (the “Plan”), hereby grants to the holder listed below (“Holder”) the number of shares of the Company’s Class A common stock, par value $0.001 per share (“Stock”), set forth below (the “Shares”). This Restricted Stock award is subject to all of the terms and conditions set forth herein and in the Restricted Stock Award Agreement attached hereto as Exhibit A (the “Restricted Stock Agreement”) and the Plan, each of which are incorporated herein by reference. Unless otherwise defined herein or in Schedule A hereto, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Award Grant Notice (the “Grant Notice”).

Holder:	Paxton Wiffler
Grant Date:	May 8, 2014
Total Number of Shares of Restricted Stock:	400,000
Vesting: As of the Grant Date, 100% of the Shares will be subject to the Forfeiture Restriction (as defined in the Restricted Stock Agreement). Subject to the terms and conditions of the Plan, this Grant Notice and the Restricted Stock Agreement, the Forfeiture Restriction shall lapse as to the Shares as follows: 1. Installments. The Restricted Stock Award shall be comprised of three installments (each, an “Installment”), as follows: (i) 133,333 of the Shares shall be allocated to the first Installment; (ii) 133,334 of the Shares shall be allocated to the second Installment; and (iii) 133,333 of the Shares shall be allocated to the third Installment. 2. Vesting of Installments. Subject to Section 3, the Forfeiture Restriction shall lapse with respect to each Installment as set forth on Schedule A hereto. 3. Termination of Service. Except as provided in Schedule A hereto, in no event shall the Forfeiture Restriction lapse as to any additional Shares following Holder’s Termination of Service. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with generally accepted accounting principles.

By his or her signature below, Holder agrees to be bound by the terms and conditions of the Plan, the Restricted Stock Agreement and this Grant Notice (including Schedule A hereto). Holder has reviewed the Restricted Stock Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Restricted Stock Agreement and the Plan. Holder hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under or relating to the Plan, this Grant Notice or the Restricted Stock Agreement. If Holder is married, his or her spouse has signed the Consent of Spouse attached to this Grant Notice as Exhibit B.

SKILLED HEALTHCARE GROUP, INC.:		HOLDER:
By:	/s/ Roland Rapp	By:	/s/ Paxton Wiffler
Print Name:	Roland Rapp	Print Name:	Paxton Wiffler
Title:	Secretary
Address:	27442 Portola Parkway, Suite 200	Address:
	Foothill Ranch, CA 92610

Attachments:    Vesting Schedule (Schedule A to the Grant Notice)

Restricted Stock Award Agreement (Exhibit A)

Consent of Spouse (Exhibit B)

Stock Assignment (Exhibit C)

Joint Escrow Instructions (Exhibit D)

Form of Internal Revenue Code Section 83(b) Election and Instructions (Exhibit E)

- Election under Internal Revenue Code Section 83(b) (Attachment 1 to Exhibit E)

- Sample Cover Letter to Internal Revenue Service (Attachment 2 to
Exhibit E)

Amended and Restated 2007 Incentive Award Plan (Exhibit F)

Amended and Restated 2007 Incentive Award Plan Prospectus (Exhibit G)

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SKILLED HEALTHCARE GROUP, INC.

AMENDED AND RESTATED 2007 INCENTIVE AWARD PLAN

RESTRICTED STOCK AWARD GRANT NOTICE

SCHEDULE A

(1)     Vesting Schedule.

(a) Subject to Sections 1(b) and 1(c) below, the Forfeiture Restriction shall lapse in cumulative installments as follows:

(i) The Forfeiture Restriction on the first Installment of Shares shall lapse on the date on which the Committee certifies in writing that the Company has achieved a Vesting Price (as described in Section 1(d) below) of $7.50 per share during the Performance Period.

(ii) The Forfeiture Restriction on the second Installment of Shares shall lapse (i) as to fifty percent (50%) of such Installment on the date on which the Committee certifies in writing that the Company has achieved a Vesting Price of $10.00 per share during the Performance Period and (ii) as to fifty (50%) of such Installment on the first anniversary of such date.

(iii) The Forfeiture Restriction on the third Installment of Shares shall lapse (i) as to fifty percent (50%) of such Installment on the date on which the Committee certifies in writing that the Company has achieved a Vesting Price of $12.50 per share during the Performance Period and (ii) as to fifty (50%) of such Installment on the first anniversary of such date.

(b) Termination of Service.

(i) In the event of Holder’s Termination of Service by reason of death or total and permanent disability prior to the third anniversary of the Grant Date, then, if one or more Vesting Prices is achieved during the one year period following the date of death or the six-month period following the date of Termination of Service by reason of disability, as applicable (provided, that in no event shall either such period run beyond the last day of the Performance Period), the Forfeiture Restriction shall lapse in cumulative installments as follows on the date on which the Committee certifies in writing that the Company has achieved the applicable Vesting Price:

(A) If the Company achieves a Vesting Price of $7.50 per share, the Forfeiture Restriction on the first Installment of Shares shall lapse;

(B) If the Company achieves a Vesting Price of $10.00 per share, the Forfeiture Restriction on the second Installment of Shares shall lapse; and

(C) If the Company achieves a Vesting Price of $12.50 per share, the Forfeiture Restriction on the third Installment of Shares shall lapse.

(ii) In the event of Holder’s Termination of Service by reason of death, total and permanent disability or by the Company without Cause (as defined in that certain Employment Agreement, dated as of April 10, 2014, by and between Skilled Healthcare, LLC, the Company and Holder), the Forfeiture Restriction shall thereupon lapse on any unvested Installment of Shares with respect to which the Vesting Price has theretofore been achieved, and any Shares remaining subject to the Forfeiture Restriction shall be immediately forfeited after such date.

(iii) In the event that Holder incurs a Termination of Service by reason of death or total and permanent disability and a Change in Control (as defined below) occurs during the one year period following the date of death or the six-month period following the date of Termination of Service by reason of disability, as applicable (provided, that in no event shall either such period run beyond the last day of the Performance Period), and prior to the third anniversary of the Grant Date, then the Forfeiture Restriction on the first Installment of Shares shall lapse immediately prior to such Change in Control and, in addition, if one or more Vesting Prices is achieved in connection with the Change in Control, the Forfeiture Restriction shall lapse in

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cumulative installments as follows on the date on which the Committee certifies in writing that the Company has achieved the applicable Vesting Price:

(A) If the Company achieves a Vesting Price of $10.00 per share, the Forfeiture Restriction on the second Installment of Shares shall lapse; provided, however, that if the Vesting Price is between $7.50 per share and $10.00 per share, the Forfeiture Restriction shall lapse on the second Installment of Shares with respect to a number of such Shares determined by straight-line pro-rata linear interpolation; and

(B) If the Company achieves a Vesting Price of $12.50 per share, the Forfeiture Restriction on the third Installment of Shares shall lapse; provided, however, that if the Vesting Price is between $10.00 per share and $12.50 per share, the Forfeiture Restriction shall lapse on the third Installment of Shares with respect to a number of such Shares determined by straight-line pro-rata linear interpolation.

(c)    Change in Control. In the event that a Change in Control occurs during the Performance Period and Holder has not incurred a Termination of Service prior to the date of such Change in Control, then the Forfeiture Restriction on the first Installment of Shares shall lapse immediately prior to such Change in Control and, in addition, if one or more Vesting Prices is achieved in connection with the Change in Control, the Forfeiture Restriction shall lapse in cumulative installments as follows on the date on which the Committee certifies in writing that the Company has achieved the applicable Vesting Price:

(i) If the Company achieves a Vesting Price of $10.00 per share, the Forfeiture Restriction on the second Installment of Shares shall lapse; provided, however, that if the Vesting Price is between $7.50 per share and $10.00 per share, the Forfeiture Restriction shall lapse on the second Installment of Shares with respect to a number of such Shares determined by straight-line pro-rata linear interpolation; and

(ii) If the Company achieves a Vesting Price of $12.50 per share, the Forfeiture Restriction on the third Installment of Shares shall lapse; provided, however, that if the Vesting Price is between $10.00 per share and $12.50 per share, the Forfeiture Restriction shall lapse on the third Installment of Shares with respect to a number of such Shares determined by straight-line pro-rata linear interpolation.

(d) For purposes of this Agreement, the Vesting Price will be achieved if either (i) the Fair Market Value of a share of Stock equals or exceeds the applicable Vesting Price for thirty (30) consecutive Trading Days during the Performance Period, or (ii) the highest price per share of Stock paid in a transaction or event that results in a Change in Control on or before the third anniversary of the Grant Date equals or exceeds the Vesting Price.

(e) Except as provided in subsections (b)(iii) and (c) above, (i) in no event shall a Forfeiture Restriction lapse with respect to any Installment to the extent that the Vesting Price with respect to such Installment has not been achieved, and (ii) to the extent that the Vesting Price with respect to an Installment is not achieved during the Performance Period, the Forfeiture Restriction shall not lapse with respect to such Installment, and all such Shares subject to such Installment shall be immediately forfeited as of the last day of the Performance Period.

(f) Notwithstanding anything contained herein to the contrary, the Committee shall certify in writing that the Company has achieved a Vesting Price no later than thirty (30) days after the date on which the applicable Vesting Price is achieved.

(2) Definitions.

(a)     “Change in Control” shall have the meaning ascribed to that term in the Plan; provided, however, that any sale or other disposition of securities of the Company by Onex Corporation and/or its affiliates in a transaction or series of transactions not involving a sale or other disposition of securities of the Company by the Company’s shareholders generally shall not constitute a “Change in Control”.

(b) “Performance Period” shall mean the three (3)-year period beginning on the Grant Date and ending on the third anniversary thereof.

(c) “Trading Day” shall mean a day during which trading in securities generally occurs on the principal U.S. securities exchange or market system on which the Stock is then listed or, if the Stock is not listed on a U.S.

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national or regional securities exchange or market system, then on the principal other market on which the Stock is then traded.

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EXHIBIT A

TO RESTRICTED STOCK AWARD GRANT NOTICE

RESTRICTED STOCK AWARD AGREEMENT

Pursuant to the Restricted Stock Award Grant Notice, including Schedule A thereto (the “Grant Notice”)to which this Restricted Stock Award Agreement (this “Agreement”) isattached, Skilled Healthcare Group, Inc., a Delaware corporation (the “Company”),has granted to Holder the number of shares of the Company’s Class A common stock, par value $0.001 per share (“Stock”), specified in the Grant Notice (the “Shares”), upon the terms and conditions set forth in the Amended and Restated Skilled Healthcare Group, Inc. 2007 Incentive Award Plan (the “Plan”), the Grant Notice and this Agreement.

ARTICLE IGENERAL

1.1    Defined Terms. Capitalized terms not specifically defined herein shall have the meanings specified in the Grant Notice or, if not defined therein, the Plan.

1.2    Incorporation of Terms of Plan. The Shares are subject to the terms and conditions of the Plan, which are incorporated herein by reference.

ARTICLE IIGRANT OF RESTRICTED STOCK

2.1    Grant of Restricted Stock. In consideration of Holder’s agreement to remain in the service or employ of the Company or a Subsidiary and for other good and valuable consideration which the Committee has determined exceeds the aggregate par value of the Shares, effective as of the “Grant Date” set forth in the Grant Notice (the “Grant Date”),the Company hereby agrees to issue to Holder the Shares,upon the terms and conditions set forth in the Plan, the Grant Notice and this Agreement.

2.2    Issuance of Shares. Subject to Section 2.3, the issuance of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of the Grant Notice by the parties or on such other date as the Company and Holder shall agree (the “Issuance Date”). Subject to the provisions of Article IV, the Company shall issue the Shares (which shall be issued in Holder’s name) on the Issuance Date.

2.3    Conditions to Issuance of Shares. The Shares, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such Shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any Shares prior to fulfillment of all of the following conditions:

(a)    The admission of such Shares to listing on all stock exchanges on which the Common Stock is then listed;

(b)    The completion of any registration or other qualification of such Shares under any federal, state or foreign law or under regulations or rules promulgated by the Securities and Exchange Commission or any other governmental regulatory body, which the Administrator shall, in its discretion, deem necessary or advisable

OC\1700112.3

(c)    The obtaining of any approval or other clearance from any federal, state or foreign governmental agency which the Administrator shall, in its discretion, determine to be necessary or advisable;

(d)    The receipt by the Company of full payment for all amounts which, under federal, state, local or foreign tax law, the Company (or other employer corporation) is required to withhold upon issuance of such Shares; and

(e)    The lapse of such reasonable period of time following the satisfaction of all other conditions to issuance as the Administrator may from time to time establish for reasons of administrative convenience.

2.4    Rights as Stockholder. Except as otherwise provided herein, upon delivery of the Shares to the escrow agent pursuant to Article IV, Holder shall have all the rights of a stockholder with respect to said Shares, subject to the restrictions herein, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares; provided, however, that any and all extraordinary cash dividends paid on such Shares and any and all shares of Stock, capital stock or other securities or property received by or distributed to Holder with respect to the Shares as a result of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company shall also be subject to the Forfeiture Restriction (as defined in Section 3.1) and the restrictions on transfer in Section 3.4 until such restrictions on the underlying Shares lapse or are removed pursuant to this Agreement (or, if such Shares are no longer outstanding, until such time as such Shares would have been released from the Forfeiture Restriction pursuant to this Agreement). In addition, in the event of any merger, consolidation, share exchange or reorganization affecting the Shares, then any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) that is by reason of any such transaction received with respect to, in exchange for or in substitution of the Shares shall also be subject to the Forfeiture Restriction and the restrictions on transfer in Section 3.4 until such restrictions on the underlying Shares lapse or are removed pursuant to this Agreement (or, if such Shares are no longer outstanding, until such time as such Shares would have been released from the Forfeiture Restriction pursuant to this Agreement). Any such assets or other securities received by or distributed to Holder with respect to, in exchange for or in substitution of any Unreleased Shares (as defined in Section 3.3) shall be immediately delivered to the Company to be held in escrow pursuant to Article IV.

ARTICLE IIIRESTRICTIONS ON SHARES

3.1    Forfeiture Restriction. Subject to the provisions of Section 3.2, upon Holder’s Termination of Service, for any or no reason, all of the Unreleased Shares (as defined in Section 3.3) shall thereupon be forfeited immediately and without any further action by the Company (the “Forfeiture Restriction”). Upon the occurrence of such a forfeiture, the Company shall become the legal and beneficial owner of the Shares being forfeited and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being forfeited by Holder. In the event any of the Unreleased Shares are forfeited under this Section 3.1, any cash, cash equivalents, assets or securities received by or distributed to Holder with respect to, in exchange for or in substitution of such Shares and held by the escrow agent pursuant to Section 4.1 and the Joint Escrow Instructions shall be promptly transferred by the escrow agent to the Company.

3.2    Release of Shares from Forfeiture Restriction; Acceleration upon Change in Control. Notwithstanding anything to the contrary contained in the last sentence of Section 3.2(c) of the Plan, the Shares shall be released from the Forfeiture Restriction as indicated in the Grant Notice and Schedule A attached thereto. Any of the Shares released from the Forfeiture Restriction shall thereupon be released from the restrictions on transfer under

A-2

Section 3.4. In the event any of the Shares are released from the Forfeiture Restriction, any cash, cash equivalents, assets or securities received by or distributed to Holder with respect to, in exchange for or in substitution of such Shares and held by the escrow agent pursuant to Section 4.1 and the Joint Escrow Instructions shall be promptly transferred by the escrow agent to Holder.

3.3    Unreleased Shares. Any of the Shares which, from time to time, have not yet been released from the Forfeiture Restriction are referred to herein as “Unreleased Shares.”

3.4    Restrictions on Transfer. Unless otherwise permitted by the Administrator pursuant to the Plan, no Unreleased Shares or any dividends or other distributions thereon or any interest or right therein or part thereof, shall be liable for the debts, contracts or engagements of Holder or Holder’s successors in interest or shall be subject to sale or other disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such sale or other disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted sale or other disposition thereof shall be null and void and of no effect.

ARTICLE IVESCROW OF SHARES

4.1    Escrow of Shares. To ensure the availability the Unreleased Shares for delivery in the event of forfeiture of such Shares by Holder pursuant to Section 3.1, Holder hereby appoints the Secretary of the Company, or any other person designated by the Administrator as escrow agent, as Holder’s attorney-in-fact to assign and transfer unto the Company, such Unreleased Shares, if any, forfeited by Holder pursuant to Section 3.1 and any cash, cash equivalents, assets or securities received by or distributed to Holder with respect to, in exchange for or in substitution of such Unreleased Shares, and shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Administrator, any share certificates representing the Unreleased Shares, together with the Stock Assignment duly endorsed in blank, attached as Exhibit C to the Grant Notice. The Unreleased Shares and stock assignment shall be held by the Secretary of the Company, or such other person designated by the Administrator, in escrow, pursuant to the Joint Escrow Instructions of the Company and Holder attached as Exhibit D to the Grant Notice, until the Unreleased Shares are forfeited by Holder as provided in Section 3.1, until such Unreleased Shares are released from the Forfeiture Restriction, or until such time as this Agreement no longer is in effect. Upon release of the Unreleased Shares from the Forfeiture Restriction, the escrow agent shall deliver to Holder the certificate or certificates representing such Shares in the escrow agent’s possession belonging to Holder in accordance with the terms of the Joint Escrow Instructions attached as Exhibit D to the Grant Notice, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. If the Shares are held in book entry form, then such entry will reflect that the Shares are subject to the restrictions of this Agreement. If any cash, cash equivalents, assets or securities are paid, received by or distributed to Holder with respect to, in exchange for or in substitution of the Unreleased Shares and held by the escrow agent pursuant to Section 4.1 and the Joint Escrow Instructions, such cash, cash equivalents, assets or securities shall also be subject to the restrictions set forth in this Agreement and held in escrow pending release of the Unreleased Shares with respect to which such cash, cash equivalents, assets or securities were paid, received or distributed from the Forfeiture Restriction.

4.2    Transfer of Forfeited Shares. Holder hereby authorizes and directs the Secretary of the Company, or such other person designated by the Administrator, to transfer the Unreleased Shares which have been forfeited by

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Holder to the Company, and any cash, cash equivalents, assets or securities received by or distributed to Holder with respect to, in exchange for or in substitution of such Unreleased Shares.

4.3    No Liability for Actions in Connection with Escrow. The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow while acting in good faith and in the exercise of its judgment.

ARTICLE VOTHER PROVISIONS

5.1    Administration. The Administrator shall have the power to (a) interpret the Plan and this Agreement, (b) adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules and (c) amend this Agreement, subject to Section 5.8. All actions taken and all interpretations and determinations made by the Administrator in good faith shall be binding, conclusive and final upon Holder, the Company and all other interested persons. No member of the Administrator shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, this Agreement or the Shares. In its discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Administrator under the Plan, except with respect to matters which under Rule 16b‑3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the discretion of the Administrator

5.2    Restrictive Legends and Stop-Transfer Orders.

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(a)    Any share certificate(s) evidencing the Shares issued hereunder shall be endorsed with the following legend and any other legend(s) that may be required by any applicable federal, state or foreign securities laws:

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO FORFEITURE IN FAVOR OF THE COMPANY AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A RESTRICTED STOCK AWARD AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

(b)    Holder agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

(c)    The Company shall not be required: (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement, or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

5.3    Adjustments. The Administrator may adjust the Unreleased Shares in accordance with the provisions of Section 11.3 of the Plan.

