10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

or

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

Commission File Number: 1-12040

SUN HEALTHCARE GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	13-4230695
(State of Incorporation)	(I.R.S. Employer Identification No.)

18831 Von Karman, Suite 400

Irvine, CA  92612

(949) 255-7100

(Address, zip code and telephone number of Registrant)

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  ý   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  ý 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    o	Accelerated filer    ý
Non-accelerated filer    o	Smaller reporting company    o
(Do not check if a smaller reporting company)

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

As of October 29, 2012, there were 25,538,944 shares of the Registrant’s $.01 par value Common Stock outstanding.

1

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Index

		Page Numbers
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets (unaudited)	3
	As of September 30, 2012
	As of December 31, 2011
	Consolidated Statements of Comprehensive Income (unaudited)	5
	For the three months ended September 30, 2012 and 2011
	For the nine months ended September 30, 2012 and 2011
	Consolidated Statements of Cash Flows (unaudited)	7
	For the three months ended September 30, 2012 and 2011
	For the nine months ended September 30, 2012 and 2011
	Notes to Consolidated Financial Statements (unaudited)	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	42
Item 4.	Controls and Procedures	43
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 6.	Exhibits	43
Signature		44

References throughout this document to the Company, “we,” “our” and “us” refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) contain “forward-looking” information as that term is defined by the Private Securities Litigation Reform Act of 1995 (the “Act”) and the federal securities laws.  Any statements that do not relate to historical or current facts or matters are forward-looking statements. Examples of forward-looking statements include all statements regarding our expectations with respect to our proposed merger transaction with Genesis HealthCare LLC, including the expected closing date of the proposed merger, expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, the impact of reductions in reimbursements and other changes in government reimbursement programs,  the scope, timing and effectiveness of our efforts to mitigate the impact on our business of the CMS Final Rule (described below), the outcome and costs of litigation, projected expenses and capital expenditures, growth opportunities, ability to refinance our indebtedness on favorable terms, plans and objectives of management for future operations, and compliance with and changes in governmental regulations.  You can identify some of the forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “may” and other similar expressions, although not all forward-looking statements contain these identifying words.

The forward-looking statements are based on the information currently available and are applicable only as of the date of this report. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements.  You are urged to carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results, including those made in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our other reports filed with the Securities and Exchange Commission.  The forward-looking statements are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the “safe harbor” provisions of the Act.  We caution you that any forward-looking statements made in this Form 10-Q are not guarantees of future performance and that you should not place undue reliance on any of such forward-looking statements, which speak only as of the date of this document.  There may be additional risks of which we are presently unaware or that we currently deem immaterial.  We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

_______________________

2

PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

ASSETS

(in thousands)

	September 30, 2012		December 31, 2011
Current assets:
Cash and cash equivalents	$	63,801	$	57,908
Restricted cash	14,252		15,706
Accounts receivable, net of allowance for doubtful accounts of $59,728
and $67,640 at September 30, 2012 and December 31, 2011, respectively	199,787		202,229
Prepaid expenses and other assets	27,323		29,075
Assets held for sale	4,946		—
Deferred tax assets	61,629		63,170
Total current assets	371,738		368,088
Property and equipment, net	143,288		148,298
Intangible assets, net	33,358		35,294
Goodwill	34,905		34,496
Restricted cash, non-current	354		353
Deferred tax assets	125,409		123,974
Other assets	40,792		45,163
Total assets	$	749,844	$	755,666

See accompanying notes.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited) (CONTINUED)

LIABILITIES AND STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

	September 30, 2012			December 31, 2011
Current liabilities:
Accounts payable	$	47,427		$	55,888
Accrued compensation and benefits	58,212			61,101
Accrued self-insurance obligations, current portion	58,273			57,810
Other accrued liabilities	47,602			43,139
Current portion of long-term debt and capital lease obligations	944			1,017
Total current liabilities	212,458			218,955
Accrued self-insurance obligations, net of current portion	158,224			157,267
Long-term debt and capital lease obligations, net of current portion	87,989			88,768
Unfavorable lease obligations, net	5,268			7,110
Other long-term liabilities	55,500			58,110
Total liabilities	519,439			530,210
Commitments and contingencies
Stockholders' equity:
Preferred stock of $.01 par value, authorized 3,333 shares,
zero shares issued and outstanding as of September 30, 2012
and December 31, 2011	—			—
Common stock of $.01 par value, authorized 41,667 shares,
25,538 and 25,146 shares issued and outstanding as of
September 30, 2012 and December 31, 2011, respectively	255			251
Additional paid-in capital	731,473			726,861
Accumulated deficit	(499,907		)	(500,427		)
Accumulated other comprehensive loss, net	(1,416		)	(1,229		)
Total stockholders' equity	230,405			225,456
Total liabilities and stockholders' equity	$	749,844		$	755,666

See accompanying notes.

4

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands, except per share data)

	For the Three Months Ended
	September 30, 2012			September 30, 2011
Total net revenues	$	460,470		$	468,676
Costs and expenses:
Operating salaries and benefits	259,379			263,932
Self-insurance for workers’ compensation and general and
professional liability insurance	15,237			14,545
Operating administrative expenses	10,635			12,962
Other operating costs	97,619			93,705
Center rent expense	36,647			35,952
General and administrative expenses	14,447			14,825
Depreciation and amortization	8,654			8,163
Provision for losses on accounts receivable	5,250			4,604
Interest, net of interest income of $94 and $103, respectively	4,458			4,834
Transaction costs	1,034			—
Loss on sale of assets, net	189			809
Restructuring costs	—			2,426
Loss on asset impairment	—			317,091
Total costs and expenses	453,549			773,848
Income (loss) before income taxes and discontinued operations	6,921			(305,172		)
Income tax expense	2,932			2,203
Income (loss) from continuing operations	3,989			(307,375		)
Loss from discontinued operations, net	(2,702		)	(2,031		)
Net income (loss)	$	1,287		$	(309,406	)
Other comprehensive loss, net of tax:
Loss from cash flow hedge, net of related tax benefit of $24 and $357, respectively	(36		)	(535		)
Other comprehensive loss, net of tax	(36		)	(535		)
Comprehensive income (loss)	$	1,251		$	(309,941	)
Basic earnings per common and common equivalent share:
Income (loss) from continuing operations	$	0.15		$	(11.73	)
Loss from discontinued operations, net	(0.10		)	(0.08		)
Net income (loss)	$	0.05		$	(11.81	)
Diluted earnings per common and common equivalent share:
Income (loss) from continuing operations	$	0.15		$	(11.73	)
Loss from discontinued operations, net	(0.10		)	(0.08		)
Net income (loss)	$	0.05		$	(11.81	)
Weighted average number of common and common
equivalent shares outstanding:
Basic	27,082			26,203
Diluted	27,082			26,203

See accompanying notes.

5

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands, except per share data)

	For the Nine Months Ended
	September 30, 2012			September 30, 2011
Total net revenues	$	1,376,105		$	1,405,558
Costs and expenses:
Operating salaries and benefits	779,976			789,874
Self-insurance for workers’ compensation and general and
professional liability insurance	43,744			43,643
Operating administrative expenses	34,744			39,333
Other operating costs	289,614			276,999
Center rent expense	109,546			107,394
General and administrative expenses	46,537			45,156
Depreciation and amortization	25,588			23,241
Provision for losses on accounts receivable	15,157			14,198
Interest, net of interest income of $229 and $243, respectively	13,297			14,688
Transaction costs	2,871			—
Loss on sale of assets, net	189			809
Restructuring costs	—			2,728
Loss on asset impairment	—			317,091
Total costs and expenses	1,361,263			1,675,154
Income (loss) before income taxes and discontinued operations	14,842			(269,596		)
Income tax expense	6,021			16,715
Income (loss) from continuing operations	8,821			(286,311		)
Loss from discontinued operations, net	(8,301		)	(5,036		)
Net income (loss)	$	520		$	(291,347	)
Other comprehensive loss, net of tax:
Loss from cash flow hedge, net of related tax benefit expense of $124 and $769, respectively	(263		)	(1,153		)
Other comprehensive loss, net of tax	(263		)	(1,153		)
Comprehensive income (loss)	$	257		$	(292,500	)
Basic earnings per common and common equivalent share:
Income (loss) from continuing operations	$	0.33		$	(11.00	)
Loss from discontinued operations, net	(0.31		)	(0.19		)
Net income (loss)	$	0.02		$	(11.19	)
Diluted earnings per common and common equivalent share:
Income (loss) from continuing operations	$	0.33		$	(11.00	)
Loss from discontinued operations, net	(0.31		)	(0.19		)
Net income (loss)	$	0.02		$	(11.19	)
Weighted average number of common and common
equivalent shares outstanding:
Basic	26,732			26,038
Diluted	26,732			26,038

See accompanying notes.

6

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Cash flows from operating activities:
Net income (loss)	$	1,287		$	(309,406	)	$	520		$	(291,347	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities, including discontinued operations:
Depreciation and amortization	8,654			8,335			25,740			23,879
Amortization of favorable and unfavorable lease intangibles	(507		)	(492		)	(1,527		)	(1,466		)
Provision for losses on accounts receivable	5,403			4,975			15,866			15,479
Loss on sale of assets, including discontinued operations, net	188			1,925			257			1,925
Loss on asset impairment	—			317,091			—			317,091
Stock-based compensation expense	1,233			2,359			5,041			5,160
Deferred taxes	386			(105		)	229			9,871
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	7,641			23			(13,568		)	(12,555		)
Restricted cash	78			52			1,453			(1,876		)
Prepaid expenses and other assets	1,800			(1,600		)	4,125			(1,410		)
Accounts payable	2,756			1,595			(7,358		)	(1,906		)
Accrued compensation and benefits	(5,666		)	(11,717		)	(2,889		)	(12,298		)
Accrued self-insurance obligations	3,821			3,618			1,420			(294		)
Other accrued liabilities	(36		)	2,104			4,386			1,158
Other long-term liabilities	(667		)	(880		)	(2,920		)	(2,098		)
Net cash provided by operating activities	26,371			17,877			30,775			49,313
Cash flows from investing activities:
Capital expenditures	(6,722		)	(14,190		)	(24,551		)	(32,346		)
Proceeds from sale of assets	781			1,809			781			1,809
Acquisitions, net of cash acquired	—			—			(260		)	(356		)
Net cash used for investing activities	(5,941		)	(12,381		)	(24,030		)	(30,893		)
Cash flows from financing activities:
Principal repayments of long-term and capital lease obligations	(277		)	(2,806		)	(852		)	(8,404		)
Net cash used for financing activities	(277		)	(2,806		)	(852		)	(8,404		)
Net increase in cash and cash equivalents	20,153			2,690			5,893			10,016
Cash and cash equivalents at beginning of period	43,648			88,489			57,908			81,163
Cash and cash equivalents at end of period	$	63,801		$	91,179		$	63,801		$	91,179

See accompanying notes.