5.4    Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company, and any notice to be given to Holder shall be addressed to Holder at the address given beneath Holder’s signature on the Grant Notice or at the last known address for Holder contained in the Company’s records. By a notice given pursuant to this Section 5.4, either party may hereafter designate a different address for notices to be given to that party. Any notice shall be deemed duly given when sent via email or enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

5.5    Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

5.6    Governing Law; Severability. This Agreement shall be administered, interpreted and enforced under the laws of the State of Delaware, without regard to the conflicts of laws principles thereof. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable.

5.7    Conformity to Securities Laws. Holder acknowledges that the Plan is intended to conform to the extent necessary with all applicable federal, state and foreign securities laws (including the Securities Act and the Exchange Act) and any and all regulations and rules promulgated thereunder by the Securities and Exchange Commission or any other governmental regulatory body. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Shares are to be issued, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

5.8    Amendments. This Agreement may not be modified, amended or terminated, except by an instrument in writing, signed by a duly authorized representative of the Company and, to the extent any such modification,

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amendment or termination may adversely affect Holder’s rights under this Agreement, by Holder, except as otherwise provided under the terms of the Plan.

5.9    Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Holder and Holder’s heirs, executors, administrators, successors and assigns.

5.10    No Employment Rights. Nothing in the Plan or this Agreement shall confer upon Holder any right to continue in the employ or service of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries, which rights are hereby expressly reserved, to discharge or terminate the services of Holder at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in a written agreement between the Company or a Subsidiary and Holder.

5.11    Taxes. Holder has reviewed with Holder’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by the Grant Notice and this Agreement. Holder is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Holder understands that Holder (and not the Company) shall be responsible for Holder’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. Holder understands that Holder will recognize ordinary income for federal income tax purposes under Section 83 of the Code as the restrictions applicable to the Unreleased Shares lapse. In this context, “restriction” includes the Forfeiture Restriction. Holder understands that Holder may elect to be taxed for federal income tax purposes at the time the Shares are issued rather than as and when the Forfeiture Restriction lapses by filing an election under Section 83(b) of the Code with the Internal Revenue Service no later than 30 days following the date of purchase. A form of election under Section 83(b) of the Code is attached to the Grant Notice as Exhibit E.

HOLDER ACKNOWLEDGES THAT IT IS HOLDER’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO TIMELY FILE THE ELECTION UNDER SECTION 83(B), EVEN IF HOLDER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HOLDER’S BEHALF.

5.12    Tax Withholding.

(a)    The Company shall be entitled to require payment of any sums required by federal, state or local tax law to be withheld with respect to the transfer of the Shares or the lapse of the Forfeiture Restriction with respect to the Shares, or any other taxable event related thereto. The Company may permit Holder to make such payment in one or more of the forms specified below:

(i)    by cash or check made payable to the Company;

(ii)    by the deduction of such amount from other compensation payable to Holder;

(iii)    by tendering Shares which are not subject to the Forfeiture Restriction and which have a then current Fair Market Value not greater than the amount necessary to satisfy the Company’s withholding obligation based on the minimum statutory withholding rates for federal, state and local income tax and payroll tax purposes; or

(iv)    in any combination of the foregoing.

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(b)    In the event Holder fails to provide timely payment of all sums required by the Company pursuant to Section 5.12(a), the Company shall have the right and option, but not obligation, to treat such failure as an election by Holder to provide all or any portion of such required payment by means of tendering Shares in accordance with Section 5.12(a)(iii).

5.13    Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan or this Agreement, if Holder is subject to Section 16 of the Exchange Act, the Plan, the Shares and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

5.14    Entire Agreement. The Plan, the Grant Notice (including all Exhibits thereto) and this Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Holder with respect to the subject matter hereof, except to the extent expressly provided otherwise in a written agreement between the Company or a Subsidiary and Holder.

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EXHIBIT B

TO RESTRICTED STOCK AWARD GRANT NOTICE

CONSENT OF SPOUSE

I, , spouse of , have read and approve the foregoing Restricted Stock Award Agreement (the “Agreement”). In consideration of issuing to my spouse the shares of common stock of Skilled Healthcare Group, Inc., a Delaware corporation (the “Company”), set forth in the Restricted Stock Award Grant Notice and Restricted Stock Award Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares of the common stock of the Company issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement.

Dated: _______________, ____

Signature of Spouse

EXHIBIT C

TO RESTRICTED STOCK AWARD GRANT NOTICE

STOCK ASSIGNMENT

FOR VALUE RECEIVED, the undersigned, , hereby sells, assigns and transfers unto SKILLED HEALTHCARE GROUP, INC., a Delaware corporation (the “Company”), _______________ shares of the common stock of the Company, standing in its name on the books of said corporation represented by Certificate No. ____ herewith and does hereby irrevocably constitute and appoint ____________________ to transfer the said stock on the books of the within named corporation with full power of substitution in the premises.

This Stock Assignment may be used only in accordance with the Restricted Stock Award Grant Notice between the Company and the undersigned dated_______________, 20___ and the Restricted Stock Award Agreement attached thereto.

Dated: _______________, ____

Signature of Holder

INSTRUCTIONS: Please do not fill in the blanks other than the signature line. The purpose of this assignment is to enable the Company to enforce the Forfeiture Restriction as set forth in the Agreement, without requiring additional signatures on the part of Holder.

EXHIBIT D

TO RESTRICTED STOCK AWARD GRANT NOTICE

JOINT ESCROW INSTRUCTIONS

May , 2014

Secretary
Skilled Healthcare Group, Inc.    
27442 Portola Parkway, Suite 200

Foothill Ranch, CA 92610

Ladies and Gentlemen:

As escrow agent (the “Escrow Agent”) for both Skilled Healthcare Group, Inc., a Delaware corporation (“Skilled Healthcare”), and the undersigned recipient of stock of Skilled Healthcare (the “Holder”), you are hereby authorized and directed to hold in escrow the documents delivered to you pursuant to the terms of that certain Restricted Stock Award Agreement (the “Agreement”) between Skilled Healthcare and the undersigned (the “Escrow”), including the stock certificate and the Stock Assignment, in accordance with the following instructions:

1.    In the event of (a) forfeiture by Holder of any of the shares owned by Holder pursuant to Section 3.1 of the Agreement (the “Forfeiture Restriction”), or (b) an election (or deemed election) by Holder to tender shares owned by Holder which are not subject to the Forfeiture Restriction to satisfy the Company’s tax withholding obligation pursuant to Section 5.12 of the Agreement, Skilled Healthcare and/or any assignee of Skilled Healthcare (referred to collectively for convenience herein as the “Company”) shall give to Holder and you a written notice specifying the number of shares of stock forfeited or tendered and the date of forfeiture or tender. Holder and the Company hereby irrevocably authorize and direct you to effect the forfeiture or tender contemplated by such notice in accordance with the terms of said notice.

2.    As of the date of forfeiture or tender indicated in such notice, you are directed (a) to date the stock assignments necessary for the forfeiture/tender and transfer in question, (b) to fill in the number of shares being forfeited/tendered and transferred, and (c) to deliver the same, together with the certificate evidencing the shares of stock to be forfeited/tendered and transferred, to the Company or its assignee.

3.    Holder irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as described in the Agreement. Holder does hereby irrevocably constitute and appoint you as Holder’s attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including, but not limited to, the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Holder shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you.

4.    Upon written request of Holder, but no more than once per calendar year, unless the Forfeiture Restriction has been enforced, you will deliver to Holder a certificate or certificates representing so many shares of stock as are not then subject to the Forfeiture Restriction. Within 120 days after any voluntary or involuntary termination of Holder’s services to the Company for any or no reason, you will deliver to Holder a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not forfeited pursuant to the Forfeiture Restriction.

5.    If at the time of termination of this escrow you should have in your possession any cash, cash equivalents, documents, securities or other property belonging to Holder, you shall deliver all of the same to Holder and shall be discharged of all further obligations hereunder.

6.    Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.

7.    You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Holder while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.

8.    You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

9.    You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder.

10.    You shall not be liable for the expiration of any rights under any applicable federal, state, local or foreign statute of limitations or similar statute or regulation with respect to these Joint Escrow Instructions or any documents deposited with you.

11.    You shall be entitled to employ such legal counsel and other experts as you may deem necessary to properly advise you in connection with your obligations hereunder, may rely upon the advice of such counsel and may pay such counsel reasonable compensation therefor.

12.    Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent.

13.    If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

14.    It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.

15.    Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally or sent by facsimile transmission, overnight air courier, or first class certified or registered mail, postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of these Joint Escrow Instructions or such other address as a party may designate by five days’ advance written notice to the other parties hereto. All notices and communications shall be deemed to have been received unless otherwise set forth herein: (i) in the case of personal delivery, on the date of such delivery; (ii) in the case of facsimile transmission, on the date on which the sender receives electronic confirmation that such notice was received by the addressee; (iii) in the case of overnight air courier, on the second business day following the day sent, with receipt confirmed by the courier; and

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(iv) in the case of mailing by first class certified or registered mail, postage prepaid, return receipt requested, on the fifth business day following such mailing.

16.    By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement.

17.    This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns.

18.    These Joint Escrow Instructions shall be governed by, and interpreted and enforced in accordance with, the laws of the State of Delaware, without regard to the conflicts of laws principles thereof.

(Signature page follows.)

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IN WITNESS WHEREOF, the parties have executed these Joint Escrow Instructions as of the date first written above.

			Very truly yours, SKILLED HEALTHCARE GROUP, INC.:
			By:
				Name: Roland Rapp Title: Secretary
			Address:		27442 Portola Parkway, Suite 200
					Foothill Ranch, CA 92610
			HOLDER:
			Paxton Wiffler
			Address
ESCROW AGENT:
By:
	Secretary Skilled Healthcare Group, Inc.
Address		27442 Portola Parkway, Suite 200
		Foothill Ranch, CA 92610

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EXHIBIT E

TO RESTRICTED STOCK AWARD GRANT NOTICE

FORM OF 83(B) ELECTION AND INSTRUCTIONS

These instructions are provided to assist you if you choose to make an election under Section 83(b) of the Internal Revenue Code, as amended, with respect to the shares of common stock, par value $0.001 per share, of Skilled Healthcare Group, Inc. transferred to you. Please consult with your personal tax advisor as to whether an election of this nature will be in your best interests in light of your personal tax situation.

The executed original of the Section 83(b) election must be filed with the Internal Revenue Servicenot later than 30 days after the date the shares were transferred to you. PLEASE NOTE: There is no remedy for failure to file on time. The steps outlined below should be followed to ensure the election is mailed and filed correctly and in a timely manner. ALSO, PLEASE NOTE: If you make the Section 83(b) election, the election is irrevocable.

1. Complete Section 83(b) election form (attached as Attachment 1) and make four (4) copies of the signed election form. (Your spouse, if any, should sign the Section 83(b) election form as well.)

2. Prepare the cover letter to the Internal Revenue Service (sample letter attached as Attachment 2).

3. Send the cover letter with the originally executed Section 83(b) election form and one (1) copy via certified mail, return receipt requested to the Internal Revenue Service at the address of the Internal Revenue Service where you file your personal tax returns. We suggest that you have the package date-stamped at the post office. The post office will provide you with a white certified receipt that includes a dated postmark. Enclose a self-addressed, stamped envelope so that the Internal Revenue Service may return a date-stamped copy to you. However, your postmarked receipt is your proof of having timely filed the Section 83(b) election if you do not receive confirmation from the Internal Revenue Service.

4. One (1) copy must be sent to Skilled Healthcare Group, Inc. for its records and one (1) copy must be attached to your federal income tax return for the applicable calendar year.

5. Retain the Internal Revenue Service file stamped copy (when returned) for your records.

Please consult your personal tax advisor for the address of the office of the Internal Revenue Service to which you should mail your election form.

ATTACHMENT 1TO EXHIBIT E

TO RESTRICTED STOCK AWARD GRANT NOTICE

ELECTION UNDER INTERNAL REVENUE CODE SECTION 83(B)

The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer’s gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer’s receipt of shares (the “Shares”) of Class A common stock, par value $0.001 per share, of Skilled Healthcare Group, Inc., a Delaware corporation (the “Company”).

The name, address and taxpayer identification number of the undersigned taxpayer are:

SSN:

The name, address and taxpayer identification number of the taxpayer’s spouse are (complete if applicable):

SSN:

Description of the property with respect to which the election is being made:

________________ shares of Class A common stock, par value $0.001 per share, of the Company.

The date on which the property was transferred was _______________, 20__.

The taxable year to which this election relates is calendar year 20__.

Nature of restrictions to which the property is subject:

The Shares may not be transferred and are subject to forfeiture if taxpayer’s employment or service with the Company and its majority-owned subsidiaries terminates for any reason (other than death or total and permanent disability). The forfeiture restriction applicable to the Shares will lapse in whole or in part upon the achievement of certain performance conditions for the period from November 20, 2013 through November 20, 2017 or, if earlier, upon the occurrence of a qualifying change in ownership or control of the Company.

The fair market value at the time of transfer (determined without regard to any lapse restrictions, as defined in Treasury Regulation Section 1.83-3(a)) of the Shares was $______ per Share.

No amount was paid by the taxpayer for the Shares.

A copy of this statement has been furnished to the Company.

Dated:    ____________, 20__    Taxpayer Signature

The undersigned spouse of Taxpayer joins in this election. (Complete if applicable).

Dated:    ____________, 20__    Spouse’s Signature

ATTACHMENT 2 TO EXHIBIT E
TO RESTRICTED STOCK AWARD GRANT NOTICE

SAMPLE COVER LETTER TO INTERNAL REVENUE SERVICE

[Date]

VIA CERTIFIED MAILRETURN RECEIPT REQUESTED

Internal Revenue Service

[Address where taxpayer files returns]

Re: Election under Section 83(b) of the Internal Revenue Code of 1986
Taxpayer:
Taxpayer’s Social Security Number:
Taxpayer’s Spouse:
Taxpayer’s Spouse’s Social Security Number:

Ladies and Gentlemen:

Enclosed please find an original and one copy of an Election under Section 83(b) of the Internal Revenue Code of 1986, as amended, being made by the taxpayer referenced above. Please acknowledge receipt of the enclosed materials by stamping the enclosed copy of the Election and returning it to me in the self-addressed stamped envelope provided herewith.

Very truly yours,

Enclosures

cc:    Skilled Healthcare Group, Inc.

EXHIBIT F

TO RESTRICTED STOCK AWARD GRANT NOTICE

AMENDED AND RESTATED SKILLED HEALTHCARE GROUP, INC. 2007 INCENTIVE AWARD PLAN

EXHIBIT G

TO RESTRICTED STOCK AWARD GRANT NOTICE

AMENDED AND RESTATED SKILLED HEALTHCARE GROUP, INC. 2007 INCENTIVE AWARD PLAN PROSPECTUS

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Robert H. Fish, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Skilled Healthcare Group, 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, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated 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 fiscal 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 the 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.

Date:	August 11, 2014
		/S/    ROBERT H. FISH
		Robert H. Fish
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Christopher N. Felfe, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Skilled Healthcare Group, 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, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated 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 fiscal 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 the 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.

Date:	August 11, 2014
		/S/ CHRISTOPHER N. FELFE
		Christopher N. Felfe
		Chief Financial Officer
		(Principal Financial Officer, Principal Accounting Officer, and Authorized Signatory)

EX-32

Exhibit 32

The following certifications are being furnished solely to accompany the Quarterly Report on Form 10-Q for the period ended June 30, 2014 (the “Report”), of Skilled Healthcare Group, Inc., a Delaware corporation (the “Company”), pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238. These certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Certification of Principal Executive Officer

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of the Company, hereby certifies, to his knowledge, that:

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

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	August 11, 2014	/S/    ROBERT H. FISH
		Robert H. Fish
		Chief Executive Officer

Certification of Principal Financial Officer

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of the Company, hereby certifies, to his knowledge, that:

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

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:	August 11, 2014	/S/ CHRISTOPHER N. FELFE
		Christopher N. Felfe
		Chief Financial Officer
		(Principal Financial Officer, Principal Accounting Officer, and Authorized Signatory)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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Business Segments Reconciliation of Adjusted EBITDA and Adjusted EBITDAR to Net Income (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Segment Reporting [Abstract]
Adjusted EBITDAR	$ 23,199	$ 22,986	$ 45,826	$ 46,714
Rent cost of revenue	(4,922)	(4,685)	(9,696)	(9,354)
Adjusted EBITDA	18,277	18,301	36,130	37,360
Depreciation and amortization	(6,034)	(5,902)	(12,120)	(11,800)
Interest expense	(7,945)	(8,734)	(15,984)	(17,409)
Interest income	(302)	(112)	(345)	(224)
Change in fair value of contingent consideration	121	2,244	107	2,161
Organization restructure costs	(631)	(1,549)	(1,071)	(1,549)
Exit costs related to divested facilities	27	0	(340)	0
Losses at skilled nursing facility not at full operation	(133)	0	(133)	0
Governmental investigation expense	(6,000)	0	(6,000)	0
Professional fees related to non-routine matters	(1,205)	(457)	(1,519)	(1,393)
Debt modification/retirement costs	(822)	(1,088)	(822)	(1,088)
Impairment of long-lived assets	(82)	0	(82)	0
Loss from discontinued operations, net of tax	0	(265)	0	(529)
Benefit (provision) for income taxes	1,345	(1,139)	3	(1,384)
Net (loss) income	$ (2,780)	$ 1,523	$ (1,486)	$ 4,593

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Debt - Schedule of Debt Parenthetical (Details)	Jun. 30, 2014	Dec. 31, 2013
Debt Instrument [Line Items]
Debt instrument, interest rate percentage		5.30%
Senior Secured Term Loan Amended [Member] | Term Loan, due April 2016, interest rate based on LIBOR (subject to a 1.50% floor) plus 5.50%, or 7.00%, at June 30, 2014 and LIBOR (subject to a 1.50% floor) plus 5.25%, or 6.75%, at December 31, 2013; collateralized by substantially all assets of the Company excluding the skilled nursing facilities that collateralize the HUD insured mortgage loans and the skilled nursing facilities that collateralize the MidCap Financial credit facility
Debt Instrument [Line Items]
LIBOR Floor	1.50%	1.50%
Libor rate margin	5.50%	5.25%
Prime Rate Margin 2	7.00%	6.75%
Senior Secured Term Loan Amended [Member] | Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities
Debt Instrument [Line Items]
Prime Rate Margin 2	6.70%	6.70%
Prime rate	0.75%	0.75%
Prime rate margin	5.95%	5.95%
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due April 2015, interest rate comprised of the Prime rate of 3.25% plus 3.50%, or 6.75%, at December 31, 2013
Debt Instrument [Line Items]
Prime Rate Margin 2	6.75%	6.75%
Prime rate	3.25%	3.25%
Prime rate margin	3.50%	3.50%
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due 2016, interest rate comprised of LIBOR plus 5.50% or 5.74% [Member] [Domain]
Debt Instrument [Line Items]
Prime rate margin	5.74%
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due April 2016, interest rate comprised of LIBOR plus 5.50%, or 5.74%, at June 30, 2014
Debt Instrument [Line Items]
Prime rate	4.50%	4.50%
Prime rate margin	4.74%	4.74%
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities
Debt Instrument [Line Items]
LIBOR Floor	0.75%
Libor rate margin	5.95%
Prime Rate Margin 2	6.70%	6.70%
Prime rate	0.75%	0.75%
Prime rate margin	5.95%	5.95%
Revolving Credit Facility due 2016, interest rate comprised of LIBOR plus 5.50% or 5.74% [Member] [Domain] | Revolving Credit Facility Amended [Member]
Debt Instrument [Line Items]
Prime rate margin	5.50%
Notes Payable to Banks [Member] | HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively
Debt Instrument [Line Items]
Weighted average interest rate	4.28%	4.24%
Mortgages [Member] | HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively
Debt Instrument [Line Items]
Weighted average interest rate	4.23%
Mortgages [Member] | Note payable due December 2018, interest rate fixed at 6.50%, payable in monthly installments, collateralized by a first priority deed of trust
Debt Instrument [Line Items]
Debt instrument, interest rate percentage	6.50%	6.50%

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Stockholders' Equity Stock Option Activity (Details) (2007 Incentive Award plan, Stock Options, USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
2007 Incentive Award plan | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding at January 1, 2014 (in shares)		794,645
Granted (in shares)	0
Exercised (in shares)	(160,548)
Forfeited or cancelled (in shares)	(157,083)
Outstanding at March 31, 2014 (in shares)	477,014	794,645
Fully vested and expected to vest at March 31, 2014 (in shares)	475,956
Exercisable at March 31, 2014 (in shares)	456,491
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Outstanding at January 1, 2014, Weighted-Average Exercise Price (usd per share)		$ 8.54
Granted, Weighted-Average Exercise Price (usd per share)	$ 0.00
Exercised, Weighted-Average Exercise Price (usd per share)	$ 5.91
Forfeited or cancelled, Weighted-Average Exercise Price (usd per share)	$ 9.55
Outstanding a March 31, 2014, Weighted-Average Exercise Price (usd per share)	$ 9.09	$ 8.54
Fully vested and expected to vest at March 31, 2014, Weighted-Average Exercise Price (usd per share)	$ 9.10
Exercisable at March 31, 2014, Weighted-Average Exercise Price (usd per share)	$ 9.15
Weighted average remaining contractual term in years for outstanding options	4 years 7 months 24 days
Weighted average remaining contractual term in years for vested	4 years 7 months 24 days
Weighted average remaining contractual term in years for excersiable options	4 years 6 months 10 days
Outstanding at June 30, 2013, Aggregate Intrinsic Value	$ 0
Fully vested and expected to vest at March 31, 2014, Aggregate Intrinsic Value	0
Exercisable at June March 31, 2014, Aggregate Intrinsic Value	$ 0

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Debt - Long Term Debt Terms and Details (Details) (USD $)	6 Months Ended		6 Months Ended			12 Months Ended		0 Months Ended						6 Months Ended	12 Months Ended						12 Months Ended			3 Months Ended		6 Months Ended			3 Months Ended	6 Months Ended			0 Months Ended	6 Months Ended		6 Months Ended	0 Months Ended
	Jun. 30, 2014 mortgage facility	Dec. 31, 2013	Jun. 30, 2014 Repayment Period One [Member]	Jun. 30, 2014 Repayment Period Two [Member]	Jun. 30, 2014 Repayment Period Three [Member]	Dec. 31, 2013 Minimum	Dec. 31, 2013 Maximum	Jun. 23, 2014 Senior Secured Credit Facility Amended June 2014 [Member]	Jun. 23, 2014 Senior Secured Credit Facility Amended June 2014 [Member] Other Current Assets [Member]	Mar. 31, 2014 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively	Dec. 31, 2013 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively	Jun. 30, 2014 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Notes Payable to Banks [Member]	Dec. 31, 2013 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Notes Payable to Banks [Member]	Jun. 30, 2014 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Mortgages [Member]	Dec. 31, 2013 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Mortgages [Member]	Jun. 30, 2014 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Mortgages [Member] Other Current Assets [Member]	Jun. 30, 2014 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Mortgages [Member] Minimum	Jun. 30, 2014 HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively Mortgages [Member] Maximum	Jun. 30, 2014 Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities Senior Secured Term Loan Amended [Member]	Dec. 31, 2013 Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities Senior Secured Term Loan Amended [Member]	Dec. 31, 2013 Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities Mortgages [Member]	Jun. 30, 2014 Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities Revolving Credit Facility Amended [Member]	Dec. 31, 2013 Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities Revolving Credit Facility Amended [Member]	Mar. 31, 2014 Senior Secured Term Loan [Member] Prior Credit Agreement [Member] Secured Debt [Member]	Apr. 09, 2010 Senior Secured Term Loan [Member] Prior Credit Agreement [Member] Secured Debt [Member]	Jun. 30, 2014 Senior Secured Term Loan [Member] Senior Secured Term Loan Amended [Member] Secured Debt [Member]	Apr. 09, 2010 Revolving Credit Facility [Member] Prior Credit Agreement [Member] Secured Debt [Member]	Jun. 23, 2014 Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Mar. 31, 2014 Senior Secured Term Loan Amended [Member] Restated Credit Agreement [Member] Secured Debt [Member]	Jun. 30, 2014 Senior Secured Term Loan Amended [Member] Restated Credit Agreement [Member] Secured Debt [Member]	Jun. 06, 2013 Senior Secured Term Loan Amended [Member] Restated Credit Agreement [Member] Secured Debt [Member]	Apr. 12, 2012 Senior Secured Term Loan Amended [Member] Restated Credit Agreement [Member] Secured Debt [Member]	Jun. 23, 2014 Senior Secured Term Loan Amended [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Jun. 30, 2014 Senior Secured Term Loan Amended [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Jun. 23, 2014 Senior Secured Term Loan Amended [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Jun. 30, 2014 Senior Secured Term Loan Amended [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member] Repayment Period One [Member]	Jun. 23, 2014 Extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Jun. 23, 2014 Extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Jun. 23, 2014 Extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member] Minimum	Jun. 23, 2014 Extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member] Maximum	Jun. 23, 2014 Non-extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member]	Jun. 23, 2014 Non-extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member] Minimum	Jun. 23, 2014 Non-extended Revolving Credit Facility [Member] Senior Secured Credit Facility Amended June 2014 [Member] Secured Debt [Member] Maximum
Debt Instrument [Line Items]
Debt instrument, face amount																									$ 360,000,000
Line of credit facility, maximum borrowing capacity										250,000,000																	100,000,000	83,100,000										50,600,000			32,500,000
Addition of debt issuance on senior secured term loan																																100,000,000
Leverage ratio, maximum allowable	5.25																														0.50				5.25
Debt modifcation fees	2,500,000							2,000,000
Debt modification costs	1,100,000							800,000
Debt modification fees, capitalized	1,400,000								1,200,000
Fixed charge coverage ratio, minimum requirement	1.85																																		1.85
Interest rate increase																																	0.25%
LIBOR Floor																						0.75%													1.50%
Libor rate margin																						5.95%													550.00%				5.25%	5.50%		4.25%	4.50%
Prime rate																			0.75%	0.75%		0.75%	0.75%												2.50%
Prime rate margin																			5.95%	5.95%		5.95%	5.95%												4.50%				4.25%	4.50%		3.25%	3.50%
Commitments decrease (Percentage)																																					25.00%
Line of credit facility, maximum borrowing capacity future limit																												50,600,000
Periodic payment																										900,000								2,600,000		1,600,000
Consolidated excess cash flow percentage																								50.00%					75.00%	75.00%
Stepdown percentage																								25.00%					50.00%
Refinance portion of credit facility																													250,000,000
Fixed charge coverage ratio	2.2
Leverage ratio	4.7
Number of mortgages insured by HUD	10
Debt	410,234,000	419,125,000									87,600,000	86,668,000	87,314,000	87,600,000
Debt instrument, interest rate percentage		5.30%															3.40%	4.60%
Debt Term	25 years					30 years	35 years
Average Debt Term	33 years
Weighted average interest rate												4.28%	4.24%	4.23%
Debt prepayment penalty														10.00%
Escrow deposit																1,600,000
Replacement reserve escrow														3,000,000
Proceeds from issuance of long-term debt															87,600,000						65,000,000
Secured debt																			61,262,000	62,000,000
Revolving Credit Facility Outstanding, Libor Rate																						5,000,000	5,000,000
Additional quarterly payments due			$ 300,000	$ 400,000	$ 500,000
Number of skilled nursing facilities	10

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Stockholders' Equity Restricted Stock Activity (Details) (2007 Incentive Award plan, USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Performance Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Granted (shares)	512	0
Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Non-vested balance at January 1, 2014 (shares)	2,256
Granted (shares)	872
Vested (shares)	(322)
Forfeited (shares)	(582)
Non-vested balance at March 31, 2014 (shares)	2,224
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
Non-vested balance at January 1, 2014 (dollars per share)	$ 6.42
Granted (dollars per share)	$ 4.75
Vested (dollars per share)	$ 4.51
Forfeited (dollars per share)	$ 5.44
Non-vested balance at March 31, 2014 (dollars per share)	$ 6.30

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Summary of Significant Accounting Policies - Notes Receivable (Details) (USD $)			6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Therapy Services Notes Receivable	Jun. 30, 2014 Therapy Services Accounts Receivable	Jun. 30, 2014 Therapy Services Sales Revenue, Services, Net
Accounting Policies [Abstract]
Financing receivable, net	$ 4,100,000	$ 2,000,000
Financing receivable, net, current	1,700,000	1,500,000
Accounts, Notes, Loans and Financing Receivable [Line Items]
Concentration risk, percentage			100.00%	43.60%	41.70%
Accounts receivable, net				8,500,000	19,300,000
Financing receivable, allowance for credit losses	$ 0

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Investment in Joint Venture Summarized Financial Information (Details) (APS - Summit Care [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
APS - Summit Care [Member]
Statement of Earnings [Abstract]
Sales, Net	$ 3,391	$ 4,267	$ 6,082	$ 7
Gross Profit	473	1,409	1,439	2
Net Income	75	897	802	2
Balance Sheet [Abstract]
Current Assets	2,485		2,485		3,518
Non-Current Assets	1,088		1,088		1,078
Current Liabilities	129		129		96
Non-Current Liabilities	$ 0		$ 0		$ 0

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Property and Equipment (Tables)

6 Months Ended

Jun. 30, 2014

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014			December 31, 2013
Land and land improvements	$	62,370		$	62,370
Buildings and leasehold improvements	324,121			320,923
Furniture and equipment	90,695			87,392
Construction in progress	8,349			8,621
	485,535			479,306
Less accumulated depreciation	(149,175		)	(137,484		)
	$	336,360		$	341,822

Leased Facility Assets

Leased facility assets consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014			December 31, 2013
Leased facility assets	$	13,848		$	13,848
Less accumulated depreciation	(4,674		)	(4,432		)
	$	9,174		$	9,416

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Fair Value Measurements - Fair Value, Hierarchy (Details) (Fair Value, Measurements, Recurring, USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Consideration - Acquisitions	$ 0	$ 0
Level 1 | Available-for-sale Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	0	0
Level 1 | Trading Liabilities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading Securities	0	0
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Consideration - Acquisitions	0	0
Level 2 | Available-for-sale Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	0	1,046
Level 2 | Trading Liabilities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading Securities	8,526	0
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent Consideration - Acquisitions	1,329	1,736
Level 3 | Available-for-sale Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale Securities	0	0
Level 3 | Trading Liabilities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trading Securities	$ 0	$ 0

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Property and Equipment Leased Facility Assets Schedule (Details) (USD $) In Thousands, unless otherwise specified	1 Months Ended	6 Months Ended
	Apr. 30, 2011	Jun. 30, 2014 option facility	Dec. 31, 2013
Property, Plant and Equipment [Abstract]
Leased facility assets		$ 13,848	$ 13,848
Less accumulated depreciation		(4,674)	(4,432)
Leased facility assets, net		$ 9,174	$ 9,416
Number of leased facility asset		5
Lease period	10 years
Number of lease extension options		2
Lease extension, lease period		10 years

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Business Segments Segment Information (Details)	3 Months Ended
	Jun. 30, 2014 segment facility
Facility Count [Line Items]
Number of reportable segments	3
Number of skilled nursing facilities	10
Long-Term Care Services
Facility Count [Line Items]
Number of skilled nursing facilities	73
Number of assisted living facility	22

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Fair Value Measurements - Level 3 Rollforward (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2014	Jun. 30, 2013
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Value at January 1, 2014		$ 1,736
Change in fair value	(107)	(107)	(2,161)
Payout	(300)
Value at June 30, 2014	$ 1,329	$ 1,329

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Stockholders' Equity Stock Options (Details) (2007 Incentive Award plan, USD $) In Millions, unless otherwise specified	3 Months Ended
	Jun. 30, 2014
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation	$ 0.1
Remaining award vesting period	1 year 5 months 12 days
Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation	5.4
Remaining award vesting period	1 year 10 months 27 days
Fair value of shares vested in period	$ 1.5

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Description of Business

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Description of Business

Description of Business

Current Business

Skilled Healthcare Group, Inc. ("Skilled") is a holding company that owns subsidiary companies that operate long-term care facilities and provides a wide range of post-acute care services, with a strategic emphasis on sub-acute specialty medical care. Skilled and its consolidated wholly-owned companies are collectively referred to as the "Company." As of June 30, 2014, the Company operated facilities in California, Iowa, Kansas, Missouri, Nevada, Nebraska, New Mexico and Texas, including 73 skilled nursing facilities ("SNFs"), which offer sub-acute care, rehabilitative, specialty healthcare, and skilled nursing care, and 22 assisted living facilities ("ALFs"), which provide room and board and assistance with activities of daily living. The Company leases five skilled nursing facilities in California to an unaffiliated third party operator. In addition, through its Hallmark Rehabilitation subsidiary ("Hallmark"), the Company provides a variety of rehabilitative services such as physical, occupational and speech therapy in Company-operated facilities and unaffiliated facilities. Furthermore, as of June 30, 2014, the Company provided hospice care and home health services in Arizona, California, Idaho, Montana, Nevada and New Mexico. The Company also provides private duty care services in Idaho, Montana, and Nevada. The Company has an administrative services company that provides a full complement of administrative and consultative services that allows affiliated operators and third-party operators with whom the Company contracts to better focus on delivery of healthcare services. The Company currently has one such service agreement with an unrelated skilled nursing facility operator. The Company also owns a 50% interest in an institutional pharmacy in Texas, which currently serves eight of the Company's SNFs as well as other facilities unaffiliated with the Company.

In June 2014, the Company commenced operations at its state-of-the-art skilled nursing facility in Kansas City, Kansas. The facility is co-located within the University of Kansas' acute rehabilitation hospital adjacent to the medical school. This facility added 96 licensed beds to the Company's long term care operations. As of June 30, 2014, the newly leased facility was not at full operation.

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Income Taxes (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Income Tax Disclosure [Abstract]
(Benefit) provision for income taxes	$ (1,345,000)	$ 1,139,000	$ (3,000)	$ 1,384,000
Effective income tax rate	32.60%		0.20%
Change from net Income to net loss	(7,100,000)		(8,000,000)
(Loss) income from continuing operations before (benefit) provision for income taxes	(4,125,000)	2,927,000	(1,489,000)	6,506,000
Tax expense for shares that vested at a lower price than the grant value			$ 300,000

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Debt (Tables)

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

Schedule of Debt

The Company’s long-term debt is summarized as follows (dollars in thousands):

	As of June 30, 2014			As of December 31, 2013
Term Loan, due April 2016, interest rate based on LIBOR (subject to a 1.50% floor) plus 5.50%, or 7.00%, at June 30, 2014 and LIBOR (subject to a 1.50% floor) plus 5.25%, or 6.75%, at December 31, 2013; collateralized by substantially all assets of the Company excluding the skilled nursing facilities that collateralize the HUD insured mortgage loans and the skilled nursing facilities that collateralize the MidCap Financial credit facility	$	243,953		$	243,953
Term Loan original issue discount	(973		)	(1,254		)
Revolving Credit Facility due April 2015, interest rate comprised of the Prime rate of 3.25% plus 3.50%, or 6.75%, at December 31, 2013	—			11,000
Revolving Credit Facility due April 2016, interest rate comprised of LIBOR plus 5.50%, or 5.74%, at June 30, 2014	7,308			—
Revolving Credit Facility due April 2015, interest rate comprised of LIBOR plus 4.50%, or 4.74%, at June 30, 2014 and December 31, 2013	4,692			7,057
HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively	86,668			87,314
Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities	61,262			62,000
Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities	5,000			5,000
Note payable due December 2018, interest rate fixed at 6.50%, payable in monthly installments, collateralized by a first priority deed of trust	875			959
Insurance premiums financed	1,395			2,990
Other	54			106
Total long-term debt	410,234			419,125
Less amounts due within one year	(10,198		)	(7,630		)
Long-term debt, less current portion	$	400,036		$	411,495

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements, Recurring and Nonrecurring

The following table summarizes the valuation of the Company’s marketable securities and contingent consideration as of June 30, 2014 (dollars in thousands) and December 31, 2013:

	June 30, 2014						December 31, 2013
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Available for sale securities	$	—	$	—	$	—	$	—	$	1,046	$	—
Trading securities	$	—	$	8,526	$	—	$	—	$	—	$	—
Contingent consideration – acquisitions	$	—	$	—	$	1,329	$	—	$	—	$	1,736

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation

Below is a table listing the Level 3 rollforward as of June 30, 2014 (in thousands):

Level 3 Rollforward
Value at January 1, 2014	$	1,736
Change in fair value	(107		)
Payout	(300		)
Value at June 30, 2014	$	1,329

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Investment in Joint Venture - Narrative (Details) (APS - Summit Care [Member], USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
APS - Summit Care [Member]
Schedule of Equity Method Investments [Line Items]
Equity method investment, ownership percentage	50.00%
Equity method investment, percentage owned by another company	50.00%
Equity method investment, percentage of net income received	50.00%
Equity investment in joint ventures	$ 5.1	$ 6.0