7

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1)  Nature of Business

References throughout this document to the Company include Sun Healthcare Group, Inc. and our consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this report has been written in the first person. In this document, the words “we,” “our” and “us” refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.

Business

Our subsidiaries provide long-term, post-acute and related specialty healthcare in the United States.  We operate through three principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, and (iii) medical staffing services.  Inpatient services represent the most significant portion of our business.  Our continuing operations include 190 healthcare centers in 23 states as of September 30, 2012.

Pending Merger with Genesis HealthCare LLC

On June 20, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Genesis HealthCare LLC, a Delaware limited liability company (“Genesis”), and Jam Acquisition LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of Genesis (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into us, with us continuing as the surviving corporation and an indirect wholly-owned subsidiary of Genesis (the “Merger”). Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock, other than treasury shares, shares held by us (other than shares held in a fiduciary capacity that are beneficially owned by third parties), Genesis, Merger Sub or any wholly-owned subsidiary of Genesis or us and shares held by stockholders who perfect their appraisal rights under Delaware law, will be converted into the right to receive $8.50 in cash, without interest (the “Merger Consideration”). At the effective time of the Merger, outstanding equity awards with respect to shares of our common stock (whether vested or unvested) will be canceled and converted into the right to receive a cash amount equal to the difference between the Merger Consideration and the exercise price, if any, of such awards. We anticipate that the total amount of funds necessary to pay the aggregate Merger Consideration will be approximately $230 million, not including refinancing of our existing indebtedness or payment of related transaction fees and expenses.

In connection with the proposed Merger, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on August 8, 2012. Our stockholders approved the proposed Merger at a special stockholders meeting on September 5, 2012.  The transaction is expected to close in December 2012 subject to the satisfaction of customary closing conditions, including, among other things, (i) the receipt of remaining regulatory approvals, (ii) the absence of any law or order prohibiting the consummation of the Merger, (iii) subject to certain materiality exceptions, the accuracy of our representations and warranties in the Merger Agreement, (iv) the performance in all material respects of our covenants in the Merger Agreement, (v) the absence of any material adverse effect on us between June 20, 2012 and consummation of the Merger and (vi) compliance by us with our obligations under certain third party contracts.

Transaction Costs

During the three and nine months ended September 30, 2012, we incurred $1.0 million and $2.9 million, respectively, of transaction costs in connection with the pending merger with Genesis. These costs consist primarily of legal fees and financial advisory fees.

Other Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with our customary accounting practices and accounting principles generally accepted in the United States (“GAAP”) for interim financial statements.  In our opinion, the accompanying interim consolidated financial statements are a fair statement of our financial position at September 30, 2012, and our consolidated results of operations and cash flows for the three and nine month periods ended September 30, 2012 and 2011.  These statements are unaudited, and certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and

8

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

regulations of the Securities and Exchange Commission.  The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of only normal recurring items.  Readers of these statements should refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of significant contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include determination of impairment for goodwill and other long-lived assets, third-party payor settlements, allowances for doubtful accounts, self-insurance obligations, loss accruals and income taxes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

The Financial Accounting Standards Board issued an Accounting Standards Update in June 2011 regarding the presentation of comprehensive income within financial statements.  GAAP now requires that comprehensive income and its components of net income and other comprehensive income be presented in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive statements.  This new guidance is now effective for us and our accompanying consolidated financial statements have been presented with one single continuous statement of comprehensive income.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the 2012 financial statement presentation.  We have reclassified the results of operations of nine skilled nursing centers of our Inpatient Services segment (see Note 4 – “Discontinued Operations”) for all periods presented to discontinued operations within the consolidated statements of comprehensive income, in accordance with GAAP.

(2)Long-Term Debt, Capital Lease Obligations and Hedging Arrangements

Long-term debt and capital lease obligations consisted of the following as of the periods indicated (in thousands):

	September 30, 2012			December 31, 2011
Revolving loans	$	—		$	—
Mortgage note payable due monthly through 2014,
interest at a rate of 8.5%, collateralized by real property
with carrying values totaling $0.7 million	1,498			2,076
Term loans	87,298			87,389
Capital leases	137			320
Total long-term obligations	88,933			89,785
Less amounts due within one year	(944		)	(1,017		)
Long-term obligations, net of current portion	$	87,989		$	88,768

The scheduled or expected maturities of long-term obligations as of September 30, 2012, were as follows (in thousands):

For the twelve months ending September 30:
2013	$	944
2014	691
2015	—
2016	—
2017	87,298
	$	88,933

We manage interest expense using a mix of fixed and variable rate debt, and, to help manage borrowing costs, we may enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount.   We also may enter into interest rate cap agreements that effectively limit the maximum interest rate that we pay on an agreed to notional principal

9

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

amount.  We use interest rate hedges to manage interest rate risk related to borrowings.  Our intent is to only enter into such arrangements that qualify for hedge accounting treatment in accordance with GAAP.  Accordingly, we designate all such arrangements as cash-flow hedges and perform initial and quarterly effectiveness testing using the hypothetical derivative method.  To the extent that such arrangements are effective hedges, changes in fair value are recognized through other comprehensive income.  Ineffectiveness, if any, would be recognized in earnings.

Our credit agreement requires that at least 50% of our term loans be subject to at least a three-year hedging agreement. To satisfy this requirement, we executed two hedging instruments on January 18, 2011: a two-year interest rate cap and a two-year “forward starting” interest rate swap.  The two-year interest rate cap limits our exposure to increases in interest rates for $82.5 million of debt through December 31, 2012.  This cap is effective when LIBOR rises above 1.75%, effectively fixing the interest rate on $82.5 million of our term loans at 8.75% through December 31, 2012.  The fee for this interest rate cap arrangement was $0.3 million, which will be amortized to interest expense over the life of the arrangement.  The two-year “forward starting” interest rate swap effectively converts the interest rate on $82.5 million of our term loans to a fixed rate from January 1, 2013 through December 31, 2014.  LIBOR is fixed at 3.185%, making the all-in rate effectively a fixed 10.185% for this portion of the term loans.  There was no fee for this swap agreement.  Both arrangements qualify for hedge accounting treatment.

The fair values of our hedging agreements as presented in the consolidated balance sheets are as follows (in thousands):

	Derivatives
	September 30, 2012			December 31, 2011
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:	Other Long-Term			Other Long-Term
Interest rate hedging agreements	Liabilities	$	2,359	Liabilities	$	2,049

The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the three months ended September 30 is as follows (in thousands):

	Amount of Loss in Other Comprehensive Loss				Gain Reclassified from Accumulated Other Comprehensive Loss to Income (ineffective portion)
	2012		2011		2012		2011
Derivatives designated as cash flow hedges:
Interest rate hedging agreements	$	36	$	535	$	—	$	—

The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the nine months ended September 30 is as follows (in thousands):

	Amount of Loss in Other Comprehensive Loss				Gain Reclassified from Accumulated Other Comprehensive Income to Income (ineffective portion)
	2012		2011		2012		2011
Derivatives designated as cash flow hedges:
Interest rate hedging agreements	$	263	$	1,153	$	—	$	—

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(3)Fair Value of Financial Instruments

The estimated fair values of our financial instruments were as follows (in thousands):

	September 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	63,801	$	63,801	$	57,908	$	57,908
Restricted cash	$	14,606	$	14,606	$	16,059	$	16,059
Long-term debt and capital lease obligations,
including current portion	$	88,933	$	88,975	$	89,785	$	74,545
Interest rate hedging agreements	$	2,359	$	2,359	$	2,049	$	2,049

The cash and cash equivalents and restricted cash carrying amounts approximate fair value because of the short maturity of these instruments. At September 30, 2012 and December 31, 2011, the fair value of our long-term debt, including current maturities, and our interest rate hedging agreements was based on estimates using present value techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk.

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

Level 1:     Unadjusted quoted market prices in active markets for identical assets or liabilities.

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

Level 3:    Unobservable inputs for the asset or liability.

We endeavor to utilize the best available information in measuring fair value.  The following tables summarize the valuation of our financial instruments by the above pricing levels as of September 30, 2012 and December 31, 2011, respectively (in thousands):

	September 30, 2012
	Total	Unadjusted Quoted Market Prices (Level 1)	Significant Other Observable Inputs (Level 2)
Interest rate hedging agreements – liability	$2,359	$—	$2,359

	December 31, 2011
	Total	Unadjusted Quoted Market Prices (Level 1)	Significant Other Observable Inputs (Level 2)
Interest rate hedging agreements - liability	$2,049	$—	$2,049

We currently have no other financial instruments subject to fair value measurement on a recurring basis. The fair value for our cash and cash equivalents and restricted cash disclosed above were determined by Level 1 valuation techniques and our long-term debt and capital lease obligations fair value above was determined by Level 2 valuation techniques.

11

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(4)Discontinued Operations

The results of operations of assets to be disposed of, disposed assets and the losses related to these divestitures have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of comprehensive income as their operations and cash flows have been (or will be) eliminated from our ongoing operations and we will not have any significant continuing involvement in their operations after their disposal.

During the nine months ended September 30, 2012, we developed plans to dispose of eight skilled nursing centers and one assisted living center, which are classified as discontinued operations. The disposal plans for these centers involves the sale of the centers to unaffiliated third-party operators. All of these centers are located in either the Oklahoma or the Rhode Island markets. All of the centers described above were formerly part of our Inpatient Services segment, and their historical results have been reclassified to discontinued operations for all periods presented in accordance with GAAP.  As of September 30, 2012, the $4.9 million in assets held for sale for these centers consisted of (i) a net carrying amount of $3.2 million of property and equipment, (ii) $1.2 million of other non-current assets and (iii) $0.5 million of prepaid expenses and other assets.