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Commitments and Contingencies Commitments and Contingencies (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended		0 Months Ended	1 Months Ended	6 Months Ended	0 Months Ended			0 Months Ended
	Jun. 30, 2014 facility	Jun. 30, 2013	Jun. 30, 2014 facility	Jun. 30, 2013	Dec. 31, 2013 Workers' Compensation Liability [Member] Texas [Member] Fountain View Reinsurance, Ltd. [Member]	Dec. 31, 2013 Employee Medical Liability [Member]	Nov. 30, 2010 Humboldt County Action [Member]	Apr. 30, 2011 Humboldt County Action [Member] defendent	Jun. 30, 2014 Humboldt County Action [Member] defendent	Nov. 30, 2010 Humboldt County Action [Member] Governmental Claims [Member]	Nov. 30, 2010 Humboldt County Action [Member] Professional Fees [Member]	Nov. 30, 2010 Humboldt County Action [Member] Plaintiffs [Member]	Nov. 30, 2010 State of California and Other Districts [Member] Governmental Claims [Member]	Feb. 15, 2013 BMFEA Matter [Member]	Apr. 15, 2009 BMFEA Matter [Member] subsidiary count	Jun. 30, 2014 BMFEA Matter [Member] Affiliated Entity [Member] H	Feb. 15, 2013 BMFEA Matter [Member] Affiliated Entity [Member] facility	Jun. 30, 2014 Creekside Hospice Investigation [Member]	Aug. 02, 2013 Creekside Hospice Investigation [Member]
Loss Contingencies [Line Items]
Loss Contingency, Range of Possible Loss, Minimum																			$ 5,500
Loss Contingency, Range of Possible Loss, Maximum																			11,500
Loss Contingency, Estimate of Possible Loss																		6,000,000
Litigation settlement amount							50,000,000			5,000,000			4,000,000
Legal settlement payments approved from court							3,000,000			1,000,000		10,000
Professional fees	1,205,000	457,000	1,519,000	1,393,000							24,800,000
Loss contingency, number of defendants								5	22
Injunction Costs							9,600,000
Number of subsidiaries under investigation															2
Loss contingency, fine															6,000
Number of felony counts															2
Loss contingency, fine per misdemeanor count															2,000
Number of misdemeanor counts															9
Statutory fine														680
Investigation costs of plaintiff paid by defendant														145,000
Period of summary probation														2 years
Number of skilled nursing facilities	10		10														20
Number of nursing hours per patient day																3.2
Self-insured per loss limit					1,000,000
Self-Insured stop loss limit						250,000
Required indemnification payments made	$ 0	$ 0	$ 0	$ 0

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Investment in Joint Venture (Tables)

6 Months Ended

Jun. 30, 2014

Equity Method Investments and Joint Ventures [Abstract]

Schedule of summarized financial information for equity method investment

The following tables provide summarized information from the balance sheet and statement of earnings for APS - Summit Care as of June 30, 2014:

Statement of Earnings

(In thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Sales, Net	$	3,391	$	4,267	$	6,082	$	6,941
Gross Profit	473		1,409		1,439		2,134
Net Income	$	75	$	897	$	802	$	1,563

Balance Sheet

(In thousands)

	June 30, 2014		December 31, 2013
Current Assets	$	2,485	$	3,518
Non-Current Assets	1,088		1,078
Current Liabilities	129		96
Non-Current Liabilities	$	—	$	—

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Description of Business (Details)	Jun. 30, 2014 facility
Facility Count [Line Items]
Number of skilled nursing facilities	10
Number of leased facility asset	5
Licensed Beds	96
Long-Term Care Services
Facility Count [Line Items]
Number of skilled nursing facilities	73
Number of assisted living facility	22

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Condensed Consolidated Statements of Cash Flows (Parentheticals) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash paid for:
Interest expense	$ 13,073	$ 15,684
Income taxes, net	(1,838)	181
Non-cash activities:
Conversion of accounts receivable into notes receivable	2,782	0
Insurance premium financed	$ 1,625	$ 1,187

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Discontinued Operations (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Discontinued Operations and Disposal Groups [Abstract]
Net operating revenues	$ 0	$ 3,500	$ 0	$ 7,317
Operating expenses	0	3,932	0	8,180
Loss from discontinued operations	0	(432)	0	(863)
Income tax benefit	0	(167)	0	(334)
Loss from discontinued operations	$ 0	$ (265)	$ 0	$ (529)

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Business Segments Reconciliation of Assets by Segment (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Segment Reporting, Asset Reconciling Item [Line Items]
Segment total assets	$ 643,961	$ 643,416
Goodwill and intangibles included in total assets	87,631	87,872
Long-Term Care Services
Segment Reporting, Asset Reconciling Item [Line Items]
Segment total assets	448,036	445,987
Goodwill and intangibles included in total assets	1,168	1,300
Therapy Services
Segment Reporting, Asset Reconciling Item [Line Items]
Segment total assets	49,664	48,251
Goodwill and intangibles included in total assets	23,693	23,693
Hospice and Home Health Services
Segment Reporting, Asset Reconciling Item [Line Items]
Segment total assets	78,472	80,290
Goodwill and intangibles included in total assets	62,770	62,879
Other
Segment Reporting, Asset Reconciling Item [Line Items]
Segment total assets	67,789	68,888
Goodwill and intangibles included in total assets	$ 0	$ 0

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Debt - Schedule of Long Term Debt Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Debt Instrument [Line Items]
Term Loan original issue discount	$ (973)	$ (1,254)
Insurance premiums financed	1,395	2,990
Other	54	106
Total long-term debt	410,234	419,125
Less amounts due within one year	(10,198)	(7,630)
Long-term debt, less current portion	400,036	411,495
HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively
Debt Instrument [Line Items]
Total long-term debt		87,600
Senior Secured Term Loan Amended [Member] | Term Loan, due April 2016, interest rate based on LIBOR (subject to a 1.50% floor) plus 5.50%, or 7.00%, at June 30, 2014 and LIBOR (subject to a 1.50% floor) plus 5.25%, or 6.75%, at December 31, 2013; collateralized by substantially all assets of the Company excluding the skilled nursing facilities that collateralize the HUD insured mortgage loans and the skilled nursing facilities that collateralize the MidCap Financial credit facility
Debt Instrument [Line Items]
Secured debt	243,953	243,953
Senior Secured Term Loan Amended [Member] | Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities
Debt Instrument [Line Items]
Secured debt	61,262	62,000
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due April 2015, interest rate comprised of the Prime rate of 3.25% plus 3.50%, or 6.75%, at December 31, 2013
Debt Instrument [Line Items]
Revolving Credit Facility Outstanding, Prime Rate	0	11,000
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due 2016, interest rate comprised of LIBOR plus 5.50% or 5.74% [Member] [Domain]
Debt Instrument [Line Items]
Revolving Credit Facility Outstanding, Libor Rate	7,308	0
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due April 2016, interest rate comprised of LIBOR plus 5.50%, or 5.74%, at June 30, 2014
Debt Instrument [Line Items]
Revolving Credit Facility Outstanding, Libor Rate	4,692	7,057
Revolving Credit Facility Amended [Member] | Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities
Debt Instrument [Line Items]
Revolving Credit Facility Outstanding, Libor Rate	5,000	5,000
Notes Payable to Banks [Member] | HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively
Debt Instrument [Line Items]
Total long-term debt	86,668	87,314
Mortgages [Member] | HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively
Debt Instrument [Line Items]
Total long-term debt	87,600
Mortgages [Member] | Note payable due December 2018, interest rate fixed at 6.50%, payable in monthly installments, collateralized by a first priority deed of trust
Debt Instrument [Line Items]
Notes payable	$ 875	$ 959

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 7,960	$ 4,177
Accounts receivable, less allowance for doubtful accounts of $17,943 and $16,665 at June 30, 2014 and December 31, 2013, respectively	110,443	107,215
Deferred income taxes	11,845	9,876
Prepaid expenses	6,009	8,961
Other current assets	11,115	12,188
Total current assets	147,372	142,417
Property and equipment, less accumulated depreciation of $149,175 and $137,484 at June 30, 2014 and December 31, 2013, respectively	336,360	341,822
Leased facility assets, less accumulated depreciation of $4,674 and $4,432 at June 30, 2014 and December 31, 2013, respectively	9,174	9,416
Other assets:
Notes receivable	2,350	520
Deferred financing costs, net	8,600	9,189
Goodwill	68,983	69,065
Intangible assets, less accumulated amortization of $4,799 and $4,640 at June 30, 2014 and December 31, 2013, respectively	18,648	18,807
Deferred income taxes	7,029	9,472
Restricted Assets	30,246	26,965
Other assets	15,199	15,743
Total other assets	151,055	149,761
Total assets	643,961	643,416
Current liabilities:
Accounts payable and accrued liabilities	57,868	57,179
Employee compensation and benefits	41,385	32,979
Current portion of long-term debt	10,198	7,630
Total current liabilities	109,451	97,788
Long-term liabilities:
Insurance liability risks	29,232	29,534
Other long-term liabilities	12,471	12,367
Long-term debt, less current portion	400,036	411,495
Total liabilities	551,190	551,184
Stockholders’ equity:
Additional paid-in-capital	380,808	378,756
Accumulated deficit	(288,078)	(286,592)
Accumulated other comprehensive income	0	28
Total stockholders’ equity	92,771	92,232
Total liabilities and stockholders’ equity	643,961	643,416
Common Class A
Stockholders’ equity:
Common stock	25	24
Common Class B
Stockholders’ equity:
Common stock	$ 16	$ 16

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Commitments and Contingencies Schedule of Liabilities Related to Insurance Risks (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
Liabilities Related to Insurance Risks [Line Items]
Self Insurance Reserve, Current	$ 15,912		$ 13,852
Insurance liability risks	29,232		29,534
Self Insurance Reserve	45,144		43,386
General and Professional Liability [Member]
Liabilities Related to Insurance Risks [Line Items]
Self Insurance Reserve, Current	7,620	[1]	8,228	[1]
Insurance liability risks	14,530		12,762
Self Insurance Reserve	22,150		20,990
Employee Medical Liability [Member]
Liabilities Related to Insurance Risks [Line Items]
Self Insurance Reserve, Current	2,079	[2]	2,446	[2]
Insurance liability risks	0		0
Self Insurance Reserve	2,079		2,446
Workers' Compensation Liability [Member]
Liabilities Related to Insurance Risks [Line Items]
Self Insurance Reserve, Current	6,213	[2]	3,178	[2]
Insurance liability risks	14,702		16,772
Self Insurance Reserve	$ 20,915		$ 19,950

[1] Included in accounts payable and accrued liabilities.

[2] Included in employee compensation and benefits.

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Condensed Consolidated Statements of Comprehensive Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statement of Comprehensive Income [Abstract]
Unrealized gain (loss) on interest rate swap, tax	$ 0	$ 0		$ 0
Unrealized gain (loss) on Investment available for sale, tax	0	(9)	0	(10)
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax	17	0	17	0
Interest expense on interest rate swap, tax	$ 0	$ 56	$ 0	$ 107

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Income Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Net (loss) Income per share, basic
Allocation of (loss) income from continuing operations	$ (2,780)	$ 1,788	$ (1,486)	$ 5,122
Allocation of loss from discontinued operations	0	(265)	0	(529)
Net (loss) income	(2,780)	1,523	(1,486)	4,593
Denominator for basic and diluted (loss) income per share:
Weighted-average common shares outstanding, basic (in shares)	38,098	37,646	38,035	37,602
Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable (in shares)	0	540	0	537
Adjusted weighted-average common shares outstanding, diluted (in shares)	38,098	38,186	38,035	38,139
Earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
Income (loss) per share, basic (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
Earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
Income (loss) per share, diluted (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
Common Class A
Net (loss) Income per share, basic
Allocation of (loss) income from continuing operations	(1,648)	1,048	(880)	3,000
Allocation of loss from discontinued operations	0	(155)	0	(310)
Allocation of net (loss) income	(1,648)	893	(880)	2,690
Net (loss) income per share, diluted
Allocation of (loss) income from continuing operations	(1,648)	1,059		3,030
Allocation of loss from discontinued operations	0	(157)		(313)
Allocation of net (loss) income	(1,648)	902		2,717
Denominator for basic and diluted (loss) income per share:
Weighted-average common shares outstanding, basic (in shares)	22,585	22,070	22,521	22,026
Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable (in shares)	0	540	0	537
Adjusted weighted-average common shares outstanding, diluted (in shares)	22,585	22,610	22,521	22,563
Earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
Income (loss) per share, basic (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
Earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
Income (loss) per share, diluted (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
Common Class B
Net (loss) Income per share, basic
Allocation of (loss) income from continuing operations	(1,132)	740	(606)	2,122
Allocation of loss from discontinued operations	0	(110)	0	(219)
Allocation of net (loss) income	(1,132)	630	(606)	1,903
Net (loss) income per share, diluted
Allocation of (loss) income from continuing operations	(1,132)	729		2,092
Allocation of loss from discontinued operations	0	(108)		(216)
Allocation of net (loss) income	$ (1,132)	$ 621		$ 1,876
Denominator for basic and diluted (loss) income per share:
Weighted-average common shares outstanding, basic (in shares)	15,513	15,576	15,514	15,576
Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable (in shares)	0	0	0	0
Adjusted weighted-average common shares outstanding, diluted (in shares)	15,513	15,576	15,514	15,576
Earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
Income (loss) per share, basic (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
Earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
Income (loss) per share, diluted (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12

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Discontinued Operations (Tables)

6 Months Ended

Jun. 30, 2014

Discontinued Operations and Disposal Groups [Abstract]

Summary of Discontinued Operations

A summary of the discontinued operations for the periods presented is as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Net operating revenues	$	—	$	3,500		$	—	$	7,317
Operating expenses	—		3,932			—		8,180
Loss from discontinued operations	—		(432		)	—		(863		)
Income tax benefit	—		(167		)	—		(334		)
Loss from discontinued operations	$	—	$	(265	)	$	—	$	(529	)

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Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share (Details) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Earnings Per Share [Abstract]
Options to purchase common shares	338	585	492	585
Non-vested common shares	198	434	221	911
Total excluded	536	1,019	713	1,496

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Business Segments (Tables)

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

Schedule of Segment Reporting Information, by Segment

	Long-Term Care Services		Therapy Services		Hospice & Home Health Services			Other			Elimination			Total
Three months ended June 30, 2014
Net patient service revenue from external customers	$	162,264	$	23,076	$	20,832		$	—		$	—		$	206,172
Leased facility revenue	807		—		—			—			—			807
Intersegment revenue	503		14,066		—			—			(14,569		)	—
Total revenue	$	163,574	$	37,142	$	20,832		$	—		$	(14,569	)	$	206,979
Operating income (loss)	$	12,950	$	3,892	$	(5,192	)	$	(7,409	)	$	—		$	4,241
Interest expense, net of interest income														(7,643		)
Other income														7
Equity in earnings of joint venture														92
Debt modification/retirement costs														(822		)
Loss from continuing operations before benefit for income taxes														$	(4,125	)
Depreciation and amortization	$	5,520	$	165	$	227		$	122		$	—		$	6,034
Segment capital expenditures	$	2,469	$	18	$	53		$	171		$	—		$	2,711
Adjusted EBITDA	$	18,834	$	4,056	$	1,461		$	(6,074	)	$	—		$	18,277
Adjusted EBITDAR	$	23,297	$	4,056	$	1,920		$	(6,074	)	$	—		$	23,199
Three months ended June 30, 2013
Net patient service revenue from external customers	$	157,512	$	26,637	$	25,256		$	—		$	—		$	209,405
Leased facility revenue	787		—		—			—			—			787
Intersegment revenue	653		14,018		—			—			(14,671		)	—
Total revenue	$	158,952	$	40,655	$	25,256		$	—		$	(14,671	)	$	210,192
Operating income (loss)	$	12,608	$	2,705	$	3,879		$	(6,995	)	$	—		$	12,197
Interest expense, net of interest income														(8,622		)
Other expense														(32		)
Equity in earnings of joint venture														472
Debt modification/retirement costs														(1,088		)
Income from continuing operations before provision for income taxes														$	2,927
Depreciation and amortization	$	5,428	$	174	$	135		$	165		$	—		$	5,902
Segment capital expenditures	$	3,365	$	70	$	83		$	62		$	—		$	3,580
Adjusted EBITDA	$	18,237	$	2,879	$	2,017		$	(4,832	)	$	—		$	18,301
Adjusted EBITDAR	$	22,464	$	2,879	$	2,483		$	(4,840	)	$	—		$	22,986
Six months ended June 30, 2014
Net patient service revenue from external customers	$	322,850	$	46,143	$	43,693		$	—		$	—		$	412,685
Leased facility revenue	1,594		—		—			—			—			1,594
Intersegment revenue	954		27,901		—			—			(28,855		)	—
Total revenue	$	325,398	$	74,044	$	43,693		$	—		$	(28,855	)	$	414,279
Operating income (loss)	$	23,920	$	7,197	$	(3,208	)	$	(13,635	)	$	—		$	14,274
Interest expense, net of interest income														(15,639		)

	Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Other			Elimination			Total
Other income													60
Equity in earnings of joint venture													638
Debt modification/retirement costs													(822		)
Loss from continuing operations before provision from income taxes													$	(1,489	)
Depreciation and amortization	$	11,061	$	333	$	462	$	264		$	—		$	12,120
Segment capital expenditures	$	5,307	$	54	$	107	$	793		$	—		$	6,261
Adjusted EBITDA	$	35,964	$	7,530	$	3,863	$	(11,227	)	$	—		$	36,130
Adjusted EBITDAR	$	44,735	$	7,530	$	4,788	$	(11,227	)	$	—		$	45,826
Six months ended June 30, 2013
Net patient service revenue from external customers	$	318,608	$	53,744	51,350		$	—		$	—		$	423,702
Leased facility revenue	1,548		—		—		—			—			1,548
Intersegment revenue	1,194		29,190		—		—			(30,384		)	—
Total revenue	$	321,350	$	82,934	51,350		$	—		$	(30,384	)	$	425,250
Operating income (loss)	$	25,289	$	5,659	6,583		$	(13,650	)	$	—		$	23,881
Interest expense, net of interest income													(17,185		)
Other expense													(62		)
Equity in earnings of joint venture													960
Debt modification/retirement costs													(1,088		)
Income from continuing operations before provision for income taxes													$	6,506
Depreciation and amortization	$	10,802	$	350	$	291	$	357		$	—		$	11,800
Segment capital expenditures	$	5,562	$	93	$	213	$	113		$	—		$	5,981
Adjusted EBITDA	$	36,987	$	6,010	$	5,219	$	(10,856	)	$	—		$	37,360
Adjusted EBITDAR	$	45,423	$	6,010	$	6,137	$	(10,856	)	$	—		$	46,714