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

	For the Three Months Ended
	September 30, 2012									September 30, 2011
	Inpatient Services			Other			Total			Inpatient Services			Other			Total
Net operating revenues	$	12,330		$	—		$	12,330		$	17,998		$	—		$	17,998
Loss from discontinued operations, net (1)	$	(2,690	)	$	(12	)	$	(2,702	)	$	(2,020	)	$	(11	)	$	(2,031	)

(1) Net of related tax benefit of $1,727 and $1,313, respectively

	For the Nine Months Ended
	September 30, 2012									September 30, 2011
	Inpatient Services			Other			Total			Inpatient Services			Other			Total
Net operating revenues	$	42,631		$	—		$	42,631		$	57,676		$	—		$	57,676
Loss from discontinued operations, net (1)	$	(8,283	)	$	(18	)	$	(8,301	)	$	(5,007	)	$	(29	)	$	(5,036	)

(1) Net of related tax benefit of $4,378 and $3,276, respectively

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(5)  Commitments and Contingencies

(a) Insurance

We self-insure for certain insurable risks, including general and professional liabilities, workers' compensation liabilities and employee health insurance liabilities, through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary by the states in which we operate. There is a risk that amounts funded to our self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments.  This liability includes an estimate of the development of reported losses and losses incurred but not reported.  Provisions for changes in insurance reserves are made in the period of the related coverage.  An independent actuarial analysis is prepared twice a year to assist management in determining the adequacy of the self-insurance obligations booked as liabilities in our financial statements.  The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. Any adjustments resulting from such reviews are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

We evaluate the adequacy of our self-insurance reserves on a quarterly basis and perform detailed actuarial analyses semi-annually in the second and fourth quarters. The analyses use generally accepted actuarial methods in evaluating the workers’ compensation reserves and general and professional liability reserves.  For both the workers’ compensation reserves and the general and professional liability reserves, those methods include reported and paid loss development methods, expected loss method and the reported and paid Bornhuetter-Ferguson methods.  Reported loss methods focus on development of case reserves for incurred losses through claims closure.  Paid loss methods focus on development of claims actually paid to date.  Expected loss methods are based upon an anticipated loss per unit of measure.  The Bornhuetter-Ferguson method is a combination of loss development methods and expected methods.

The foundation for most of these methods is our actual historical reported and/or paid loss data, over which we have effective internal controls.  We utilize third-party administrators (“TPAs”) to process claims and to provide us with the data utilized in our semi-annual actuarial analyses.  The TPAs are under the oversight of our in-house risk management and legal functions.  The purpose of these functions is to properly administer the claims so that the historical data is reliable for estimation purposes.  Case reserves, which are approved by our legal and risk management departments, are determined based on our estimate of the ultimate settlement of individual claims.  In instances where our historical data are not statistically credible, stable, or mature, we supplement our experience with skilled nursing industry benchmark reporting and payment patterns.

The use of multiple methods tends to eliminate any biases that one particular method might have.  Management’s judgment based upon each method’s inherent limitation is applied when weighting the results of each method.  The results of each of the methods are estimates of ultimate losses which include the case reserves plus an estimate for future development of these reserves based on past trends, and an estimate for losses incurred but not reported. These results are compared by accident year, and an estimated unpaid loss and allocated loss adjustment expense is determined for the open accident years based on judgment reflecting the range of estimates produced by the methods.

13

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Activity in our professional liability and workers’ compensation self-insurance reserves as of and for the periods ended September 30, 2012 and 2011 is as follows (in thousands):

	For the Three Months Ended September 30, 2012									For the Nine Months Ended September 30, 2012
	Professional Liability			Workers’ Compensation			Total			Professional Liability			Workers’ Compensation			Total
Gross balance, beginning of period	$	118,506		$	87,942		$	206,448		$	120,856		$	87,241		$	208,097
Less: anticipated insurance recoveries	(2,388		)	(22,268		)	(24,656		)	(2,390		)	(21,930		)	(24,320		)
Net balance, beginning of period	$	116,118		$	65,674		$	181,792		$	118,466		$	65,311		$	183,777
Current year provision, continuing operations	8,135			7,102			15,237			23,770			19,974			43,744
Current year provision, discontinued operations	467			326			793			1,501			1,177			2,678
Claims paid, continuing operations	(4,819		)	(3,775		)	(8,594		)	(17,933		)	(12,678		)	(30,611		)
Claims paid, discontinued operations	(1,664		)	(613		)	(2,277		)	(5,847		)	(1,598		)	(7,445		)
Amounts paid for administrative services and other	(649		)	(1,674		)	(2,323		)	(2,369		)	(5,146		)	(7,515		)
Net balance, end of period	$	117,588		$	67,040		$	184,628		$	117,588		$	67,040		$	184,628
Plus: anticipated insurance recoveries	2,388			22,268			24,656			2,388			22,268			24,656
Gross balance, end of period	$	119,976		$	89,308		$	209,284		$	119,976		$	89,308		$	209,284

	For the Three Months Ended September 30, 2011									For the Nine Months Ended September 30, 2011
	Professional Liability			Workers’ Compensation			Total			Professional Liability			Workers’ Compensation			Total
Gross balance, beginning of period	$	109,315		$	96,186		$	205,501		$	113,971		$	96,585		$	210,556
Less: anticipated insurance recoveries	(2,273		)	(26,150		)	(28,423		)	(2,100		)	(28,100		)	(30,200		)
Net balance, beginning of period	$	107,042		$	70,036		$	177,078		$	111,871		$	68,485		$	180,356
Current year provision, continuing operations	7,664			6,881			14,545			23,012			20,631			43,643
Current year provision, discontinued operations	482			388			870			1,431			1,180			2,611
Claims paid, continuing operations	(6,382		)	(3,709		)	(10,091		)	(24,174		)	(12,425		)	(36,599		)
Claims paid, discontinued operations	(604		)	(515		)	(1,119		)	(2,330		)	(1,378		)	(3,708		)
Amounts paid for administrative services and other	(788		)	(1,718		)	(2,506		)	(2,396		)	(5,130		)	(7,526		)
Net balance, end of period	$	107,414		$	71,363		$	178,777		$	107,414		$	71,363		$	178,777
Plus: anticipated insurance recoveries	2,273			26,150			28,423			2,273			26,150			28,423
Gross balance, end of period	$	109,687		$	97,513		$	207,200		$	109,687		$	97,513		$	207,200

    The anticipated insurance recoveries relate primarily to our workers’ compensation programs associated with policy years 1996 through 2001 where the claim losses have exceeded the policies' aggregate retention limits. Obligations above these retention limits are covered by our excess insurance carriers, which all have carrier ratings of at least “A,” “XIV” or better.

14

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

A summary of the assets and liabilities related to insurance risks at September 30, 2012 and December 31, 2011 is as indicated below (in thousands):

	September 30, 2012							December 31, 2011
	Professional Liability		Workers’ Compensation		Total		| |	Professional Liability		Workers’ Compensation		Total
Assets:							|
Restricted cash (1)							|
Current	$	5,725	$	8,330	$	14,055	|	$	6,254	$	9,332	$	15,586
Non-current	—		—		—		|	—		—		—
	$	5,725	$	8,330	$	14,055	|	$	6,254	$	9,332	$	15,586
							|
Anticipated insurance recoveries (2)							|
Current	$	483	$	2,820	$	3,303	|	$	524	$	2,730	$	3,254
Non-current	1,905		19,448		21,353		|	1,866		19,200		21,066
	$	2,388	$	22,268	$	24,656	|	$	2,390	$	21,930	$	24,320
Total Assets	$	8,113	$	30,598	$	38,711	|	$	8,644	$	31,262	$	39,906
Liabilities:							|
Self-insurance liabilities (3)(4)							|
Current	$	29,442	$	21,618	$	51,060	|	$	28,758	$	22,074	$	50,832
Non-current	90,534		67,690		158,224		|	92,099		65,168		157,267
Total Liabilities	$	119,976	$	89,308	$	209,284	|	$	120,857	$	87,242	$	208,099

(1) Total restricted cash includes cash collateral deposits posted and other cash deposits held by third parties.  Total restricted cash above excludes $551 and $473 at September 30, 2012 and December 31, 2011, respectively, held for bank collateral, various mortgages, bond payments and capital expenditures on HUD-insured buildings.

(2) Anticipated insurance recovery assets are presented as Other Assets (both current and long-term) in our September 30, 2012 and December 31, 2011 consolidated balance sheets.  

(3) Total self-insurance liabilities above exclude $7,213 and $6,978 at September 30, 2012 and December 31, 2011, respectively, related to our employee health insurance liabilities.

(4) Total self-insurance liabilities for workers’ compensation claims are collateralized, in addition to the restricted cash, by letters of credit of $57,438 as of September 30, 2012 and $55,335 as of December 31, 2011.

(b)  Litigation

Between June 27, 2012 and July 16, 2012, we, the members of our Board of Directors, Genesis and Merger Sub were named as defendants in connection with the transactions contemplated by the Merger Agreement in four separate purported class action lawsuits that were filed in the Superior Court of the State of California, County of Orange and in a purported class action lawsuit filed in the Court of Chancery of the State of Delaware. The Delaware lawsuit was subsequently dismissed without prejudice and the Delaware plaintiff then filed a complaint in the Superior Court of the State of California, County of Orange on July 31, 2012. On August 3, 2012, the parties to the initial four California lawsuits executed a stipulation to consolidate the first four California actions, including any subsequently filed actions with similar allegations relating to the transaction (including the action filed on July 31, 2012). The amended complaint filed in the purported consolidated action alleges, among other things, that our directors breached their fiduciary duties to our stockholders in entering into the Merger Agreement pursuant to an unfair process, and that we, Genesis and Merger Sub aided and abetted the alleged breaches of fiduciary duties. In addition, the complaint filed on July 31, 2012 alleges that the preliminary proxy statement filed by Sun on July 12, 2012 omitted or misrepresented material information. The lawsuits sought, among other things, to enjoin consummation of the Merger.

In order to minimize the expense of defending the lawsuits, to avoid the risk of delaying or adversely affecting the Merger and the related transactions and to provide additional information to our stockholders at a time and in a manner that would not cause any delay of the special meeting or the Merger, on August 29, 2012, we entered into a memorandum of understanding with

15

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

the plaintiffs regarding the terms of a proposed settlement of the lawsuits, which would include the dismissal with prejudice of all claims against all of the defendants. Pursuant to the memorandum of understanding, Sun agreed to provide certain additional disclosures, which were included in a proxy supplement filed with the SEC on August 29, 2012. The proposed settlement is subject to customary conditions, including the execution of an appropriate stipulation of settlement and court approval following notice to Sun's stockholders. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding. The proposed settlement will not affect the amount of the Merger Consideration that our stockholders are entitled to receive in the Merger.

We are a party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of our business, including claims that our services have resulted in injury or death to the residents of our centers and claims relating to employment and commercial matters.  The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties.  Although we intend to vigorously defend ourselves in these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows. In certain states in which we have operations, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions. There can be no assurance that we will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.

We operate in an industry that is extensively regulated. As such, in the ordinary course of business, we are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, the industries in which we operate are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is found to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief; and reimbursement authorities could also seek the suspension or exclusion of the provider or individual from participation in their program. We believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations or cash flows.

In November 2010, a jury verdict was rendered in a Kentucky state court against us for $2.75 million in compensatory damages and $40 million in punitive damages. On February 25, 2011, the trial court judge reduced the punitive damage award to $24.75 million. The case involves claims for professional negligence resulting in wrongful death. We disagree with the jury's verdict and believe that it is not supported by the facts of the case or applicable law. Our appeal is currently pending with the Kentucky Court of Appeals. We believe our reserves are adequate for this matter.

(c)  Other Inquiries

From time to time, fiscal intermediaries and Medicaid agencies examine cost reports filed by predecessor operators of our skilled nursing centers. If, as a result of any such examination, it is concluded that overpayments to a predecessor operator were made, we, as the current operator of such centers, may be held financially responsible for such overpayments. At this time, we are unable to predict the outcome of any existing or future examinations.

(d)  Genesis Termination Fee

The Merger Agreement contains customary representations and warranties and pre-closing covenants. It contains termination provisions for each of us and Genesis, and provides that in certain specified circumstances, we must pay Genesis a termination fee equal to $6.9 million and up to $1.0 million of reasonable, out-of-pocket expenses incurred by Genesis in connection with the Merger Agreement.

16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(6)  Income Taxes

The provision for income taxes of $2.9 million and $6.0 million for the three and nine months ended September 30, 2012, respectively, results in an effective tax rate of approximately 42% and 41%, respectively. The provision for income taxes was $2.2 million and $16.7 million for the three and nine months ended September 30, 2011, respectively. Excluding the impact of the $317.1 million loss on asset impairment and its related $1.8 million income tax benefit, the effective tax rate would have been approximately 33% and 39% for the three and nine months ended September 30, 2011, respectively. The rates for 2012 and 2011 differ from the statutory tax rate of 35% primarily due to state taxes.

The realization of our deferred tax assets is dependent upon generation of taxable income during periods in which deductions and/or credits can be utilized.  As a result, we consider the level of historical taxable income, historical non-recurring credits and charges, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income in determining the amount of the valuation allowance.  The valuation allowance of $17.9 million at September 30, 2012 and December 31, 2011 relates primarily to state net operating loss (“NOL”) carryforwards and other deferred tax assets for which realization is uncertain.

In evaluating the need to establish a valuation allowance on our net deferred tax assets, all items of positive evidence (e.g., future sources of taxable income, including the ability to reliably forecast and to continue our mitigation initiatives implemented in 2011) and negative evidence (e.g., impact of the Centers for Medicare and Medicaid Services ("CMS") final rule for skilled nursing facilities for the 2012 federal fiscal year, which commenced on October 1, 2011 (the "CMS Final Rule") and subsequent impairment of goodwill in 2011) were considered.  We were in a cumulative pre-tax book loss of approximately $217 million for the three-year period ended December 31, 2011.  However, because approximately $324 million of the book expenses (principally related to our 2011 non-cash loss on asset impairment for goodwill and other intangibles) were not deductible for tax purposes, we generated taxable income and utilized existing net operating loss carryforwards in each of the last three years.  As a result of the negative impact of the CMS Final Rule on our business, we commenced a broad based mitigation initiative in 2011, which includes infrastructure cost reductions. Our ability to generate sufficient future taxable income to realize our deferred tax assets is dependent on our ability to continue our mitigation initiatives. Based upon our current estimates of future taxable income, we believe that we will more likely than not realize our net deferred tax assets.  However, if we are unable to continue realizing enough savings through our mitigation initiative to offset the negative impact of the CMS Final Rule, we may be required to increase our valuation allowance in future periods.

After consideration of the November 2010 restructuring of our former parent company, which, among other matters resulted in Sabra Health Care REIT, Inc. holding substantially all of our former parent’s owned real property, and utilization of NOL carryforwards through 2011, the Internal Revenue Code (“IRC”) Section 382 annual base limitation to be applied to our tax attribute carryforwards is approximately $7.4 million. Accordingly, our NOL and tax credit carryforwards have been reduced to take into account this limitation and the respective carryforward periods for these tax attributes.  As a result of unused IRC Section 382 limitations from prior years and post-ownership change NOLs, we estimate there is approximately $47.0 million of NOLs which can be used to offset U.S. taxable income in 2012.  Considering annual IRC Section 382 limitations and built-in gains, we estimate a total of approximately $144.9 million of utilizable NOL carryforwards to offset taxable income in 2012 and future years.

17

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(7)  Segment Information

We operate predominantly in the long-term care segment of the healthcare industry. We are a provider of long-term, sub-acute and related ancillary care services to nursing home patients.  Our reportable segments are composed of operating segments, which are aggregated, comprising strategic business units that provide different products and services. They are managed separately because each business has different marketing strategies due to differences in types of customers, distribution channels and capital resource needs.  More complete descriptions and accounting policies of the segments are described in Note 13 – “Segment Information” and  Note 2 – “Summary of Significant Accounting Policies” of our 2011 Form 10-K.  The following tables summarize, for the periods indicated, operating results and other financial information, by business segment (in thousands):

As of and for the
Three Months Ended
September 30, 2012
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	409,750		$	29,032	$	21,686	$	2		$	—		$	460,470
Intersegment revenues	—			31,885		432		—			(32,317		)	—
Total net revenues	409,750			60,917		22,118		2			(32,317		)	460,470
Operating salaries and benefits	191,048			51,809		16,522		—			—			259,379
Self-insurance for workers’ compensation and
general and professional liability insurance	14,237			601		335		64			—			15,237
Other operating costs	124,858			2,130		2,948		—			(32,317		)	97,619
General and administrative expenses(1)	8,523			1,514		596		14,449			—			25,082
Provision for losses on
accounts receivable	4,758			374		118		—			—			5,250
Segment operating income (loss)	$	66,326		$	4,489	$	1,599	$	(14,511	)	$	—		$	57,903
Center rent expense	36,323			154		170		—			—			36,647
Depreciation and amortization	7,276			267		191		920			—			8,654
Interest, net	(53		)	—		—		4,511			—			4,458
Net segment income (loss)	$	22,780		$	4,068	$	1,238	$	(19,942	)	$	—		$	8,144
Identifiable segment assets	$	381,223		$	17,605	$	19,806	$	298,364		$	20,915		$	737,913
Goodwill	$	30,297		$	75	$	4,533	$	—		$	—		$	34,905
Segment capital expenditures	$	6,081		$	200	$	40	$	401		$	—		$	6,722

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

18

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

As of and for the
Three Months Ended
September 30, 2011
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	418,097		$	29,568	$	20,996	$	15		$	—		$	468,676
Intersegment revenues	—			32,791		757		—			(33,548		)	—
Total net revenues	418,097			62,359		21,753		15			(33,548		)	468,676
Operating salaries and benefits	193,403			54,298		16,231		—			—			263,932
Self-insurance for workers’ compensation and
general and professional liability insurance	13,501			633		344		67			—			14,545
Other operating costs	121,890			2,374		2,989		—			(33,548		)	93,705
General and administrative expenses(1)	10,112			2,309		540		14,826			—			27,787
Provision for losses on
accounts receivable	4,460			73		71		—			—			4,604
Segment operating income (loss)	$	74,731		$	2,672	$	1,578	$	(14,878	)	$	—		$	64,103
Center rent expense	35,642			140		170		—			—			35,952
Depreciation and amortization	6,770			236		187		970			—			8,163
Interest, net	(33		)	—		—		4,867			—			4,834
Net segment income (loss)	$	32,352		$	2,296	$	1,221	$	(20,715	)	$	—		$	15,154
Identifiable segment assets	$	384,576		$	16,254	$	20,039	$	343,550		$	20,881		$	785,300
Goodwill	$	31,071		$	75	$	4,533	$	—		$	—		$	35,679
Segment capital expenditures	$	12,934		$	149	$	63	$	1,044		$	—		$	14,190

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

19

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

As of and for the
Nine Months Ended
September 30, 2012
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services			Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	1,220,673		$	88,858	$	66,559		$	15		$	—		$	1,376,105
Intersegment revenues	—			98,152		1,982			—			(100,134		)	—
Total net revenues	1,220,673			187,010		68,541			15			(100,134		)	1,376,105
Operating salaries and benefits	570,169			158,170		51,637			—			—			779,976
Self-insurance for workers’ compensation and
general and professional liability insurance	40,683			1,820		1,049			192			—			43,744
Other operating costs	374,346			6,991		8,411			—			(100,134		)	289,614
General and administrative expenses(1)	26,624			6,284		1,831			46,542			—			81,281
Provision for losses on
accounts receivable	13,802			1,154		201			—			—			15,157
Segment operating income (loss)	$	195,049		$	12,591	$	5,412		$	(46,719	)	$	—		$	166,333
Center rent expense	108,606			432		508			—			—			109,546
Depreciation and amortization	21,420			778		562			2,828			—			25,588
Interest, net	(81		)	—		(3		)	13,381			—			13,297
Net segment income (loss)	$	65,104		$	11,381	$	4,345		$	(62,928	)	$	—		$	17,902
Identifiable segment assets	$	381,223		$	17,605	$	19,806		$	298,364		$	20,915		$	737,913
Goodwill	$	30,297		$	75	$	4,533		$	—		$	—		$	34,905
Segment capital expenditures	$	22,408		$	758	$	151		$	1,234		$	—		$	24,551