Reconciliation of Adjusted EBITDA and Adjusted EBITDAR to Net Income

A reconciliation of Adjusted EBITDA and Adjusted EBITDAR to net (loss) income is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Adjusted EBITDAR	$	23,199		$	22,986		$	45,826		$	46,714
Rent cost of revenue	(4,922		)	(4,685		)	(9,696		)	(9,354		)
Adjusted EBITDA	18,277			18,301			36,130			37,360
Depreciation and amortization	(6,034		)	(5,902		)	(12,120		)	(11,800		)
Interest expense	(7,945		)	(8,734		)	(15,984		)	(17,409		)
Interest income	302			112			345			224
Change in fair value of contingent consideration	121			2,244			107			2,161
Organization restructure costs	(631		)	(1,549		)	(1,071		)	(1,549		)
Exit costs related to divested facilities	27			—			(340		)	—
Losses at skilled nursing facility not at full operation	(133		)	—			(133		)	—
Governmental investigation expense	(6,000		)	—			(6,000		)	—
Professional fees related to non-routine matters	(1,205		)	(457		)	(1,519		)	(1,393		)
Debt modification/retirement costs	(822		)	(1,088		)	(822		)	(1,088		)
Impairment of long-lived assets	(82		)	—			(82		)	—
Discontinued operations, net of taxes	—			(265		)	—			(529		)
Benefit (provision) for income taxes	1,345			(1,139		)	3			(1,384		)
Net (loss) income	$	(2,780	)	$	1,523		$	(1,486	)	$	4,593

Schedule of Total Assets, Goodwill, and Intangibles, by Segment

The following table presents the segment assets as of June 30, 2014 compared to December 31, 2013 (in thousands):

	Long-Term Care  Services		Therapy Services		Hospice & Home Health Services		Other		Total
June 30, 2014:
Segment total assets	$	448,036	$	49,664	$	78,472	$	67,789	$	643,961
Goodwill and intangibles included in total assets	$	1,168	$	23,693	$	62,770	$	—	$	87,631
December 31, 2013:
Segment total assets	$	445,987	$	48,251	$	80,290	$	68,888	$	643,416
Goodwill and intangibles included in total assets	$	1,300	$	23,693	$	62,879	$	—	$	87,872

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash Flows from Operating Activities
Net (loss) income	$ (1,486)	$ 4,593
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	12,120	12,266
Change in fair value of contingent consideration	107	2,161
Provision for doubtful accounts	6,625	6,097
Non-cash stock-based compensation	1,446	1,634
Loss on disposal of assets	5	0
Amortization of deferred financing costs	1,803	1,323
Debt modification/retirement costs	822	1,088
Deferred income taxes	474	4,080
Impairment of long lived assets	82	0
Amortization of discount on debt	282	475
Changes in operating assets and liabilities:
Accounts receivable	(12,643)	(21,037)
Payments on notes receivable	727	1,419
Other current and non-current assets	2,004	(1,642)
Accounts payable and accrued liabilities	1,298	766
Employee compensation and benefits	5,739	(328)
Insurance liability risks	1,812	4,271
Other long-term liabilities	211	945
Net cash provided by operating activities	21,214	13,789
Cash Flows from Investing Activities
Additions to property and equipment	(6,261)	(5,981)
Proceeds from maturity of investments	1,060	0
Net cash used in investing activities	(5,201)	(5,981)
Cash Flows from Financing Activities
Borrowings under line of credit	157,000	165,000
Repayments under line of credit	(163,057)	(161,000)
Repayments of long-term debt	(4,741)	(9,121)
Proceeds from exercise of stock options	948	0
Taxes paid related to net share settlement of equity awards	(343)	(222)
Payment of financing costs	(2,037)	(2,449)
Net cash used in financing activities	(12,230)	(7,792)
Increase in cash and cash equivalents	3,783	16
Cash and cash equivalents at beginning of period	4,177	2,003
Cash and cash equivalents at end of period	$ 7,960	$ 2,019

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Condensed Consolidated Balance Sheets (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current Assets:
Allowance for doubtful accounts	$ 17,943	$ 16,665
Noncurrent Assets:
Accumulated depreciation on property and equipment	149,175	137,484
Accumulated depreciation for leased facility assets	4,674	4,432
Accumulated amortization on intangible assets	$ 4,799	$ 4,640
Common Class A
Stockholders' Equity:
Common Stock, Par or Stated Value Per Share (usd per share)	$ 0.001	$ 0.001
Common Stock, Shares Authorized	175,000,000	175,000,000
Common Stock, Shares, Issued	24,635,000	24,278,000
Common Stock, Shares, Outstanding	24,635,000	24,278,000
Common Class B
Stockholders' Equity:
Common Stock, Par or Stated Value Per Share (usd per share)	$ 0.001	$ 0.001
Common Stock, Shares Authorized	30,000,000	30,000,000
Common Stock, Shares, Issued	15,512,000	15,515,000
Common Stock, Shares, Outstanding	15,512,000	15,515,000

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Stockholders' Equity

6 Months Ended

Jun. 30, 2014

Equity [Abstract]

Shareholders' Equity

Stockholders' Equity

Accumulated Other Comprehensive Income

Accumulated other comprehensive income refers to gains and losses that are recorded as an element of stockholders' equity but are excluded from net (loss) income. The Company's other comprehensive (loss) income consists of net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges and gains and losses from investments available for sale. Details of other comprehensive (loss) income are included in the accompanying condensed consolidated Statements of Comprehensive (Loss) Income.

2007 Incentive Award Plan

During the six months ended June 30, 2014, the Company granted performance stock awards covering 512,475 shares of common stock. Each of the stock awards is subject to market-based vesting criteria. In order for the shares to vest, the Company must attain various average stock prices, each over a thirty-day period. There were no such market-based awards issued in the six months ended June 30, 2013.

During the year ended June 30, 2014, the following occurred with respect to restricted stock awards, restricted stock units, and performance stock awards under the Company’s existing plans (number of shares in thousands):

	Number of Shares		Weighted- Average Grant Date Fair Value
Non-vested balance at January 1, 2014	2,256		$	6.42
Granted	872		4.75
Vested	(322	)	4.51
Forfeited	(582	)	5.44
Non-vested balance at June 30, 2014	2,224		$	6.30

As of June 30, 2014, there was approximately $5.4 million of total unrecognized compensation costs related to restricted stock awards, restricted stock units and performance stock awards. These costs have a weighted-average remaining recognition period of 1.9 years as of June 30, 2014. The total fair value of shares vested during the period ended June 30, 2014 was $1.5 million.

The following table summarizes stock option activity during the six months ended June 30, 2014 under the Skilled Healthcare Group, Inc. Amended and Restated 2007 Incentive Award Plan:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2014	794,645		$	8.54
Granted	—		$	—
Exercised	(160,548	)	$	5.91
Forfeited or cancelled	(157,083	)	$	9.55
Outstanding at June 30, 2014	477,014		$	9.09	4.65	$	—
Fully vested and expected to vest at June 30, 2014	475,956		$	9.10	4.65	$	—
Exercisable at June 30, 2014	456,491		$	9.15	4.53	$	—

As of June 30, 2014, there was $0.1 million of unrecognized compensation cost related to outstanding stock options, net of estimated forfeitures. This amount is expected to be recognized over a weighted-average period of 1.4 years. To the extent the forfeiture rate is different than the Company has anticipated, stock-based compensation related to these awards will be different from the Company's expectations.

Aggregate intrinsic value represents the value of Skilled's closing stock price on the New York Stock Exchange on the last trading day of the fiscal period in excess of the exercise price, multiplied by the number of options outstanding or exercisable.

Compensation related to stock option grants and stock awards included in general and administrative expenses was $0.6 million and $0.1 million for the three months ended June 30, 2014 and 2013, respectively. The amount of compensation included in general and administrative expense was $1.2 million and $0.9 million for the six months ended June 30, 2014 and 2013, respectively. The amount of compensation included in cost of services was $0.2 million for both the three months ended June 30, 2014 and 2013, respectively. The amount of compensation included in cost of services was $0.2 million and $0.8 million for the six months ended June 30, 2014 and 2013.

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Document and Entity Information Document	6 Months Ended
	Jun. 30, 2014	Aug. 08, 2014 Common Class A	Aug. 08, 2014 Common Class B
Entity Listings [Line Items]
Entity Registrant Name	Skilled Healthcare Group, Inc.
Entity Central Index Key	0001351051
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		24,615,157	15,511,603

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Fair Value Measurements

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following table summarizes the valuation of the Company’s marketable securities and contingent consideration as of June 30, 2014 (dollars in thousands) and December 31, 2013:

	June 30, 2014						December 31, 2013
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Available for sale securities	$	—	$	—	$	—	$	—	$	1,046	$	—
Trading securities	$	—	$	8,526	$	—	$	—	$	—	$	—
Contingent consideration – acquisitions	$	—	$	—	$	1,329	$	—	$	—	$	1,736

The Company's wholly-owned offshore captive insurance company is required by regulatory agencies to set aside assets to comply with the laws of the jurisdiction in which it operates. These assets consist of restricted cash and trading securities, which are included in restricted assets in the Company's consolidated June 30, 2014 condensed balance sheet. The unrealized holding gain included in (loss) income on the Company's trading securities was negligible for the three and six months ended June 30, 2014 and 2013.

On July 1, 2011, a wholly-owned subsidiary of the Company acquired Altura Homecare & Rehab ("Altura"). The acquisition included contingent earn-out consideration which can be earned based on the acquired business's achievement of an EBITDA threshold. The contingent consideration is up to $1.5 million over a period of 3 years following the closing. The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The fair value of the earn-out was $0.5 million at June 30, 2014 and December 31, 2013.

On October 24, 2011, a wholly-owned subsidiary of the Company acquired substantially all of the assets of Cornerstone Hospice, Inc. ("Cornerstone"). The acquisition included contingent earn-out consideration which can be earned based on the acquired business's achievement of an EBITDA threshold. The contingent consideration is up to $1.5 million over a period of 5 years following the closing. The fair value of the contingent consideration was estimated using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The fair value of the earn-out at December 31, 2013 was $1.1 million and at June 30, 2014 was $0.8 million which reflects payments of $0.3 million to the seller and a fair value adjustment of less than $0.1 million.

As discussed above, EBITDA is the basis for calculating the contingent consideration. The unobservable inputs to the determination of the fair value of the contingent consideration include assumptions as to the ability of the acquired businesses to meet their EBITDA targets and discount rates used in the calculation. Should the actual EBITDA generated by the acquired businesses increase or decrease as compared to our assumptions, the fair value of the contingent consideration obligations would increase or decrease, up to the contracted limit, as applicable. As the timing of contingent payments go further into the future, discount rate assumptions increase due to the increased uncertainty of the EBITDA that may be generated in those periods.

The Company's assumptions range from the acquired businesses achieving none, a portion, or all of the consideration, and discount rates range from 2%- 5%.

Below is a table listing the Level 3 rollforward as of June 30, 2014 (in thousands):

Level 3 Rollforward
Value at January 1, 2014	$	1,736
Change in fair value	(107		)
Payout	(300		)
Value at June 30, 2014	$	1,329

Long Term Debt

At June 30, 2014 and December 31, 2013, the aggregate fair value of the Company's term loan due 2016, the revolving credit facility due 2015, the HUD insured loans due in 2043 and 2048, the mortgage term loan due 2016, and the asset based revolving credit facility due 2016, using Level 2 inputs, approximated the carrying value. The carrying value of the debt was approximately $410.2 million and $419.1 million at June 30, 2014 and December 31, 2013 respectively. Fair value was estimated based on current yield rates plus the Company's estimated credit spread available for loan products with similar terms and maturities.

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Condensed Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenue:
Net patient service revenue	$ 206,172	$ 209,405	$ 412,685	$ 423,702
Leased facility revenue	807	787	1,594	1,548
Total revenue	206,979	210,192	414,279	425,250
Expenses:
Cost of services (exclusive of rent cost of revenue and depreciation and amortization shown below)	178,529	182,815	358,838	369,084
Rent cost of revenue	4,922	4,685	9,696	9,354
General and administrative	7,287	6,837	13,371	13,292
Change in fair value of contingent consideration	(121)	(2,244)	(107)	(2,161)
Depreciation and amortization	6,034	5,902	12,120	11,800
Governmental investigation expense	6,000	0	6,000	0
Impairment of long-lived assets	82	0	82	0
Loss on disposal of asset	5	0	5	0
Expenses	202,738	197,995	400,005	401,369
Other (expenses) income:
Interest expense	(7,945)	(8,734)	(15,984)	(17,409)
Interest income	302	112	345	224
Other income (expense), net	7	(32)	60	(62)
Equity in earnings of joint venture	92	472	638	960
Debt modification/retirement costs	(822)	(1,088)	(822)	(1,088)
Total other (expenses) income, net	(8,366)	(9,270)	(15,763)	(17,375)
(Loss) income from continuing operations before (benefit) provision for income taxes	(4,125)	2,927	(1,489)	6,506
(Benefit) provision for income taxes	(1,345)	1,139	(3)	1,384
(Loss) income from continuing operations	(2,780)	1,788	(1,486)	5,122
Loss from discontinued operations, net of tax	0	(265)	0	(529)
Net (loss) income	$ (2,780)	$ 1,523	$ (1,486)	$ 4,593
(Loss) earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
(Loss) earnings per share (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
(Loss) earnings per common share from continuing operations (usd per share)	$ (0.07)	$ 0.05	$ (0.04)	$ 0.13
Loss per share from discontinued operations (usd per share)	$ 0.00	$ (0.01)	$ 0.00	$ (0.01)
(Loss) earnings per share (usd per share)	$ (0.07)	$ 0.04	$ (0.04)	$ 0.12
Weighted-average common shares outstanding, basic (in shares)	38,098	37,646	38,035	37,602
Weighted-average common shares outstanding, diluted (in shares)	38,098	38,186	38,035	38,139

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Income Per Share

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Income Per Share

Income Per Share

The Company computes (loss) income per share of Class A common stock and Class B common stock using the two-class method. The Company's Class A common stock and Class B common stock are identical in all respects, except with respect to voting rights and that each share of Class B common stock is convertible into one share of Class A common stock under certain circumstances. (Loss) income is allocated on a proportionate basis to each class of common stock in the determination of (loss) income per share.

Basic net (loss) income per share was computed by dividing net (loss) income by the weighted-average number of outstanding shares for the period. Diluted earnings per share is computed by dividing income (loss) plus the effect of assumed conversions (if applicable) by the weighted-average number of outstanding shares after giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and convertible preferred stock, if any. The following table sets forth the computation of basic and diluted net (loss) income per share of Class A common stock and Class B common stock for the three and six months ended June 30, 2014 and June 30, 2013 (amounts in thousands, except per share data):

	Three months ended June 30, 2014									Three months ended June 30, 2013									Six months ended June 30, 2014									Six months ended June 30, 2013
	Class A			Class B			Total			Class A			Class B			Total			Class A			Class B			Total			Class A			Class B			Total
Net (loss) Income per share, basic
Numerator:
Allocation of (loss) income from continuing operations	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	1,048		$	740		$	1,788		$	(880	)	$	(606	)	$	(1,486	)	$	3,000		$	2,122		$	5,122
Allocation of loss from discontinued operations	—			—			—			(155		)	(110		)	(265		)	—			—			—			(310		)	(219		)	(529		)
Allocation of net (loss) income	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	893		$	630		$	1,523		$	(880	)	$	(606	)	$	(1,486	)	$	2,690		$	1,903		$	4,593
Net (loss) income per share, diluted
Numerator:
Allocation of (loss) income from continuing operations	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	1,059		$	729		$	1,788		$	(880	)	$	(606	)	$	(1,486	)	$	3,030		$	2,092		$	5,122
Allocation of loss from discontinued operations	—			—			—			(157		)	(108		)	(265		)	—			—			—			(313		)	(216		)	$	(529	)
Allocation of net (loss) income	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	902		$	621		$	1,523		$	(880	)	$	(606	)	$	(1,486	)	$	2,717		$	1,876		$	4,593
Denominator for basic and diluted (loss) income per share:
Weighted average common shares outstanding, basic	22,585			15,513			38,098			22,070			15,576			37,646			22,521			15,514			38,035			22,026			15,576			37,602
Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable	—			—			—			540			—			540			—			—			—			537			—			537
Adjusted weighted-average common shares outstanding, diluted	22,585			15,513			38,098			22,610			15,576			38,186			22,521			15,514			38,035			22,563			15,576			38,139
(Loss) earnings per share, basic:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.05		$	0.05		$	0.05		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.13		$	0.13		$	0.13
Loss per share from discontinued operations	—			—			—			(0.01		)	(0.01		)	(0.01		)	—			—			—			$	(0.01	)	$	(0.01	)	$	(0.01	)
(Loss) earnings per share	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.04		$	0.04		$	0.04		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.12		$	0.12		$	0.12
(Loss) earnings per share, diluted:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.05		$	0.05		$	0.05		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.13		$	0.13		$	0.13
Loss per share from discontinued operations	—			—			—			(0.01		)	(0.01		)	(0.01		)	—			—			—			$	(0.01	)	$	(0.01	)	$	(0.01	)
(Loss) earnings per share	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.04		$	0.04		$	0.04		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.12		$	0.12		$	0.12

The following were excluded from the weighted-average diluted shares computation for the three and six months ended June 30, 2014 and 2013, as their inclusion would have been anti-dilutive (shares in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Options to purchase common shares	338	585	492	585
Non-vested common shares	198	434	221	911
Total excluded	536	1,019	713	1,496

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 (collectively, the "Interim Financial Statements"), are unaudited. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted, as permitted under applicable U.S. Securities and Exchange Commission rules and regulations. Readers of the Interim Financial Statements should refer to the Company's audited consolidated financial statements and notes thereto (as updated by Note 3, "Summary of Significant Accounting Policies," in this filing), for the year ended December 31, 2013, which are included in the Company's 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Management believes that the Interim Financial Statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company's financial information in all material respects as of the dates and for the periods presented. The results of operations presented in the Interim Financial Statements are not necessarily indicative of operations to be expected for the entire year or any other period.

The accompanying Interim Financial Statements include the accounts of Skilled and its consolidated wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Estimates and Assumptions

The interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which require the Company to consolidate company financial information and make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the Company’s interim financial statements relate to revenue, allowance for doubtful accounts, self-insured liability risks, income taxes, governmental investigation, and valuation of contingent consideration.

Revenue and Accounts Receivables

Revenue and accounts receivable are recorded on an accrual basis as services are performed at their estimated net realizable value. The Company derives a majority of its revenue from funds under federal Medicare and state Medicaid assistance programs, the continuation of which are dependent upon governmental policies and are subject to audit risk and potential recoupment.

Overall payments made by Medicare for hospice services are subject to an annual cap amount on a per hospice agency basis. Total Medicare payments received for services rendered during the applicable Medicare hospice cap year by each Medicare-certified agency during this period are compared to the cap amount for the relevant period. Payments in excess of the cap are subject to recoupment by Medicare. For the three months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $1.4 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the three months ended June 30, 2014, $0.5 million was related to the 2014 cap year and $0.4 million was related to the 2013 cap year. Of the $1.4 million recorded in the three months ended June 30, 2013, $0.7 million was related to the 2013 cap year and $0.7 million was related to the 2012 cap year. For the six months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $2.9 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the six months ended June 30, 2014, $0.5 million was related to the 2014 cap year and$0.4 million was related to the 2013 cap year. Of the $2.9 million recorded in the six months ended June 30, 2013, $0.7 million was related to the 2013 cap year, $2.0 million was related to the 2012 cap year, and $0.2 million was related to the 2011 cap year.