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

As of and for the
Nine Months Ended
September 30, 2011
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	1,250,568		$	89,645	$	65,309	$	36		$	—		$	1,405,558
Intersegment revenues	—			98,710		2,079		—			(100,789		)	—
Total net revenues	1,250,568			188,355		67,388		36			(100,789		)	1,405,558
Operating salaries and benefits	577,160			161,925		50,789		—			—			789,874
Self-insurance for workers’ compensation and
general and professional liability insurance	40,480			1,918		1,043		202			—			43,643
Other operating costs	362,158			7,082		8,548		—			(100,789		)	276,999
General and administrative expenses(1)	30,387			7,139		1,804		45,159			—			84,489
Provision for losses on
accounts receivable	13,438			713		47		—			—			14,198
Segment operating income (loss)	$	226,945		$	9,578	$	5,157	$	(45,325	)	$	—		$	196,355
Center rent expense	106,487			394		513		—			—			107,394
Depreciation and amortization	19,331			689		561		2,660			—			23,241
Interest, net	(69		)	—		1		14,756			—			14,688
Net segment income (loss)	$	101,196		$	8,495	$	4,082	$	(62,741	)	$	—		$	51,032
Identifiable segment assets	$	384,576		$	16,254	$	20,039	$	343,550		$	20,881		$	785,300
Goodwill	$	31,071		$	75	$	4,533	$	—		$	—		$	35,679
Segment capital expenditures	$	27,309		$	1,102	$	136	$	3,799		$	—		$	32,346

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Measurement of Segment Income

We evaluate financial performance and allocate resources primarily based on income or loss from operations before income taxes, excluding any unusual items. The following table reconciles net segment income to consolidated income before income taxes and discontinued operations (in thousands):

	For the Three Months Ended September 30,
	2012		2011
Net segment income	$	8,144	$	15,154
Transaction costs	1,034		—
Loss on sale of assets, net	189		809
Restructuring costs	—		2,426
Loss on asset impairment	—		317,091
Consolidated income (loss) before income taxes
and discontinued operations	$	6,921	$	(305,172	)

	For the Nine Months Ended September 30,
	2012		2011
Net segment income	$	17,902	$	51,032
Transaction costs	2,871		—
Loss on sale of assets, net	189		809
Restructuring costs	—		2,728
Loss on asset impairment	—		317,091
Consolidated income (loss) before income taxes
and discontinued operations	$	14,842	$	(269,596	)

(8)  Asset Impairment

GAAP requires that goodwill, intangible assets and other long-lived assets be evaluated for potential impairment when a triggering event occurs during an interim time period. As a result of the CMS Final Rule, the prospective net decrease in Medicare reimbursement rates was 11.1%, after the application of the market basket increase of 2.7%, the productivity adjustment of (1.0)% and the parity adjustment of (12.6)%. Additionally, the CMS Final Rule changed group therapy reimbursement and introduced new change-of-therapy provisions as patients move through their post-acute stay that further reduced our revenues from the Medicare program and increased our costs of providing such services. We determined that the CMS Final Rule announcement constituted a triggering event in the three months ended September 30, 2011 for evaluating whether the recoverability of goodwill, intangible assets and other long-lived assets in the operating segments of our Inpatient Services reportable segment affected by the CMS Final Rule was impaired.

During the three months ended September 30, 2011, we recognized $317.1 million of non-cash loss on asset impairment for the healthcare facilities operating segments in our Inpatient Services reportable segment. The non-cash charges consisted of $314.7 million of goodwill impairment and $2.4 million of asset impairment for intangible assets for favorable lease obligations. During the three and nine months ended September 30, 2012, there were no triggering events for potential impairment and as such, there was no impairment charge. The 2011 charges were determined in the following manner:

Finite-Lived Intangibles

Our finite-lived intangibles include tradenames and favorable lease obligations.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

When evaluating the recoverability of tradenames, we considered projections of future profitability and undiscounted cash flows for the affected portions of the Inpatient Services operating segments as compared to the carrying value of the tradenames assets. We determined that projected undiscounted cash flows were sufficient to recover the assets' carrying value. As a result, there was no impairment of tradenames during the three months ended September 30, 2011.

When evaluating the recoverability of favorable lease obligations, we considered projections of future profitability and undiscounted cash flows for the affected portions of the Inpatient Services operating segments as compared to the carrying value of the favorable lease obligation intangible assets. We determined that projected undiscounted cash flows were not sufficient to recover the full carrying value of the assets and proceeded to determine a fair value of each asset.

We determined fair value based upon estimates of market rental values for the centers associated with the favorable lease intangibles using valuations techniques broadly accepted by the long-term care industry in which we operate. We applied an industry average discount factor to the difference of this estimated market rental values to our contractually obligated lease payments over the remaining term of the leases, resulting in an appropriate estimate of fair value for the favorable lease intangible. We determined that certain favorable lease obligations had fair values less than their carrying values and recognized the $2.4 million loss on asset impairment described above.

Indefinite-Lived Intangibles

Our indefinite-lived intangibles consist of certificates of need (“CON”) obtained through our acquisitions. We evaluate the recoverability of our CON intangibles by comparing the assets' respective carrying value to estimates of fair value. We determine the estimated fair value of these intangible assets through an estimate of incremental cash flows with the intangible assets versus cash flows without the intangible assets in place coupled with estimates of market pricing to determine the highest and best use for purposes of determining fair value. The resulting fair values exceeded the assets' carrying value and thus no impairment was recognized.

Long-Lived Assets

GAAP requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows associated with these assets are not sufficient to recover the assets' carrying amounts. In estimating the undiscounted projected cash flows for our impairment assessment, we primarily used our internally prepared projections and forecast information, including adjustments for the estimated impact of the CMS Final Rule. We determined that undiscounted projected cash flows were sufficient to ensure recoverability of our long-lived assets.

Goodwill

GAAP requires that impairment be assessed for reporting units of the affected operating segments. A reporting unit is a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment.  For our Inpatient Services reportable segment, the reporting units for our annual goodwill impairment analysis were determined to be at the operating segment level, which were the divisional operating levels. The divisional operating levels of the Inpatient Services reportable segment include the northeast, southeast, central and west geographic divisions of SunBridge Healthcare Corporation (“SunBridge”) as well as the SolAmor Hospice Corporation (“SolAmor”) division and the Americare nutritional supplement division.

We determine potential impairment by comparing the net assets of each reporting unit to their respective fair values, which GAAP describes as Step 1 of goodwill impairment testing. We determine the estimated fair value of each reporting unit using a discounted projected cash flow analysis and other appropriate valuation methodologies. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit, which is referred to in GAAP as Step 2 of the impairment analysis. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the difference between the goodwill's carrying value and its implied fair value.

In estimating the projected cash flows for our impairment assessment, we primarily used our internally prepared projections and forecast information including adjustments for the estimated impact of the CMS Final Rule. Other factors in the cash flow

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

projections include anticipated funding from other payor sources such as Medicaid funding plus our plans to manage overhead costs, capital expenditures and patient care liability costs.

The discounted cash flow model utilizes five years of projected cash flows for each reporting unit. The projected financial results are created from critical assumptions and estimates based upon management's business plan and historical trends while giving consideration to the overall economic environment. Determining fair value requires the exercise of significant judgments about appropriate discount rates, business growth rates, the amount and timing of expected future cash flows and market information relevant to our overall company value. In addition, to validate the reasonableness of our assumptions, we utilized our discounted cash flow model on a consolidated basis and compared the estimated fair value to our market capitalization as of September 30, 2011. Key assumptions in the discounted cash flow model are as follows:

Business Growth Assumptions - In determining our projected Inpatient Services revenue growth rates for our discounted cash flow model, we focus on the two primary drivers: average daily census (“ADC”) and reimbursement rates, particularly those rates impacted by the CMS Final Rule. Key revenue inputs include historical ADC adjusted for known trends and current Medicare and Medicaid rates adjusted for anticipated changes. ADC trends have been reasonably constant within a narrow range and may be influenced over the long run by a number of factors, including demographic changes in the population we serve and our ability to deliver quality service in an attractive environment. Generally long term care reimbursement rates are set annually by the payor. To estimate these rates, we evaluate the current reimbursement climate and adjust historical trends where appropriate. Significant adverse rate changes in any one year would cause us to reevaluate our projected rates.  In recent years we have generated historical revenue growth of 1.4% to 6.2% annually.  Expenses generally vary with ADC and have historically grown by approximately 2.9% to 5.6% annually.  Labor is the largest component of our expenses.  We consider labor market trends and staffing needs for the projected ADC levels in determining labor growth rates to be used in our projections. The projected growth rates used in our discounted cash flow model took into account the potential adverse effects of the current economic downturn on our projected revenue and expenses.

Terminal Value EBITDAR Multiple - Consistent with commonly accepted valuation techniques, a terminal multiple for the final year's projected results is applied to estimate our value in the final year of the analysis. That multiple is applied to the final year's projected EBITDAR from continuing operations.

Discount Rate - Market conditions indicated that a discount rate of 10.5% was appropriate at September 30, 2011. This discount rate is consistent with our overall market capitalization comparison. We consistently apply the same discount rate to the evaluation of each reporting unit.

The goodwill impairment analysis is subject to impact from uncertainties arising from such events as changes in economic or competitive conditions, the current general economic environment, material changes in Medicare and Medicaid reimbursement that could positively or negatively impact anticipated future operating conditions and cash flows, and the impact of strategic decisions. The results of our interim 2011 impairment analysis showed that goodwill in each of reporting units tested was impaired. Based on the analysis performed, we recognized a loss on impairment of $314.7 million for the three months ended September 30, 2011, which represents the full carrying value of goodwill for the SunBridge divisional operating segments of our Inpatient Services reportable segment. The SolAmor division's prospective Medicare reimbursement rates were not impacted by the CMS Final Rule and thus no interim 2011 impairment event arose for SolAmor and Americare.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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

Overview

Our subsidiaries are providers of nursing, rehabilitative and related specialty healthcare services primarily to the senior population in the United States. Our core business is providing inpatient services, primarily through 158 skilled nursing centers, 13 combined skilled nursing, assisted and independent living centers, 10 assisted living centers, 2 independent living centers and 7 mental health centers with 21,324 licensed beds located in 23 states as of September 30, 2012. Our subsidiaries also provide hospice services, rehabilitation therapy services and temporary medical staffing services to skilled nursing centers.