Notes Receivable

As of June 30, 2014 and December 31, 2013, net notes receivable were approximately $4.1 million and $2.0 million, respectively, of which $1.7 million and $1.5 million was reflected as current assets as of June 30, 2014 and December 31, 2013, with the remaining balances reflected as long-term assets. Interest rates on these notes approximated market rates as of the date the notes were originated.

As of June 30, 2014, two customers of the Company's rehabilitation therapy services business were responsible for 100% of the net notes receivable balance. The notes receivable, as well as the receivables from these customers, are secured by the assets of the customers as well as a personal guaranty by the principal owners of the customers. Additionally, the customers represented $8.5 million, or 43.6% of the net accounts receivable for the Company's rehabilitation therapy services business and approximately $19.3 million, or 41.7%, of the external revenue of the rehabilitation therapy services business for the six months ended June 30, 2014.

The notes receivable balance is stated net of an allowance for uncollectibility. At June 30, 2014, there was no note receivable reserve balance.

Recent Accounting Pronouncement

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, ("ASU 2014-08").  This ASU requires an entity to report disposed components or components held-for-sale in discontinued operations if such components represent a strategic shift that have or will have a significant effect on operations and financial results. Additionally, expanded disclosure about discontinued operations and disposals of significant components that do not qualify for discontinued operations presentation will be required. The adoption of ASU 2014-08 is effective prospectively for disposals that occur within annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company is currently evaluating the impact to the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-08").  This ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The ASU is effective beginning in the first quarter of our fiscal year 2017. Early adoption is not permitted. The Company is currently evaluating the impact to the consolidated financial statements.

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Income Per Share (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

The following table sets forth the computation of basic and diluted net (loss) income per share of Class A common stock and Class B common stock for the three and six months ended June 30, 2014 and June 30, 2013 (amounts in thousands, except per share data):

	Three months ended June 30, 2014									Three months ended June 30, 2013									Six months ended June 30, 2014									Six months ended June 30, 2013
	Class A			Class B			Total			Class A			Class B			Total			Class A			Class B			Total			Class A			Class B			Total
Net (loss) Income per share, basic
Numerator:
Allocation of (loss) income from continuing operations	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	1,048		$	740		$	1,788		$	(880	)	$	(606	)	$	(1,486	)	$	3,000		$	2,122		$	5,122
Allocation of loss from discontinued operations	—			—			—			(155		)	(110		)	(265		)	—			—			—			(310		)	(219		)	(529		)
Allocation of net (loss) income	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	893		$	630		$	1,523		$	(880	)	$	(606	)	$	(1,486	)	$	2,690		$	1,903		$	4,593
Net (loss) income per share, diluted
Numerator:
Allocation of (loss) income from continuing operations	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	1,059		$	729		$	1,788		$	(880	)	$	(606	)	$	(1,486	)	$	3,030		$	2,092		$	5,122
Allocation of loss from discontinued operations	—			—			—			(157		)	(108		)	(265		)	—			—			—			(313		)	(216		)	$	(529	)
Allocation of net (loss) income	$	(1,648	)	$	(1,132	)	$	(2,780	)	$	902		$	621		$	1,523		$	(880	)	$	(606	)	$	(1,486	)	$	2,717		$	1,876		$	4,593
Denominator for basic and diluted (loss) income per share:
Weighted average common shares outstanding, basic	22,585			15,513			38,098			22,070			15,576			37,646			22,521			15,514			38,035			22,026			15,576			37,602
Plus: incremental shares related to dilutive effect of stock options and restricted stock, if applicable	—			—			—			540			—			540			—			—			—			537			—			537
Adjusted weighted-average common shares outstanding, diluted	22,585			15,513			38,098			22,610			15,576			38,186			22,521			15,514			38,035			22,563			15,576			38,139
(Loss) earnings per share, basic:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.05		$	0.05		$	0.05		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.13		$	0.13		$	0.13
Loss per share from discontinued operations	—			—			—			(0.01		)	(0.01		)	(0.01		)	—			—			—			$	(0.01	)	$	(0.01	)	$	(0.01	)
(Loss) earnings per share	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.04		$	0.04		$	0.04		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.12		$	0.12		$	0.12
(Loss) earnings per share, diluted:
(Loss) earnings per common share from continuing operations	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.05		$	0.05		$	0.05		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.13		$	0.13		$	0.13
Loss per share from discontinued operations	—			—			—			(0.01		)	(0.01		)	(0.01		)	—			—			—			$	(0.01	)	$	(0.01	)	$	(0.01	)
(Loss) earnings per share	$	(0.07	)	$	(0.07	)	$	(0.07	)	$	0.04		$	0.04		$	0.04		$	(0.04	)	$	(0.04	)	$	(0.04	)	$	0.12		$	0.12		$	0.12

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

The following were excluded from the weighted-average diluted shares computation for the three and six months ended June 30, 2014 and 2013, as their inclusion would have been anti-dilutive (shares in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Options to purchase common shares	338	585	492	585
Non-vested common shares	198	434	221	911
Total excluded	536	1,019	713	1,496

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Debt

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

Debt

Debt

The Company’s long-term debt is summarized as follows (dollars in thousands):

	As of June 30, 2014			As of December 31, 2013
Term Loan, due April 2016, interest rate based on LIBOR (subject to a 1.50% floor) plus 5.50%, or 7.00%, at June 30, 2014 and LIBOR (subject to a 1.50% floor) plus 5.25%, or 6.75%, at December 31, 2013; collateralized by substantially all assets of the Company excluding the skilled nursing facilities that collateralize the HUD insured mortgage loans and the skilled nursing facilities that collateralize the MidCap Financial credit facility	$	243,953		$	243,953
Term Loan original issue discount	(973		)	(1,254		)
Revolving Credit Facility due April 2015, interest rate comprised of the Prime rate of 3.25% plus 3.50%, or 6.75%, at December 31, 2013	—			11,000
Revolving Credit Facility due April 2016, interest rate comprised of LIBOR plus 5.50%, or 5.74%, at June 30, 2014	7,308			—
Revolving Credit Facility due April 2015, interest rate comprised of LIBOR plus 4.50%, or 4.74%, at June 30, 2014 and December 31, 2013	4,692			7,057
HUD insured loans due in 2043 and 2048, with a weighted average interest rate of 4.28% and 4.24% at June 30, 2014 and December 31, 2013, respectively	86,668			87,314
Term Loan, due December 2016, interest rate based on LIBOR rate (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by 10 skilled nursing facilities	61,262			62,000
Revolving Credit Facility due December 2016, interest rate comprised of LIBOR (subject to a floor of 0.75%) plus 5.95%, or 6.70%, at June 30, 2014 and December 31, 2013; collateralized by the accounts receivable of 10 skilled nursing facilities	5,000			5,000
Note payable due December 2018, interest rate fixed at 6.50%, payable in monthly installments, collateralized by a first priority deed of trust	875			959
Insurance premiums financed	1,395			2,990
Other	54			106
Total long-term debt	410,234			419,125
Less amounts due within one year	(10,198		)	(7,630		)
Long-term debt, less current portion	$	400,036		$	411,495

Term Loan and Revolving Credit Facility

On April 9, 2010, the Company entered into an up to $360.0 million senior secured term loan and a $100.0 million revolving credit facility (the "Prior Credit Agreement") that amended and restated the senior secured term loan and revolving credit facility that were set to mature in June 2012. On April 12, 2012, the Company entered into an Amendment and Restatement and Additional Term Loan Assumption Agreement (“Restated Credit Agreement”) that amended and restated the Prior Credit Agreement and pursuant to which, among other things, the size of the Company's existing senior secured term loan was increased by $100.0 million (hereinafter referred to as the incremental senior secured term loan).

On June 6, 2013, the Company entered into an amendment to the Restated Credit Agreement that increased the maximum leverage ratio by 0.50 throughout the life of the Restated Credit Agreement. The amendment additionally permits the Company to make future offers to the lenders under the revolving credit facility to extend the maturity date of all or a portion of the revolving credit facility. The credit arrangements provided under the Restated Credit Agreement are collectively referred to herein as the Company's senior secured credit facility.

In connection with the June 2013 modification, the Company paid fees totaling $2.5 million, of which $1.1 million was recorded as debt modification costs in the consolidated statement of operations, and $1.4 million was recorded as other assets in the consolidated balance sheet. Substantially all of the Company's assets, except those skilled nursing facilities securing the HUD and MidCap mortgage loans, are pledged as collateral under the senior secured credit facility. Amounts borrowed under the senior secured term loan may be prepaid at any time without penalty, except for LIBOR breakage costs. The senior secured term loan matures on April 9, 2016.

On June 23, 2014, the Company entered into an Amendment No. 2 and Loan Modification Agreement ("Amendment No. 2") to our Fourth Amended and Restated Credit Agreement dated April 12, 2012, as previously amended on June 6, 2013. Amendment No. 2 increased the maximum leverage ratio to 5.25 and decreased the fixed charge coverage ratio to 1.85, both up to but not including June 30, 2015. Amendment No. 2 increased the interest rate by 0.25% to the London Interbank Offered Rate ("LIBOR") (subject to a floor of 1.50%) plus a margin of 5.50 or the prime rate (subject to a floor of 2.50%) plus a margin of 4.50%. Amendment No. 2 extended the maturity date of the revolving credit facility to April 9, 2016 and reduced the commitments of any extending revolving lenders by 25%. After giving effect to Amendment No. 2, the extended revolving credit facility commitments are $50.6 million and the non-extended revolving credit facility commitments are $32.5 million, for a total capacity of $83.1 million. The capacity of the revolving credit facility will decrease to $50.6 million on April 9, 2015 until its maturity. Lenders that take an assignment of non-extended commitments may subsequently agree to extend those commitments in accordance with Amendment No. 2. Amendment No. 2 also modified the interest rate for the extended revolving credit commitments to be, at the Company’s option, LIBOR plus a margin between 5.25% and 5.50% (based upon consolidated leverage) or the prime rate plus a margin between 4.25% and 4.50% (based upon consolidated leverage). The interest rates on the non-extended revolving credit facility commitments remain, at the Company’s option, at LIBOR plus a margin of between 4.25% and 4.50% (based upon consolidated leverage) or the prime rate plus a margin between 3.25% and 3.50% (based upon consolidated leverage). In connection with the June 2014 modification, the Company paid fees totaling $2.0 million of which $0.8 million were recorded as debt modification costs in the condensed consolidated statements of operations, and $1.2 million was recorded as other assets in the condensed consolidated balance sheet.

Pursuant to the Restated Credit Agreement, the quarterly term loan amortization payments increased to $2.6 million beginning June 30, 2012 compared to $0.9 million under the Prior Credit Agreement. Due to the principal reductions made in 2013 made in association with the HUD insured financings, no amortization payments are due until December 2014, at which time the quarterly principal payments due will be $1.6 million. Additionally, the maximum portion of the annual Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement) to be applied to term debt reductions increased to 75% from 50%, subject to stepdowns to 50% and 25% based on consolidated leverage. The Company has also increased its ability to refinance a portion of its credit facility with U.S. Department of Housing and Urban Development ("HUD") insured debt up to $250 million, subject to certain credit facility covenants. Any HUD insured borrowings beyond $250 million would necessitate either refinancing the senior secured credit facility in full or otherwise seeking a waiver or amendment from the senior secured lenders.

Under the senior secured credit facility, the Company must maintain compliance with specified financial covenants measured on a quarterly basis. The senior secured credit facility also includes certain additional affirmative and negative covenants, including limitations on the incurrence of additional indebtedness, liens, investments in other businesses and capital expenditures. Also under the senior secured credit facility, subject to certain exceptions and minimum thresholds, the Company is required to apply all of the proceeds from any issuance of debt, as much as half of the proceeds from any issuance of equity, as much as 75% of the Company's annual Consolidated Excess Cash Flow (as defined in the Restated Credit Agreement), and amounts received in connection with any sale of the Company's assets to repay the outstanding amounts under the Restated Credit Agreement. The Company believes that it is in compliance with its debt covenants as of June 30, 2014. As of June 30, 2014, the fixed charge coverage ratio was 2.18, which compares to a minimum requirement of 1.85 and the leverage ratio was 4.72, as compared to an allowed maximum of 5.25.

HUD Insured Loans and Other Mortgage Loans

In 2013, the Company received funding of 10 loans insured by HUD. The loans have a combined aggregate original principal balance of $87.6 million and are secured by 10 skilled nursing facilities. The HUD insured loans have an average all in interest rate of approximately 5.3% and an amortization term of 30 to 35 years. As of June 30, 2014 the HUD insured loans have a combined aggregate principal balance of $86.7 million.

Accordingly, as of June 30, 2014, the Company has 10 mortgages insured by HUD, which are each secured by a skilled nursing facility. These mortgages have an average remaining term of 33 years with fixed interest rates ranging from 3.4% to 4.6% and a weighted average interest rate of 4.2%. Depending on the mortgage agreement, prepayments are generally allowed only after 12 months from the inception of the mortgage. Prepayments are subject to a penalty of 10% of the remaining principal balances in the first year and the prepayment penalty decreases each subsequent year by 1% until no penalty is required. As all $87.6 million of the HUD insured mortgage loans were originated in 2013, none of the loans could be prepaid at June 30, 2014. Any further HUD insured mortgages will require additional HUD approval.

All HUD-insured mortgages are non-recourse loans to the Company. All mortgages are subject to HUD regulatory agreements that require escrow reserve funds to be deposited with the loan servicer for mortgage insurance premiums, property taxes, insurance and for capital replacement expenditures. As of June 30, 2014, the Company has escrow reserve funds of $1.6 million with the loan servicer that are reported within other current assets, and replacement reserve funds of $3.0 million in other assets. The net proceeds of the HUD insured loans were required to be used to pay down term debt under the Restated Credit Agreement. In 2013, $87.6 million of HUD insured loan proceeds were used to pay down term debt.

As of June 30, 2014 the Company has 10 additional skilled nursing facilities securing a $61.3 million mortgage loan and a $5.0 million asset based revolving credit facility with MidCap Financial. Both loans have an interest rate of LIBOR plus a margin of 5.95% with a LIBOR floor of 0.75%. The mortgage loan amortizes over 25 years with the remaining principal due December 1, 2016. There are additional quarterly principal payments of $0.3 million beginning after six months, $0.4 million in year two and $0.5 million in year three. The mortgage loan has a debt service coverage ratio and a minimum debt coverage ratio, both of which were met at June 30, 2014. The asset based revolving credit facility is secured by the accounts receivable of the 10 skilled nursing facilities. In 2013, $65.0 million of mortgage loan and asset based revolving credit facility proceeds were used to pay down term debt.

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Income Taxes

6 Months Ended

Jun. 30, 2014

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

For the three months ended June 30, 2014, the Company recorded an income tax benefit of $1.3 million representing an effective tax rate of 32.6% compared to an income tax expense of $1.1 million from continuing operations for the same period in 2013. The reduction in tax expense for the three months ended June 30, 2014 was primarily due to a $7.1 million decrease in pretax income, from $2.9 million for the three months ended June 30, 2013 to a loss from continuing operations of $4.1 million for the three months ended June 30, 2014, offset by $0.3 million of tax expense related to stock compensation for shares that vested at a lower price than the grant value.

For the six months ended June 30, 2014, the Company recorded an income tax expense of less than $0.1 million representing an effective tax rate of negative 0.2% compared to an income tax expense of $1.4 million from continuing operations for the same period in 2013. The reduction in tax expense for the six months ended was primarily due to a $8.0 million decrease in pretax income, from $6.5 million for the six months ended June 30, 2013 to a loss from continuing operations of $1.5 million for the six months ended June 30, 2014.

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Business Segments

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

Business Segments

Business Segments

The Company has three reportable operating segments: (i) long-term care services ("LTC"), which includes the operation of SNFs and ALFs (which is the most significant portion of the Company's business), the Company's administrative services provided to an unrelated SNF operator, and the facility lease revenue from a third-party operator; (ii) the Company's rehabilitation therapy services business; and (iii) the Company's hospice and home health businesses. The "other" column in the table below includes general and administrative items, as well as joint venture equity earnings. The Company's reporting segments are business units that offer different services, and that are managed differently due to the nature of the services provided.

At June 30, 2014, LTC services included 73 wholly-owned SNF operating companies that offer post-acute, rehabilitative custodial and specialty skilled nursing care, as well as 22 wholly-owned ALF operating companies that provide room and board and social services. Therapy services included rehabilitative services such as physical, occupational and speech therapy provided in the Company's facilities and in unaffiliated facilities. Hospice and home health services were provided by the Company's wholly-owned subsidiaries to patients.

The Company evaluates performance and allocates capital resources to each segment based on an operating model that is designed to maximize the quality of care provided and profitability. Accordingly, earnings from operations before net interest, tax, depreciation and amortization, non-core expenses ("Adjusted EBITDA") and rent cost of revenue ("Adjusted EBITDAR") is used as the primary measure of each segment’s operating results because it does not include such costs as interest expense, income taxes, depreciation, amortization and rent cost of revenue which may vary from segment to segment depending upon various factors, including the method used to finance the original purchase of assets within a segment or the tax law of the states in which a segment operates. By excluding these items, the Company is better able to evaluate operating performance of the segment by focusing on more controllable measures. Adjusted EBITDA and Adjusted EBITDAR are non‑GAAP financial measures. For a full discussion of the definitions of these terms and the reasons why the Company utilizes such measures, see Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this filing. General and administrative expenses are not allocated to any segment for purposes of determining segment profit or loss, and are included in the "other" category in the selected segment financial data that follows. Intersegment sales and transfers are recorded at cost plus standard mark-up; intersegment transactions have been eliminated in consolidation.