Pending Merger with Genesis HealthCare LLC

On June 20, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Genesis HealthCare LLC, a Delaware limited liability company (“Genesis”), and Jam Acquisition LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of Genesis (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into us, with us continuing as the surviving corporation and an indirect wholly-owned subsidiary of Genesis (the “Merger”). Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock, other than treasury shares, shares held by us (other than shares held in a fiduciary capacity that are beneficially owned by third parties), Genesis, Merger Sub or any wholly-owned subsidiary of Genesis or us and shares held by stockholders who perfect their appraisal rights under Delaware law, will be converted into the right to receive $8.50 in cash, without interest (the “Merger Consideration”). At the effective time of the Merger, outstanding equity awards with respect to shares of our common stock (whether vested or unvested) will be canceled and converted into the right to receive a cash amount equal to the difference between the Merger Consideration and the exercise price, if any, of such awards. We anticipate that the total amount of funds necessary to pay the aggregate Merger Consideration will be approximately $230 million, not including refinancing of our existing indebtedness or payment of related transaction fees and expenses.

In connection with the proposed Merger, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on August 8, 2012. Our stockholders approved the proposed Merger at a special stockholders meeting on September 5, 2012.  The transaction is expected to close in December 2012 subject to the satisfaction of customary closing conditions, including, among other things, (i) the receipt of remaining regulatory approvals, (ii) the absence of any law or order prohibiting the consummation of the Merger, (iii) subject to certain materiality exceptions, the accuracy of our representations and warranties in the Merger Agreement, (iv) the performance in all material respects of our covenants in the Merger Agreement, (v) the absence of any material adverse effect on us between June 20, 2012 and consummation of the Merger and (vi) compliance by us with our obligations under certain third party contracts.

2011 Asset Impairment

GAAP requires that goodwill, intangible assets and other long-lived assets be evaluated for potential impairment when a triggering event occurs during an interim time period. On July 29, 2011, CMS released its final rule for skilled nursing facilities for the 2012 federal fiscal year, which commenced on October 1, 2011 (the “CMS Final Rule”). After the application of the market basket increase of 2.7%, the productivity adjustment of -1.0% and the parity adjustment of -12.6%, the prospective net decrease in Medicare reimbursement rates was 11.1%. Additionally, the CMS Final Rule changed group therapy reimbursement and introduced new change-of-therapy provisions as patients move through their post-acute stay that further reduced our revenues from the Medicare program and increased our costs of providing such services. We determined that the CMS Final Rule announcement constituted a triggering event for evaluating whether the recoverability of goodwill, intangible assets and other long-lived assets in the operating segments of our Inpatient Services reportable segment affected by the CMS Final Rule was impaired.

During the three months ended September 30, 2011, we recognized $317.1 million of non-cash loss on asset impairment for the healthcare facilities operating segments in our Inpatient Services reportable segment. The non-cash charges consisted of $314.7 million of goodwill impairment and $2.4 million of asset impairment for intangible assets for favorable lease obligations. See Note 8 - “Asset Impairment” to our consolidated financial statements included in this Form 10-Q for additional information.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

2011 Restructuring

On July 29, 2011, CMS released its final rule for skilled nursing facilities for the 2012 federal fiscal year, which commenced on October 1, 2011 (the “CMS Final Rule”).  As a result of the expected negative impact of the CMS Final Rule on our business, we implemented a broad-based mitigation initiative, which included infrastructure cost reductions without affecting the quality of our patient care. These reductions in infrastructure costs were, and continue to be, necessary to mitigate the impact on our business and remain in compliance with financial covenants under our credit agreement. For additional information regarding the impact to us of the CMS Final Rule, please see "Medicare" below.

Revenues from Medicare, Medicaid and Other Sources

We receive revenues from Medicare, Medicaid, commercial insurance, self-pay residents, other third party payors and healthcare centers that utilize our specialty medical services. The sources and amounts of our inpatient services revenues are determined by a number of factors, including the number of licensed beds and occupancy rates of our centers, the acuity level of patients and the rates of reimbursement among payors. Federal and state governments continue to focus on methods to curb spending on health care programs such as Medicare and Medicaid, and pressures on federal and state budgets resulting from the current economic conditions in the United States may intensify these efforts. This focus has not been limited to skilled nursing centers, but includes specialty services provided by us, such as skilled therapy services, to third parties. We cannot at this time predict the extent to which proposals limiting federal or state expenditures will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on us. Efforts to impose reduced coverage, greater discounts and more stringent cost controls by government and other payors are expected to continue.

The following table sets forth the total nonaffiliated revenues and percentage of revenues by payor source for our continuing operations, on a consolidated and on an inpatient operations only basis, for the periods indicated (dollars in thousands):

	For the Three Months Ended								For the Nine Months Ended
Sources of Revenues	September 30, 2012				September 30, 2011				September 30, 2012				September 30, 2011
Consolidated:
Medicaid	$	195,441	42.4	%	$	184,754	39.4	%	$	570,734	41.5	%	$	541,977	38.6	%
Medicare	128,180		27.8		149,147		31.8		397,867		28.9	%	454,591		32.3	%
Private pay and other	112,281		24.5		111,998		23.9		336,193		24.4	%	339,857		24.2	%
Managed care and commercial insurance	24,568		5.3		22,777		4.9		71,311		5.2	%	69,133		4.9	%
Total	$	460,470	100.0	%	$	468,676	100.0	%	$	1,376,105	100.0	%	$	1,405,558	100.0	%
Inpatient Only:
Medicaid	$	195,431	47.7	%	$	184,732	44.2	%	$	570,690	46.8	%	$	541,884	43.3	%
Medicare	123,940		30.2		144,210		34.5		384,286		31.5	%	440,528		35.2	%
Private pay and other	66,156		16.2		66,630		15.9		195,360		15.9	%	199,830		16.0	%
Managed care and commercial insurance	24,223		5.9		22,525		5.4		70,337		5.8	%	68,326		5.5	%
Total	$	409,750	100.0	%	$	418,097	100.0	%	$	1,220,673	100.0	%	$	1,250,568	100.0	%

Medicare

Medicare is available to nearly every United States citizen 65 years of age and older. It is a broad program of health insurance designed to help the nation's elderly meet hospital, hospice, home health and other health care costs. Health insurance coverage extends to certain persons under age 65 who qualify as disabled or those having end-stage renal disease. Medicare is comprised of four related health insurance programs. Medicare Part A provides for inpatient services including hospital, skilled long-term care, hospice and home healthcare. Medicare Part B provides for outpatient services including physicians' services, diagnostic service, durable medical equipment, skilled therapy services and medical supplies. Medicare Part C is a managed care option (“Medicare Advantage”) for beneficiaries who are entitled to Part A and enrolled in Part B. Medicare Part D is a benefit that provides prescription drug benefits for both Medicare and Medicare/Medicaid dually eligible patients.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Medicare reimburses our skilled nursing centers for Medicare Part A services under the Prospective Payment System (“PPS”) as defined by the Balanced Budget Act of 1997 and subsequent legislative and rule changes. PPS regulations predetermine a payment amount per patient, per day, based on the 1995 costs of treating patients indexed forward. Prior to October 1, 2010, the amount to be paid was determined by classifying each patient into one of 53 Resource Utilization Groups (“RUGs”), which were collectively referred to as “RUGs III”. After October 1, 2010, the RUGs were expanded to 66 categories to provide further refinement and are referred to collectively as “RUGs IV”. Each RUGs level represents the level of services required to treat the patient's condition or level of acuity.

The RUGs III system reimbursed for therapy service delivered concurrently, in a group or individually, at the same rate. The RUGs IV system changes maintain the same reimbursement methodology for group and individual therapy, but only considers concurrent therapy if it is delivered to two patients and divides the services between the two patients that receive the services. Changes were also made to the required qualifications for each RUGs level.

On July 29, 2011, CMS released the CMS Final Rule for skilled nursing facilities for the 2012 federal fiscal year that commenced on October 1, 2011. Pursuant to the CMS Final Rule, Medicare Part A payment rates were reduced by 12.6% (i.e., the Medicare rate parity adjustment) to correct what CMS perceived as a lack of parity between RUGs III and RUGs IV. The CMS Final Rule also changed the reimbursement rules associated with group therapy and introduced new change-of-therapy provisions as patients move through their post-acute stay. The CMS Final Rule therapy reimbursement changes resulted in further reductions in our revenues from the Medicare program (prior to implementation of our therapy mitigation plans) and also served to increase our costs of providing such therapy services. On October 1, 2011, we also received a net 1.7% market basket increase to our prospective Medicare rates. Based on operating results through the end of the third quarter of 2012, we continue to expect the impact of the CMS Final Rule on our full year 2012 operations to be a year-over-year reduction in income before income taxes of approximately $40.0 million to $45.0 million due to the ramp-up nature of many elements of our management mitigation plans.

The following table sets forth the average amounts of inpatient Medicare Part A revenues per patient, per day, recorded by our healthcare centers for the periods indicated:

For the Three Months Ended		For the Nine Months Ended
September 30, 2012	September 30, 2011	September 30, 2012	September 30, 2011
$465.80	$520.11	$463.52	$520.92

Under current law, there are limits on reimbursement provided under Medicare Part B for therapy services. An automatic exception process has been in place for patients residing in skilled nursing centers. That exception process will continue through December 31, 2012. Beginning October 1, 2012, through December 31, 2012, a new provision for a manual medical review process has been added to request exceptions to the therapy caps for services above certain thresholds. Instructions regarding the manual medical review process have been released by CMS and we are in preliminary implementation of the first of three phases prescribed by CMS. We are not able to estimate the impact, if any, from this review process on future revenues.

CMS has notified providers that they would not issue a Notice of Proposed Rulemaking - SNF for the 2013 fiscal year, which commenced on October 1, 2012.  They instead issued an Update Notice on July 27, 2012, which made the updates that are required by current law rather than implementing policy changes.  This Update Notice provides for a market basket increase of 2.5%, which is reduced by a productivity adjustment of 0.7%, generating a net increase of 1.8%.  We estimate that the net impact of this Update Notice on our skilled nursing operations will result in increased revenues of approximately $1.9 million per quarter.  Any additional changes for the 2013 federal fiscal year would require legislative action.