The following table sets forth selected interim financial data consolidated by business segment (dollars in thousands):

	Long-Term Care Services		Therapy Services		Hospice & Home Health Services			Other			Elimination			Total
Three months ended June 30, 2014
Net patient service revenue from external customers	$	162,264	$	23,076	$	20,832		$	—		$	—		$	206,172
Leased facility revenue	807		—		—			—			—			807
Intersegment revenue	503		14,066		—			—			(14,569		)	—
Total revenue	$	163,574	$	37,142	$	20,832		$	—		$	(14,569	)	$	206,979
Operating income (loss)	$	12,950	$	3,892	$	(5,192	)	$	(7,409	)	$	—		$	4,241
Interest expense, net of interest income														(7,643		)
Other income														7
Equity in earnings of joint venture														92
Debt modification/retirement costs														(822		)
Loss from continuing operations before benefit for income taxes														$	(4,125	)
Depreciation and amortization	$	5,520	$	165	$	227		$	122		$	—		$	6,034
Segment capital expenditures	$	2,469	$	18	$	53		$	171		$	—		$	2,711
Adjusted EBITDA	$	18,834	$	4,056	$	1,461		$	(6,074	)	$	—		$	18,277
Adjusted EBITDAR	$	23,297	$	4,056	$	1,920		$	(6,074	)	$	—		$	23,199
Three months ended June 30, 2013
Net patient service revenue from external customers	$	157,512	$	26,637	$	25,256		$	—		$	—		$	209,405
Leased facility revenue	787		—		—			—			—			787
Intersegment revenue	653		14,018		—			—			(14,671		)	—
Total revenue	$	158,952	$	40,655	$	25,256		$	—		$	(14,671	)	$	210,192
Operating income (loss)	$	12,608	$	2,705	$	3,879		$	(6,995	)	$	—		$	12,197
Interest expense, net of interest income														(8,622		)
Other expense														(32		)
Equity in earnings of joint venture														472
Debt modification/retirement costs														(1,088		)
Income from continuing operations before provision for income taxes														$	2,927
Depreciation and amortization	$	5,428	$	174	$	135		$	165		$	—		$	5,902
Segment capital expenditures	$	3,365	$	70	$	83		$	62		$	—		$	3,580
Adjusted EBITDA	$	18,237	$	2,879	$	2,017		$	(4,832	)	$	—		$	18,301
Adjusted EBITDAR	$	22,464	$	2,879	$	2,483		$	(4,840	)	$	—		$	22,986
Six months ended June 30, 2014
Net patient service revenue from external customers	$	322,850	$	46,143	$	43,693		$	—		$	—		$	412,685
Leased facility revenue	1,594		—		—			—			—			1,594
Intersegment revenue	954		27,901		—			—			(28,855		)	—
Total revenue	$	325,398	$	74,044	$	43,693		$	—		$	(28,855	)	$	414,279
Operating income (loss)	$	23,920	$	7,197	$	(3,208	)	$	(13,635	)	$	—		$	14,274
Interest expense, net of interest income														(15,639		)

	Long-Term Care Services		Therapy Services		Hospice & Home Health Services		Other			Elimination			Total
Other income													60
Equity in earnings of joint venture													638
Debt modification/retirement costs													(822		)
Loss from continuing operations before provision from income taxes													$	(1,489	)
Depreciation and amortization	$	11,061	$	333	$	462	$	264		$	—		$	12,120
Segment capital expenditures	$	5,307	$	54	$	107	$	793		$	—		$	6,261
Adjusted EBITDA	$	35,964	$	7,530	$	3,863	$	(11,227	)	$	—		$	36,130
Adjusted EBITDAR	$	44,735	$	7,530	$	4,788	$	(11,227	)	$	—		$	45,826
Six months ended June 30, 2013
Net patient service revenue from external customers	$	318,608	$	53,744	51,350		$	—		$	—		$	423,702
Leased facility revenue	1,548		—		—		—			—			1,548
Intersegment revenue	1,194		29,190		—		—			(30,384		)	—
Total revenue	$	321,350	$	82,934	51,350		$	—		$	(30,384	)	$	425,250
Operating income (loss)	$	25,289	$	5,659	6,583		$	(13,650	)	$	—		$	23,881
Interest expense, net of interest income													(17,185		)
Other expense													(62		)
Equity in earnings of joint venture													960
Debt modification/retirement costs													(1,088		)
Income from continuing operations before provision for income taxes													$	6,506
Depreciation and amortization	$	10,802	$	350	$	291	$	357		$	—		$	11,800
Segment capital expenditures	$	5,562	$	93	$	213	$	113		$	—		$	5,981
Adjusted EBITDA	$	36,987	$	6,010	$	5,219	$	(10,856	)	$	—		$	37,360
Adjusted EBITDAR	$	45,423	$	6,010	$	6,137	$	(10,856	)	$	—		$	46,714

A reconciliation of Adjusted EBITDA and Adjusted EBITDAR to net (loss) income is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Adjusted EBITDAR	$	23,199		$	22,986		$	45,826		$	46,714
Rent cost of revenue	(4,922		)	(4,685		)	(9,696		)	(9,354		)
Adjusted EBITDA	18,277			18,301			36,130			37,360
Depreciation and amortization	(6,034		)	(5,902		)	(12,120		)	(11,800		)
Interest expense	(7,945		)	(8,734		)	(15,984		)	(17,409		)
Interest income	302			112			345			224
Change in fair value of contingent consideration	121			2,244			107			2,161
Organization restructure costs	(631		)	(1,549		)	(1,071		)	(1,549		)
Exit costs related to divested facilities	27			—			(340		)	—
Losses at skilled nursing facility not at full operation	(133		)	—			(133		)	—
Governmental investigation expense	(6,000		)	—			(6,000		)	—
Professional fees related to non-routine matters	(1,205		)	(457		)	(1,519		)	(1,393		)
Debt modification/retirement costs	(822		)	(1,088		)	(822		)	(1,088		)
Impairment of long-lived assets	(82		)	—			(82		)	—
Discontinued operations, net of taxes	—			(265		)	—			(529		)
Benefit (provision) for income taxes	1,345			(1,139		)	3			(1,384		)
Net (loss) income	$	(2,780	)	$	1,523		$	(1,486	)	$	4,593

The following table presents the segment assets as of June 30, 2014 compared to December 31, 2013 (in thousands):

	Long-Term Care  Services		Therapy Services		Hospice & Home Health Services		Other		Total
June 30, 2014:
Segment total assets	$	448,036	$	49,664	$	78,472	$	67,789	$	643,961
Goodwill and intangibles included in total assets	$	1,168	$	23,693	$	62,770	$	—	$	87,631
December 31, 2013:
Segment total assets	$	445,987	$	48,251	$	80,290	$	68,888	$	643,416
Goodwill and intangibles included in total assets	$	1,300	$	23,693	$	62,879	$	—	$	87,872

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Property and Equipment

6 Months Ended

Jun. 30, 2014

Property, Plant and Equipment [Abstract]

Property and Equipment

Property and Equipment

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014			December 31, 2013
Land and land improvements	$	62,370		$	62,370
Buildings and leasehold improvements	324,121			320,923
Furniture and equipment	90,695			87,392
Construction in progress	8,349			8,621
	485,535			479,306
Less accumulated depreciation	(149,175		)	(137,484		)
	$	336,360		$	341,822

Leased facility assets consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

	June 30, 2014			December 31, 2013
Leased facility assets	$	13,848		$	13,848
Less accumulated depreciation	(4,674		)	(4,432		)
	$	9,174		$	9,416

The Company began leasing five skilled nursing facilities in California to an unaffiliated third party operator in April 2011 and at that time signed a 10-year lease with two10-year extension options exercisable by the lessee.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Legal Matters

General

Skilled and its subsidiaries are party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of business, including without limitation claims that their services have resulted in injury or death to patients who receive care from the Company's businesses and claims related to employment, staffing requirements and commercial and other matters. Although Skilled and its subsidiaries intend to vigorously defend themselves in these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on the Company's results of operations and financial condition. The Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of settlement negotiations, judicial and administrative rulings, advice of legal counsel and other information and events pertaining to a particular case.

Skilled and its subsidiaries operate in a highly regulated industry. They are subject to ongoing regulatory oversight by state and federal regulatory authorities. Actual or alleged failure to comply with legal and regulatory requirements could subject Skilled and its subsidiaries to civil, administrative or criminal fines, penalties or restitutionary relief, and authorities could seek the suspension or exclusion of the offending provider or individual from participation in government healthcare programs and could lead to recoupment claims on prior payments by government healthcare programs. Adverse determinations in legal and regulatory investigations, actions and proceedings, whether currently asserted or arising in the future, could have a material adverse effect on the Company's financial position, results of operations and cash flows.

See also Part II, Item 1A -- Risk Factors, included elsewhere in this report, including without limitation the sections therein entitled "Significant legal actions, which are commonplace in our professions, could subject us to increased operating costs and substantial uninsured liabilities, which would materially and adversely affect our results of operations, liquidity and financial condition," "Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction or repayment," "We are subject to extensive and complex laws and government regulations. If we are not operating in compliance with these laws and regulations or if these laws and regulations change, we could be required to make significant expenditures or change our operations in order to bring our facilities and operations into compliance" and "We face reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business."

Creekside Hospice Investigation

On August 2, 2013, the United States Attorney for the District of Nevada and the Civil Division of the U.S. Department of Justice (collectively, the “DOJ”) informed us that its Civil Division was investigating the Company, as well as its subsidiary, Creekside Hospice II, LLC, for possible violations of federal and state healthcare fraud and abuse laws and regulations. Those laws could have included the federal False Claims Act ("FCA") and the Nevada False Claims Act ("NFCA"). The FCA provides for civil and administrative fines and penalties, plus treble damages. The NFCA provides for similar fines and penalties, including treble damages. Violations of those federal or state laws could also subject the Company and/or its subsidiaries to exclusion from participation in the Medicare and Medicaid programs.

On or about August 6, 2014, in relation to the investigation the DOJ filed a notice of intervention in two pending qui tam proceedings filed by private party relators under the FCA and the NFCA and advised that it intends to take over the actions and file an amended complaint within 90 days, asserting that certain claims for hospice services provided by Creekside in the time period 2010 to 2013 did not meet Medicare requirements for reimbursement and are in violation of the civil False Claims Act. The Company believes that False Claims Act remedies will be pursued for an unspecified amount, with a request to treble provable damages and impose penalties per proved false claim in the amount ranging from $5,500 to $11,500 per claim. Additionally, alternative remedies such as overpayment, mistake or unjust enrichment may be sought.

While the Company denies the allegations and will defend this action, the Company has accrued $6.0 million as a contingent liability in connection with the matter, but it could ultimately cost more than that amount to settle or otherwise resolve it, including to satisfy any judgment that might be rendered against the Company or Creekside if the litigation defense were ultimately unsuccessful.

Humboldt County Litigation

In connection with the September 2010 settlement of class action litigation against Skilled and certain of its subsidiaries related to, among other matters, alleged understaffing at certain California skilled nursing facilities operated by Skilled's subsidiaries (the "Humboldt County Action"), Skilled and its defendant subsidiaries (collectively, the "Defendants”) entered into settlement agreements with the plaintiffs and intervenor and agreed to an injunction. The settlement was approved by the Superior Court of California, Humboldt County on November 30, 2010. Under the terms of the settlement agreements, the defendant entities deposited a total of $50.0 million into escrow accounts to cover settlement payments to class members, notice and claims administration costs, reasonable attorneys' fees and costs and certain other payments, including $5.0 million to settle certain government agency claims and potential government claims that may arise. Of the $5.0 million provided for such government claims, $1.0 million was initially released by the court to the Humboldt County Treasurer-Tax Collector on behalf of the People of the State of California for their release of the Defendants. The remaining $4.0 million was available for the settlement and releases by the California Attorney General and certain other District Attorneys. However, in the event that any of these government authorities were to instead file certain actions against the Defendants by February 2013, the entire $4.0 million would have reverted to the Defendants upon their request to the Settlement Administrator.No such actions were filed, however, resulting in an additional $1.0 million distribution to the Humboldt County District Attorney's Office and the remaining $3.0 million was distributed to the class settlement fund, as required by the settlement agreement.

In addition to the payments to the Humboldt County Treasurer-Tax Collector on behalf of the People of the State of California, the court alsoapproved payments from the escrow of up to approximately $24.8 million for plaintiff attorneys' fees and costs and $10,000 to each of the three named plaintiffs.  Pursuant to the injunction, the twenty-two Defendants that operated California nursing facilities were required to provide specified nurse staffing levels, comply with specified state and federal regulations governing staffing levels and posting requirements, and provide reports and information to a court-appointed auditor. The injunction was to remain in effect for a period of twenty-four months unless extended for additional three-month periods as to any Defendants who violated the injunction. Defendants demonstrating compliance for an eighteen-month period that ended September 30, 2012 were permitted to petition for early termination of the injunction. The Defendants were required to demonstrate over the term of the injunction that the costs of the injunction met a minimum threshold level pursuant to the settlement agreement, which level, initially $9.6 million, was reduced by the portion attributable to any Defendant in the case that no longer operated a skilled nursing facility during the injunction period.

In April 2011, five of the subsidiary Defendants transferred their operations to an unaffiliated third party skilled nursing facility operator (the “Former Humboldt County Facilities”). On November 14, 2012, the Defendants filed a motion to terminate the injunction and vacate the final judgment in the Humboldt County Action. Based upon compliance with the injunction through the requisite eighteen-month period, on December 21, 2012, the Superior Court of California, Humboldt County granted the Defendants' motion for early termination of the injunction, and the injunction has now ended with respect to the 17 California nursing facilities that the subsidiary Defendants still operate. In its order, the court determined that the injunction termination did not apply to the Former Humboldt County Facilities. However, the 2010 court-approved stipulation and order establishing the injunction provides that the injunction applies to the named defendants and any successor licensees of the applicable nursing facilities, but only if those successor licensees are affiliates of the named defendants. As noted above, the Former Humboldt County Facilities have been operated by an unaffiliated third party since April 2011. Therefore, under the terms of the injunction it does not apply to the Former Humboldt County Facilities unless an affiliate of the Defendants operates them. Pursuant to the BMFEA matter discussed below the California theories in this context were released in February 2013.

In the course of ongoing communications with the California Attorney General's Bureau of Medi-Cal Fraud & Elder Abuse ("BMFEA") related to the BMFEA matter discussed below, representatives of the California Attorney General and the U.S. Department of Justice ("DOJ") indicated an interest in pursuing an action under the False Claims Act ("FCA"). The DOJ expressed that it believes the company has FCA and other legal liabilities based upon the jury findings in the Humboldt County Action and otherwise related to staffing and perhaps other considerations related thereto. While the Company continues to cooperate with the government's evaluation of the matter, the Company views the government's apparent legal theories, including the False Claims Act theories, as lacking support in the established case law. The Company intends to vigorously defend any such action if brought.

BMFEA Matter

On April 15, 2009, two of Skilled's wholly-owned companies, Eureka Healthcare and Rehabilitation Center, LLC (“EHRC”), which at the time operated Eureka Healthcare and Rehabilitation Center (the "Facility"), and Skilled Healthcare, LLC (“SHC”), the administrative services provider for the Facility, were served with a search warrant that related to an investigation of the Facility by the BMFEA. The search warrant related to, among other things, records, property and information regarding certain enumerated patients of the Facility and covered the period from January 1, 2007 through the date of the search. On October 31, 2012, the BMFEA filed a criminal complaint (the “BMFEA Action”) in California Superior Court, Humboldt County against EHRC, SHC and Skilled alleging elder endangerment in nine misdemeanor counts under Penal Code Section 368(c) and two felony counts under Penal Code Section 368(b)(1) related to the care of certain patients at the Facility in 2008. No individuals were named as defendants in the complaint. The Company disputed the BMFEA's theories of alleged criminal liability and vigorously defended the action. The charges filed by the BMFEA, if proven, would have carried fines of up to $6,000 for each of the two felony counts and $2,000 for each of the nine misdemeanor counts. Convictions could also lead to exclusion from participation in federal healthcare programs under federal laws such as the Federal False Claims Act and the Civil Monetary Penalty Law, which could be materially adverse to Skilled's business. EHRC transferred its operations in April 2011 to an unaffiliated third party skilled nursing facility operator, and has not had any ongoing operations since that time.

On February 15, 2013, the parties reached a mutually satisfactory settlement of the BMFEA Action. Pursuant to the settlement: (i) Skilled and SHC were dismissed from the case with prejudice; (ii) EHRC pled no contest to a single misdemeanor count of elder endangerment under Penal Code Section 368(c) and agreed to pay a statutory fine of $680, pay $145,000 to the California Attorney General for its costs of investigation, and to serve two (2) years of summary probation; and (iii) the California Attorney General granted Skilled, SHC, and twenty-five (25) of their affiliates who currently or formerly operated skilled nursing facilities in California, a release of any potential liability to the California Attorney General under certain civil statutes based upon conduct occurring through the effective date of the settlement (including the FCA theories discussed under Humboldt County Litigation above). The court accepted EHRC's misdemeanor plea and the other relevant terms of the settlement on February 15, 2013. Notwithstanding EHRC's no contest plea to the single misdemeanor charge, the Company, SHC and EHRC continue to deny any liability for the allegations in the BMFEA Action. The release granted by the California Attorney General may not apply to the DOJ should it choose to pursue action against us.

Pursuant to the settlement, Skilled, SHC and their twenty (20) affiliated current California skilled nursing facility operators also agreed to a 2-year staffing agreement (the “2013 Staffing Agreement”) with the California Attorney General that essentially continues the requirements of the staffing-related injunction that was in effect until December 2012 as a result of the September 2010 settlement of the Humboldt County Action. Similar to the former staffing-related injunction, the 2013 Staffing Agreement requires the applicable nursing facility operators to provide a minimum of 3.2 nursing hours per patient day as required by applicable California regulation and to adhere to related regulatory requirements, as well as to submit to periodic compliance audits of the same. Unlike the former staffing-related injunction, however, the 2013 Staffing Agreement does not provide for early termination based on demonstrated compliance and does not contain a minimum spend requirement. To date the 2013 Staffing Agreement has not, and the Company does not believe it will, require the Company or its affected affiliates to incur any material staffing or other costs beyond what they would otherwise incur in the ordinary course of business.

Insurance

The Company maintains various insurance and self insurance for property and casualty including workers' compensation and general and professional liability. The Company believes that its insurance programs are adequate and appropriate, and where there has not been a direct transfer of risk to the insurance carrier, the Company recognizes a liability in the consolidated financial statements.

Workers' Compensation. The Company has maintained workers' compensation insurance where statutorily required. The commercial workers' compensation insurance purchased is loss sensitive in nature. As a result, the Company is responsible for adverse loss development. The Company self-insures the first unaggregated $1.0 million per workers' compensation claim for all operations. The Company has elected not to carry workers' compensation insurance in Texas as a qualified non-subscriber and may be liable for negligence claims that are asserted against it by its Texas-based employees. The Company recognizes a liability in its financial statements for its estimated self-insured workers' compensation risks. Historically, estimated liabilities have been sufficient to cover actual claims. Effective January 1, 2014 the Company self-insures its workers compensation for all its business operations, other than those based in Texas, through its wholly-owned insurance company based on actuarily determined estimates.

General and Professional Liability. The Company's services subject it to certain liability risks. Malpractice and similar claims may be asserted against the Company if its services are alleged to have resulted in patient injury or other harm. The Company is subject to malpractice and similar claims and other litigation in the ordinary course of business.

The Company purchases excess liability policies for claims in excess of its unaggregated self insured retention for all businesses. The Company also self-insures professional liability claims through its wholly-owned insurance company.

The Company's Hospice and home health businesses are insured under a separate general and professional liability insurance policy. The excess liability coverage referenced above is also applicable to this policy.

Actuarial Analysis. Changes in actuarial estimates are reviewed on a quarterly basis for professional and general liability claims and semi-annually for workers compensation claims. Variances in expected ultimate liabilities are recognized accordingly.

Employee Medical Insurance. Medical preferred provider option programs are offered as a component of the Company's employee benefits. The Company retains a self-insured amount up to a contractual stop loss amount of $0.25 million deductible for its preferred provider organization plan. All other employee medical plans are guaranteed cost plans.