On February 17, 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2011, which included a provision reducing the reimbursement of Medicare bad debts. Medicare bad debts are primarily generated when states do not reimburse the provider for co-insurance for Medicare/Medicaid dually eligible patients. Providers are not permitted to bill this co-insurance to any other party when Medicaid does not reimburse the provider cost of service. Prior to this legislation, Medicare reimbursed providers 100% for this uncollectable co-insurance associated with dually eligible patients. Under the newly enacted legislation, Medicare will now phase in a reduction in the percentage of reimbursement for uncollectable co-insurance starting with cost reports beginning in federal fiscal year 2013, which primarily impacts our cost reports beginning on January 1, 2013. It is not clear if states will reimburse for dually eligible patient co-insurance under the state Medicaid programs as a result of this new legislation. If states do not begin to reimburse for dually eligible patient co-insurance then we are projecting the result will be a reduction in our revenues from reimbursement of Medicare bad debts of approximately $2.3 million in 2013, $4.7 million in 2014 and $6.7 million in subsequent years. Fourteen of the twenty-three states in which we operate do not reimburse the Medicaid co-insurance for dually eligible patients.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

On August 2, 2011, Congress passed the Budget Control Act of 2011, which created The Joint Select Committee on Deficit Reduction.  This Committee was tasked to find $1.5 trillion in savings by November 23, 2011.  The Committee was unable to reach an agreement and as a result, sequestration as provided for in the Budget Control Act was triggered.  Sequestration will result in a 2% reduction in Medicare payments effective January 1, 2013, which we estimate will reduce our revenues by approximately $2.5 million per quarter in 2013.

Historically we have been able to mitigate a portion of revenue reductions resulting from changes in CMS' reimbursement regulations.

We receive Medicare reimbursements for hospice care at daily or hourly rates based on the level of care furnished to the patient. Our ability to receive Medicare reimbursement for our hospice services is subject to two limitations:

· If inpatient days of care provided to all patients at a hospice exceed 20% of the total days of hospice care provided by that hospice for an annual period, then payment for days in excess of this limit are paid for at the lower routine home care rate.

· Overall payments made by Medicare on a per hospice program basis are subject to a cap amount at the end of an annual period. The 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. If a hospice program exceeds its aggregate cap, then the hospice must repay the excess.

In July 2012, CMS issued its final rule for hospice services for the 2013 federal fiscal year. The rule includes an industry-wide rate net increase of 0.9%, which is comprised of a market basket increase of 1.6% and an offsetting 0.7% decrease resulting from a phase out of the wage index budget neutrality factor. We estimate that the net impact on our hospice service operations will be a net increase of 1.1% in our reimbursement rates, which we estimate will result in increased revenues of approximately $0.2 million per quarter.

Medicaid

Medicaid is a state-administered program financed by state funds and federal matching funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods. Each state in which we operate nursing and rehabilitation centers has its own unique Medicaid reimbursement system.

Medicaid outlays are a significant component of state budgets, and there have been cost containment pressures on Medicaid outlays for nursing homes. The recent economic downturn has caused many states to institute freezes on or reductions in Medicaid spending to address state budget concerns.

Twenty-one of the states in which our Inpatient Services segment operates impose a provider tax on nursing homes as a method of increasing federal matching funds paid to those states for Medicaid.

The following table sets forth the average amounts of inpatient Medicaid revenues per patient, per day (excluding any impact of individually identifiable state-imposed provider taxes), recorded by our healthcare centers for the periods indicated:

For the Three Months Ended			For the Nine Months Ended
September 30, 2012	September 30, 2011		September 30, 2012	September 30, 2011
$183.16	$	176.42	$180.65	$175.21

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

For comparison purposes, the following table sets forth the average amounts of inpatient Medicaid revenues per patient, per day (including the impact from individually identifiable state-imposed provider taxes), recorded by our healthcare centers for the periods indicated:

For the Three Months Ended		For the Nine Months Ended
September 30, 2012	September 30, 2011	September 30, 2012	September 30, 2011
$165.95	$160.69	$163.50	$159.84

Excluded from the Medicaid revenue per patient, per day rates set forth in the tables above are Medicaid revenues we earned under certain supplemental Medicaid programs in the states of Idaho and Montana.  We classify those supplemental Medicaid revenues as other revenues.  The amounts of supplemental Medicaid revenue classified as other revenues totaled $2.7 million and $1.3 million for the three months ended September 30, 2012 and 2011, respectively, and $6.7 million and $4.5 million for the nine months ended September 30, 2012 and 2011, respectively.

Managed Care and Insurance

During the three months ended September 30, 2012, we received 5.3% of our revenues from managed care and insurance, of which the Medicare Advantage program is the primary component.  As discussed above, Medicare Advantage is the managed care option for Medicare beneficiaries.  Medicare Advantage is administered by contracted third party payors.  The managed care and insurance payors are continuing their efforts to control healthcare costs through direct contracts with healthcare providers and increased utilization review.  These payors are increasingly demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk.

The following table sets forth the average amounts of inpatient revenues per patient, per day, recorded by our healthcare centers from these revenue sources for the periods indicated below.

For the Three Months Ended		For the Nine Months Ended
September 30, 2012	September 30, 2011	September 30, 2012	September 30, 2011
$387.04	$384.33	$380.05	$377.69

Private Payors, Veterans and Other

During the three months ended September 30, 2012, we received 24.5% of our revenues from private payors, veterans’ coverage, healthcare centers that utilize our specialty medical services, self-pay center residents and other third party payors. These private and other payors are continuing their efforts to control healthcare costs.  Private payor rates are set at a price point that enables continued competition; they are driven by the markets in which our healthcare centers operate.

The following table sets forth the average amounts of inpatient revenues per patient, per day, recorded by our healthcare centers from these revenue sources for the periods indicated:

For the Three Months Ended		For the Nine Months Ended
September 30, 2012	September 30, 2011	September 30, 2012	September 30, 2011
$193.25	$190.58	$193.70	$193.89

Other Reimbursement Matters

Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment by payors during the settlement process. Under cost-based reimbursement plans, payors may either delay or disallow, in whole or in part, requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable or because additional supporting documentation is necessary. We recognize revenues from third-party payors and accrue estimated settlement amounts in the period in which the related services are provided. We estimate these settlement balances by making determinations based on our prior settlement experience and our understanding of the applicable reimbursement rules and regulations.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Recent Accounting Pronouncements

Discussion of recent accounting pronouncements can be found in the “Recent Accounting Pronouncements” portion of Note 1 – “Nature of Business” to our consolidated financial statements included in this Form 10-Q.

Results of Operations

The following tables set forth our unaudited historical consolidated income statements and certain percentage relationships for the periods presented (dollars in thousands): 

	For the Three Months Ended						As a Percentage of Net Revenues
	September 30, 2012			September 30, 2011			September 30, 2012		September 30, 2011
Total net revenues	$	460,470		$	468,676		100.0	%	100.0	%
Costs and expenses:
Operating salaries and benefits	259,379			263,932			56.3		56.3
Self-insurance for workers’ compensation and
general and professional liabilities	15,237			14,545			3.3		3.1
Other operating costs (1)	108,254			106,667			23.5		22.8
Center rent expense	36,647			35,952			8.0		7.7
General and administrative expenses	14,447			14,825			3.1		3.2
Depreciation and amortization	8,654			8,163			1.9		1.7
Provision for losses on accounts receivable	5,250			4,604			1.1		1.0
Interest, net	4,458			4,834			1.0		1.0
Other (2)	1,223			320,326			0.3		68.3
Income (loss) before income taxes and         discontinued operations	6,921			(305,172		)	1.5		(65.1	)
Income tax expense	2,932			2,203			0.6		0.5
Income (loss) from continuing operations	3,989			(307,375		)	0.9		(65.6	)
Loss from discontinued operations, net	(2,702		)	(2,031		)	(0.6	)	(0.4	)
Net income (loss)	$	1,287		$	(309,406	)	0.3	%	(66.0	)%
Supplemental Financial Information (3):
EBITDA	$	20,033		$	(292,175	)	4.4	%	(62.3	)%
Adjusted EBITDA	$	20,222		$	28,151		4.4	%	6.0	%
Adjusted EBITDAR	$	56,869		$	64,103		12.3	%	13.7	%

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

	For the Nine Months Ended						As a Percentage of Net Revenues
	September 30, 2012			September 30, 2011			September 30, 2012		September 30, 2011
Total net revenues	$	1,376,105		$	1,405,558		100.0	%	100.0	%
Costs and expenses:
Operating salaries and benefits	779,976			789,874			56.7		56.2
Self-insurance for workers’ compensation and
general and professional liabilities	43,744			43,643			3.2		3.1
Other operating costs (1)	324,358			316,332			23.6		22.5
Center rent expense	109,546			107,394			8.0		7.6
General and administrative expenses	46,537			45,156			3.4		3.2
Depreciation and amortization	25,588			23,241			1.9		1.7
Provision for losses on accounts receivable	15,157			14,198			1.1		1.0
Interest, net	13,297			14,688			1.0		1.0
Other (2)	3,060			320,628			0.2		22.8
Income (loss) before income taxes and         discontinued operations	14,842			(269,596		)	1.1		(19.2	)
Income tax expense	6,021			16,715			0.4		1.2
Income (loss) from continuing operations	8,821			(286,311		)	0.6		(20.4	)
Loss from discontinued operations, net	(8,301		)	(5,036		)	(0.6	)	(0.4	)
Net income (loss)	$	520		$	(291,347	)	—	%	(20.7	)%
Supplemental Financial Information (3):
EBITDA	$	53,727		$	(231,667	)	3.9	%	(16.5	)%
Adjusted EBITDA	$	53,916		$	88,961		3.9	%	6.3	%
Adjusted EBITDAR	$	163,462		$	196,355		11.9	%	14.0	%

(1) Operating administrative expenses are included in “other operating costs” above.

(2) Other expenses consist of loss on sale of assets, net, transaction costs, restructuring costs, and loss on asset impairment.