A summary of the liabilities related to insurance risks are as follows (dollars in thousands):

	As of June 30, 2014:											As of December 31, 2013
	General and Professional			Employee Medical			Workers’ Compensation			Total		General and Professional			Employee Medical			Workers’ Compensation			Total
Current	$	7,620	(1)	$	2,079	(2)	$	6,213	(2)	$	15,912	$	8,228	(1)	$	2,446	(2)	$	3,178	(2)	$	13,852
Non-current	14,530			—			14,702			29,232		12,762			—			16,772			29,534
	$	22,150		$	2,079		$	20,915		$	45,144	$	20,990		$	2,446		$	19,950		$	43,386

(1) Included in accounts payable and accrued liabilities.

(2) Included in employee compensation and benefits.

Hallmark Indemnification

Hallmark, the Company's rehabilitation services subsidiary, provides physical, occupational and speech therapy services to various unaffiliated skilled nursing facilities. These unaffiliated skilled nursing facilities are reimbursed for these services from the Medicare Program and other third-party payors. Hallmark has indemnified these unaffiliated skilled nursing facilities from a portion of certain disallowances of these services. Additionally, to the extent a Recovery Auditor ("RA") or other regulatory authority or contractor is successful in making a claim for recoupment of revenue from any of these skilled nursing facilities, Hallmark will typically be required to indemnify them against their charges associated with this loss. No material indemnification payments were required to be made in the three and six months ended June 30, 2014 or 2013.

Financial Guarantees

Substantially of all Skilled's wholly-owned subsidiaries guarantee the Company's first lien senior secured credit facility, excluding the subsidiaries that are pledged as collateral for the ten mortgage loans insured by the U.S. Department of Housing and Urban Development Program ("HUD") and the ten facilities pledged to MidCap Financial as collateral for the MidCap Financial credit facility. These loans are discussed in Note 11, "Debt", below. The aforementioned guarantees are full and unconditional and joint and several. Other subsidiaries of Skilled that are not guarantors are considered minor.

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Summary of Significant Accounting Policies - Revenue and Accounts Receivable (Details) (USD $)	3 Months Ended			6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2011
Accounting Policies [Abstract]
Revenue cap adjustment	$ 900,000.0	$ 1,400,000		$ 900,000.0	$ 2,900,000
Revenue cap adjustment related to 2014 cap year	500,000			500,000
Revenue cap adjustment related to 2013 cap year	400,000	700,000		400,000	700,000
Revenue cap adjustment related to 2012 cap year			700,000			2,000,000
Revenue cap adjustment related to 2011 cap year							$ 200,000

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Fair Value Measurements - Narrative (Details) (USD $)	3 Months Ended		6 Months Ended			6 Months Ended		0 Months Ended			0 Months Ended				6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Jun. 30, 2014 Fair Value, Measurements, Recurring Level 3 Minimum	Jun. 30, 2014 Fair Value, Measurements, Recurring Level 3 Maximum	Jul. 01, 2011 Fair Value, Measurements, Recurring Altura Acquisition Level 3	Jun. 30, 2014 Fair Value, Measurements, Recurring Altura Acquisition Level 3	Jul. 01, 2011 Fair Value, Measurements, Recurring Altura Acquisition Level 3 Cash	Oct. 24, 2011 Fair Value, Measurements, Recurring Cornerstone Acquisition Level 3	Jun. 30, 2014 Fair Value, Measurements, Recurring Cornerstone Acquisition Level 3	Dec. 31, 2013 Fair Value, Measurements, Recurring Cornerstone Acquisition Level 3	Oct. 24, 2011 Fair Value, Measurements, Recurring Cornerstone Acquisition Level 3 Cash	Jun. 30, 2014 Fair Value, Measurements, Recurring Cornerstone Acquisition Level 3 Payment to Seller	Dec. 31, 2013 Fair Value, Measurements, Recurring A Better Care Home Health Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Business Acquisition, Contingent Consideration, Potential Cash Payment										$ 1,500,000				$ 1,500,000
Contingent consideration period								3 years			5 years
Fair value of contingent consideration									500,000			800,000	1,100,000			500,000
Payments to seller	(107,000)		(107,000)	(2,161,000)											300,000
Change in fair value of contingent consideration	(121,000)	(2,244,000)	(107,000)	(2,161,000)											100,000
Business acquisition, effective date of acquisition								Jul. 01, 2011			Oct. 24, 2011
Discount rate						200.00%	500.00%
Long-term debt, carrying value	$ 410,234,000		$ 410,234,000		$ 419,125,000

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 (collectively, the "Interim Financial Statements"), are unaudited. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted, as permitted under applicable U.S. Securities and Exchange Commission rules and regulations. Readers of the Interim Financial Statements should refer to the Company's audited consolidated financial statements and notes thereto (as updated by Note 3, "Summary of Significant Accounting Policies," in this filing), for the year ended December 31, 2013, which are included in the Company's 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Management believes that the Interim Financial Statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company's financial information in all material respects as of the dates and for the periods presented. The results of operations presented in the Interim Financial Statements are not necessarily indicative of operations to be expected for the entire year or any other period.

The accompanying Interim Financial Statements include the accounts of Skilled and its consolidated wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Estimates and Assumptions

Estimates and Assumptions

The interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which require the Company to consolidate company financial information and make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the Company’s interim financial statements relate to revenue, allowance for doubtful accounts, self-insured liability risks, income taxes, governmental investigation, and valuation of contingent consideration.

Revenue and Accounts Receivable

Revenue and Accounts Receivables

Revenue and accounts receivable are recorded on an accrual basis as services are performed at their estimated net realizable value. The Company derives a majority of its revenue from funds under federal Medicare and state Medicaid assistance programs, the continuation of which are dependent upon governmental policies and are subject to audit risk and potential recoupment.

Overall payments made by Medicare for hospice services are subject to an annual cap amount on a per hospice agency basis. Total Medicare payments received for services rendered during the applicable Medicare hospice cap year by each Medicare-certified agency during this period are compared to the cap amount for the relevant period. Payments in excess of the cap are subject to recoupment by Medicare. For the three months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $1.4 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the three months ended June 30, 2014, $0.5 million was related to the 2014 cap year and $0.4 million was related to the 2013 cap year. Of the $1.4 million recorded in the three months ended June 30, 2013, $0.7 million was related to the 2013 cap year and $0.7 million was related to the 2012 cap year. For the six months ended June 30, 2014 and 2013, the Company recorded hospice Medicare cap reserves of $0.9 million and $2.9 million, respectively, as adjustments to revenue. Of the $0.9 million recorded in the six months ended June 30, 2014, $0.5 million was related to the 2014 cap year and$0.4 million was related to the 2013 cap year. Of the $2.9 million recorded in the six months ended June 30, 2013, $0.7 million was related to the 2013 cap year, $2.0 million was related to the 2012 cap year, and $0.2 million was related to the 2011 cap year.

Notes Receivable

Notes Receivable

As of June 30, 2014 and December 31, 2013, net notes receivable were approximately $4.1 million and $2.0 million, respectively, of which $1.7 million and $1.5 million was reflected as current assets as of June 30, 2014 and December 31, 2013, with the remaining balances reflected as long-term assets. Interest rates on these notes approximated market rates as of the date the notes were originated.

As of June 30, 2014, two customers of the Company's rehabilitation therapy services business were responsible for 100% of the net notes receivable balance. The notes receivable, as well as the receivables from these customers, are secured by the assets of the customers as well as a personal guaranty by the principal owners of the customers. Additionally, the customers represented $8.5 million, or 43.6% of the net accounts receivable for the Company's rehabilitation therapy services business and approximately $19.3 million, or 41.7%, of the external revenue of the rehabilitation therapy services business for the six months ended June 30, 2014.

The notes receivable balance is stated net of an allowance for uncollectibility. At June 30, 2014, there was no note receivable reserve balance.

Recent Accounting Pronouncements

Recent Accounting Pronouncement

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, ("ASU 2014-08").  This ASU requires an entity to report disposed components or components held-for-sale in discontinued operations if such components represent a strategic shift that have or will have a significant effect on operations and financial results. Additionally, expanded disclosure about discontinued operations and disposals of significant components that do not qualify for discontinued operations presentation will be required. The adoption of ASU 2014-08 is effective prospectively for disposals that occur within annual periods beginning on or after December 15, 2014, with early adoption permitted. The Company is currently evaluating the impact to the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-08").  This ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The ASU is effective beginning in the first quarter of our fiscal year 2017. Early adoption is not permitted. The Company is currently evaluating the impact to the consolidated financial statements.

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Commitments and Contingencies Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Liabilities Related to Insurance Risks

A summary of the liabilities related to insurance risks are as follows (dollars in thousands):

	As of June 30, 2014:											As of December 31, 2013
	General and Professional			Employee Medical			Workers’ Compensation			Total		General and Professional			Employee Medical			Workers’ Compensation			Total
Current	$	7,620	(1)	$	2,079	(2)	$	6,213	(2)	$	15,912	$	8,228	(1)	$	2,446	(2)	$	3,178	(2)	$	13,852
Non-current	14,530			—			14,702			29,232		12,762			—			16,772			29,534
	$	22,150		$	2,079		$	20,915		$	45,144	$	20,990		$	2,446		$	19,950		$	43,386

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Stockholders' Equity Stock Compensation Expense for Awards and Options (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
General and Administrative Expense
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Allocated share-based compensation expense	$ 0.6	$ 0.1	$ 1.2	$ 0.9
Cost of Sales
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Allocated share-based compensation expense	$ 0.2	$ 0.2	$ 0.2	$ 0.8

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Property and Equipment Schedule of Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Property, Plant and Equipment [Abstract]
Land and land improvements	$ 62,370	$ 62,370
Buildings and leasehold improvements	324,121	320,923
Furniture and equipment	90,695	87,392
Construction in progress	8,349	8,621
Property, plant and equipment, gross	485,535	479,306
Less accumulated depreciation	(149,175)	(137,484)
Property, plant and equipment, net	$ 336,360	$ 341,822

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Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statement of Comprehensive Income [Abstract]
Net (loss) income	$ (2,780)	$ 1,523	$ (1,486)	$ 4,593
Other comprehensive (loss) income:
Unrealized loss on investment available for sale - net of income tax benefit of $9 for the three months ended June 30, 2013; net of income tax benefit of $10 for the six months ended June 30, 2013.		(14)		(16)
Reclassification adjustments:
Gain realized in net loss on investments available for sale - net of income tax expense of $17 for the three and six months ended June 30, 2014.	(28)	0	(28)
Interest expense on interest rate swap - net of income tax expense of $56 and $107 for the three and six months ended June 30, 2013.	0	87	0	169
Other comprehensive (loss) income, net of tax	(28)	73	(28)	153
Comprehensive (loss) income	$ (2,808)	$ 1,596	$ (1,514)	$ 4,746

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Discontinued Operations (Notes)

6 Months Ended

Jun. 30, 2014

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Discontinued Operations

On December 1, 2013, the Company disposed of two skilled nursing facilities, one owned facility in Texas and one leased facility in California. The results of operations of these facilities for all periods presented and the losses associated with the transaction have been classified as discontinued operations, net of tax, in the accompanying condensed consolidated statements of operations as the operations have been eliminated from the Company’s ongoing operations.

A summary of the discontinued operations for the periods presented is as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014		2013
Net operating revenues	$	—	$	3,500		$	—	$	7,317
Operating expenses	—		3,932			—		8,180
Loss from discontinued operations	—		(432		)	—		(863		)
Income tax benefit	—		(167		)	—		(334		)
Loss from discontinued operations	$	—	$	(265	)	$	—	$	(529	)

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2014

Equity [Abstract]

Schedule of Share-based Compensation, Restricted Stock Activity

During the year ended June 30, 2014, the following occurred with respect to restricted stock awards, restricted stock units, and performance stock awards under the Company’s existing plans (number of shares in thousands):

	Number of Shares		Weighted- Average Grant Date Fair Value
Non-vested balance at January 1, 2014	2,256		$	6.42
Granted	872		4.75
Vested	(322	)	4.51
Forfeited	(582	)	5.44
Non-vested balance at June 30, 2014	2,224		$	6.30

Schedule of Share-based Compensation, Stock Options, Activity

The following table summarizes stock option activity during the six months ended June 30, 2014 under the Skilled Healthcare Group, Inc. Amended and Restated 2007 Incentive Award Plan:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2014	794,645		$	8.54
Granted	—		$	—
Exercised	(160,548	)	$	5.91
Forfeited or cancelled	(157,083	)	$	9.55
Outstanding at June 30, 2014	477,014		$	9.09	4.65	$	—
Fully vested and expected to vest at June 30, 2014	475,956		$	9.10	4.65	$	—
Exercisable at June 30, 2014	456,491		$	9.15	4.53	$	—

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Business Segments Segment Reporting (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	$ 206,172	$ 209,405	$ 412,685	$ 423,702
Leased facility revenue			1,594	1,548
Intersegment revenue	206,979	210,192	414,279	425,250
Operating income (loss)			14,274	23,881
Interest expense, net of interest income	(7,643)	(8,622)	(15,639)	(17,185)
Other expense (income)	7	(32)	60	(62)
Equity in earnings of joint venture	92	472	638	960
Debt modification/retirement costs	(822)		(822)
Debt modification/retirement costs		(1,088)		(1,088)
Loss from continuing operations before provision from income taxes	(4,125)	2,927	(1,489)	6,506
Depreciation and amortization	6,034	5,902	12,120	11,800
Segment capital expenditures	2,711	3,580	6,261	5,981
Adjusted EBITDA	18,277	18,301	36,130	37,360
Adjusted EBITDAR	23,199	22,986	45,826	46,714
Long-Term Care Services
Segment Reporting Information [Line Items]
Net patient service revenue from external customers			322,850	318,608
Leased facility revenue			1,594	1,548
Operating income (loss)			23,920	25,289
Depreciation and amortization	5,520	5,428	11,061	10,802
Segment capital expenditures	2,469	3,365	5,307	5,562
Adjusted EBITDA	18,834	18,237	35,964	36,987
Adjusted EBITDAR	23,297	22,464	44,735	45,423
Therapy Services
Segment Reporting Information [Line Items]
Net patient service revenue from external customers			46,143	53,744
Leased facility revenue			0	0
Operating income (loss)			7,197	5,659
Depreciation and amortization	165	174	333	350
Segment capital expenditures	18	70	54	93
Adjusted EBITDA	4,056	2,879	7,530	6,010
Adjusted EBITDAR	4,056	2,879	7,530	6,010
Hospice and Home Health Services
Segment Reporting Information [Line Items]
Net patient service revenue from external customers			43,693	51,350
Leased facility revenue			0	0
Operating income (loss)			(3,208)	6,583
Depreciation and amortization	227	135	462	291
Segment capital expenditures	53	83	107	213
Adjusted EBITDA	1,461	2,017	3,863	5,219
Adjusted EBITDAR	1,920	2,483	4,788	6,137
Other
Segment Reporting Information [Line Items]
Leased facility revenue			0	0
Intersegment revenue				0
Operating income (loss)			(13,635)	(13,650)
Depreciation and amortization	122	165	264	357
Segment capital expenditures	171	62	793	113
Adjusted EBITDA	(6,074)	(4,832)	(11,227)	(10,856)
Adjusted EBITDAR	(6,074)	(4,840)	(11,227)	(10,856)
Elimination
Segment Reporting Information [Line Items]
Net patient service revenue from external customers			0	0
Leased facility revenue			0	0
Operating income (loss)			0	0
Depreciation and amortization	0	0	0	0
Segment capital expenditures	0	0	0	0
Adjusted EBITDA	0	0	0	0
Adjusted EBITDAR	0	0	0	0
Operating Segments
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	206,172	209,405
Leased facility revenue	807	787
Intersegment revenue	206,979	210,192	414,279	425,250
Operating income (loss)	4,241	12,197
Operating Segments | Long-Term Care Services
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	162,264	157,512
Leased facility revenue	807	787
Intersegment revenue	163,574	158,952	325,398	321,350
Operating income (loss)	12,950	12,608
Operating Segments | Therapy Services
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	23,076	26,637
Leased facility revenue	0	0
Intersegment revenue	37,142	40,655	74,044	82,934
Operating income (loss)	3,892	2,705
Operating Segments | Hospice and Home Health Services
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	20,832	25,256
Leased facility revenue	0	0
Intersegment revenue	20,832	25,256	43,693	51,350
Operating income (loss)	(5,192)	3,879
Operating Segments | Other
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	0	0	0	0
Leased facility revenue	0	0
Intersegment revenue	0	0	0
Operating income (loss)	(7,409)	(6,995)
Operating Segments | Elimination
Segment Reporting Information [Line Items]
Net patient service revenue from external customers	0	0
Leased facility revenue	0	0
Intersegment revenue	(14,569)	(14,671)	(28,855)	(30,384)
Operating income (loss)	0	0
Segment Reconciling Items
Segment Reporting Information [Line Items]
Intersegment revenue	0	0	0	0
Segment Reconciling Items | Long-Term Care Services
Segment Reporting Information [Line Items]
Intersegment revenue	503	653	954	1,194
Segment Reconciling Items | Therapy Services
Segment Reporting Information [Line Items]
Intersegment revenue	14,066	14,018	27,901	29,190
Segment Reconciling Items | Hospice and Home Health Services
Segment Reporting Information [Line Items]
Intersegment revenue	0	0	0	0
Segment Reconciling Items | Other
Segment Reporting Information [Line Items]
Intersegment revenue	0	0	0	0
Segment Reconciling Items | Elimination
Segment Reporting Information [Line Items]
Intersegment revenue	$ (14,569)	$ (14,671)	$ (28,855)	$ (30,384)

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Investment in Joint Venture

6 Months Ended

Jun. 30, 2014

Equity Method Investments and Joint Ventures [Abstract]

Investment in Joint Venture

Investment in Joint Venture

Since 1996, the Company had a 50% equity interest in APS - Summit Care Pharmacy, LLC, or APS - Summit Care, which is a company that serves the pharmaceutical needs of a limited number of the Company's affiliated Texas operations, as well as a number of other unaffiliated customers. The remaining 50% equity interest in APS - Summit Care is owned by an unaffiliated third party. APS - Summit Care operates a pharmacy in Austin, Texas, through which the Company's affiliated operations pay market value for prescription drugs and receives a 50% share of the net income related to the joint venture. The Company’s investment balance at June 30, 2014 and 2013 of $5.1 million and $6.0 million, respectively, is included in other assets in the accompanying condensed consolidated balance sheets. The following tables provide summarized information from the balance sheet and statement of earnings for APS - Summit Care as of June 30, 2014:

Statement of Earnings

(In thousands)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Sales, Net	$	3,391	$	4,267	$	6,082	$	6,941
Gross Profit	473		1,409		1,439		2,134
Net Income	$	75	$	897	$	802	$	1,563

Balance Sheet

(In thousands)

	June 30, 2014		December 31, 2013
Current Assets	$	2,485	$	3,518
Non-Current Assets	1,088		1,078
Current Liabilities	129		96
Non-Current Liabilities	$	—	$	—