(3) We define EBITDA as net income before loss from discontinued operations, interest expense (net of interest income), income tax expense, depreciation and amortization.  EBITDA margin is EBITDA as a percentage of revenue.  Adjusted EBITDA is EBITDA adjusted for loss on sale of assets, restructuring costs and loss on asset impairment.  Adjusted EBITDA margin is Adjusted EBITDA as a percentage of revenue.  Adjusted EBITDAR is Adjusted EBITDA before center rent expense.  Adjusted EBITDAR margin is Adjusted EBITDAR as a percentage of revenue.

We believe that the presentation of EBITDA, 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 presentation of EBITDA, 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, Adjusted EBITDA and Adjusted EBITDAR are three of the primary indicators we use 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 GAAP expenses, revenues and gains that are unrelated to the day-to-day performance of our business. We also use EBITDA, 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.

In addition to other financial measures, including net segment income, we use EBITDA, 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, segment and a center-by-center level.  EBITDA, 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 and depreciation and amortization expense, 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 center 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. These types of charges are dependent on factors unrelated to our underlying business. The additional items we exclude from Adjusted EBITDA and Adjusted EBITDAR are also charges that we believe are unrelated to the operation of our underlying business.  As a result, we believe that the use of EBITDA, Adjusted EBITDA and Adjusted EBITDAR provides a meaningful and consistent comparison of our underlying business between periods by eliminating certain items required by GAAP which have little or no significance in our day-to-day operations.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

We also make capital allocations to each of our centers based on the centers’ lease terms and their expected Adjusted EBITDA returns.  We establish compensation and bonus programs for our center-level employees that are based upon the achievement of pre-established Adjusted EBITDA targets.

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 facility level basis, EBITDA, Adjusted EBITDA and Adjusted EBITDAR are non-GAAP financial measures that have no standardized meaning defined by GAAP.  As the items excluded from EBITDA, Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing our financial performance, EBITDA, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as alternatives to net income, cash flows generated by or used in operating, investing or financing activities or other financial statement data presented in the consolidated financial statements included in this Form 10-Q as indicators of financial performance or liquidity.  Therefore, our EBITDA, 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 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 in order to remain competitive in the market, and EBITDA, Adjusted EBITDA and Adjusted EBITDAR 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; 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, Adjusted EBITDA and Adjusted EBITDAR only to supplement net income on a basis prepared in conformance with GAAP in order to provide a more complete understanding of the factors and trends affecting our business. We strongly encourage investors to consider net income determined under GAAP as compared to EBITDA, Adjusted EBITDA and Adjusted EBITDAR, and to perform their own analysis, as appropriate.

The following table provides a reconciliation of our net income (loss), which is the most directly comparable financial measure presented in accordance with GAAP, to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the periods indicated (in thousands):

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012		2011			2012		2011
Net income (loss)	$	1,287	$	(309,406	)	$	520	$	(291,347	)
Plus:
Loss from discontinued operations, net	2,702		2,031			8,301		5,036
Income tax expense	2,932		2,203			6,021		16,715
Interest expense, net	4,458		4,834			13,297		14,688
Depreciation and amortization	8,654		8,163			25,588		23,241
EBITDA	$	20,033	$	(292,175	)	$	53,727	$	(231,667	)
Plus:
Loss on sale of assets	189		809			189		809
Restructuring costs	—		2,426			—		2,728
Loss on asset impairment	—		317,091			—		317,091
Adjusted EBITDA	$	20,222	$	28,151		$	53,916	$	88,961
Plus:
Center rent expense	36,647		35,952			109,546		107,394
Adjusted EBITDAR	$	56,869	$	64,103		$	163,462	$	196,355

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

The following discussion of the “Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011” is based, in part, on the financial information presented in Note 7 – “Segment Information” in our consolidated financial statements included in this Form 10-Q.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

The following summarizes our results of operations on a consolidated basis.  A more detailed discussion and analysis of the results of operations of each of our segments (Inpatient Services, Rehabilitation Therapy Services, Medical Staffing Services and Corporate) is provided below under “Segment Information.”

Total net revenues decreased $8.2 million, or 1.8%, to $460.5 million for the three months ended September 30, 2012 from $468.7 million for the three months ended September 30, 2011.  We reported net income for the three months ended September 30, 2012 of $1.3 million and net loss of 309.4 million for the three months ended September 30, 2011.

The decrease in net revenues for the 2012 period included $8.3 million of reduced revenues in our Inpatient Services segment and a $0.5 million decrease in nonaffiliated revenues from our Rehabilitation Therapy Services segment which were partially offset by a $0.7 million increase in nonaffiliated revenues from our Medical Staffing segment.

Operating salaries and benefits decreased $4.6 million, or 1.7%, to $259.4 million (56.3% of net revenues) for the three months ended September 30, 2012 from $263.9 million (56.3% of net revenues) for the three months ended September 30, 2011.  The decrease resulted primarily from decreased wages and benefits in our housekeeping and laundry departments following the outsourcing of the majority of our housekeeping and laundry services.

Self-insurance for workers’ compensation and general and professional liability insurance expense increased $0.7 million, or 4.8%, to $15.2 million (3.3% of net revenues) for the three months ended September 30, 2012 from $14.5 million (3.1% of net revenues) for the three months ended September 30, 2011, which was primarily due to increased claims-related activity in our general and professional liability programs.

Other operating costs increased $1.6 million, or 1.5%, to $108.3 million (23.5% of net revenues) for the three months ended September 30, 2012 from $106.7 million (22.8% of net revenues) for the three months ended September 30, 2011.  The increase was primarily due to increased provider taxes, coupled with increases in purchased services for housekeeping and laundry services.

Center rent expense increased $0.7 million, or 1.9%, to $36.6 million (8.0% of net revenues) for the three months ended September 30, 2012 from $36.0 million (7.7% of net revenues) for the three months ended September 30, 2011.  The increase was primarily attributable to the scheduled inflationary increases in accordance with our lease agreements.

General and administrative expenses decreased $0.4 million, or 2.5%, to $14.4 million (3.1% of net revenues) for the three months ended September 30, 2012 from $14.8 million (3.2% of net revenues) for the three months ended September 30, 2011.  The decrease was primarily due to decreased compensation and benefits.

Depreciation and amortization increased $0.5 million, or 6.0%, to $8.7 million (1.9% of net revenues) for the three months ended September 30, 2012 from $8.2 million (1.7% of net revenues) for the three months ended September 30, 2011.  The increase was due to new property and equipment placed into service since September 30, 2011.

The provision for losses on accounts receivable increased $0.6 million, or 14.0%, to $5.3 million (1.1% of net revenues) for the three months ended September 30, 2012 from $4.6 million (1.0% of net revenues) for the three months ended September 30, 2011.  The increase resulted primarily from higher reserves recorded on older accounts receivable balances.

Net interest expense decreased $0.4 million, or 7.8%, to $4.5 million (1.0% of net revenues) for the three months ended September 30, 2012 from $4.8 million (1.0% of net revenues) for the three months ended September 30, 2011 due to lower aggregate indebtedness.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Segment Information

The following table sets forth the amount and percentage of certain elements of total net revenues for the three months ended September 30, 2012 (dollars in thousands):

	2012					2011
Inpatient Services	$	409,750		89.0	%	$	418,097		89.2	%
Rehabilitation Therapy Services	60,917			13.2		62,359			13.3
Medical Staffing Services	22,118			4.8		21,753			4.6
Corporate	2			—		15			—
Intersegment Eliminations	(32,317		)	(7.0	)	(33,548		)	(7.1	)
Total net revenues	$	460,470		100.0	%	$	468,676		100.0	%

Inpatient Services revenues include revenues billed to patients for therapy and medical staffing provided by our affiliated operations.  The following table sets forth a summary of the intersegment revenues for the three months ended September 30 (in thousands):

	2012		2011
Rehabilitation Therapy Services	$	31,885	$	32,791
Medical Staffing Services	432		757
Total intersegment revenue	$	32,317	$	33,548

The following table sets forth the amount of net segment income for the three months ended September 30 (in thousands):

	2012			2011
Inpatient Services	$	22,780		$	32,352
Rehabilitation Therapy Services	4,068			2,296
Medical Staffing Services	1,238			1,221
Net segment income before Corporate	28,086			35,869
Corporate	(19,942		)	(20,715		)
Net segment income	$	8,144		$	15,154

Our reportable segments are strategic business units that provide different products and services.  They are managed separately because each business has different marketing strategies due to differences in types of customers, distribution channels and capital resource needs.  We evaluate the operational strengths and performance of each segment based on financial measures, including net segment income.  Net segment income is defined as earnings before income tax expense, restructuring costs and discontinued operations.  Net segment income for the three months ended September 30, 2012 for (1) our Inpatient Services segment decreased $9.6 million, or 29.6%, to $22.8 million, (2) our Rehabilitation Therapy Services segment increased $1.8 million, or 77.2%, to $4.1 million and (3) our Medical Staffing Services segment remained flat at $1.2 million in comparison to the three months ended September 30, 2011, due to the factors discussed below for each segment.  We use net segment income among other things to help identify opportunities for improvement and assist in allocating resources to each segment. 

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Inpatient Services

Total net revenues decreased $8.3 million, or 2.0%, to $409.8 million for the three months ended September 30, 2012 from $418.1 million for the three months ended September 30, 2011.  The decrease was primarily the result of:

-	a $20.9 million decrease in Medicare revenues as a result of a $11.4 million decrease in revenues from lower Medicare Part A rates primarily resulting from the CMS Final Rule parity rate adjustment and a $9.7 million decrease due to a decreased customer base, offset in part by a $0.2 million increase in Medicare Part B revenues; and
-	a $1.5 million decrease in private revenues consisting of a $2.5 million decrease related to customer base offset in part by a $1.0 million increase in rates;
	Offset in part by:
-	a $10.6 million increase in Medicaid revenues consisting of $7.0 million from an increase in rates and $3.6 million increase from a higher customer base;
-	a $1.7 million increase in managed care and commercial insurance revenues driven by improved customer base;
-	a $1.0 million increase in other revenue including from veterans' coverage and other various inpatient services; and
-	a $0.8 million increase in hospice revenues primarily due to organic growth.

Operating salaries and benefits expenses decreased $2.4 million, or 1.2%, to $191.0 million for the three months ended September 30, 2012 from $193.4 million for the three months ended September 30, 2011.  The decrease was attributable to the following:

-	a decrease of $3.7 million due to the outsourcing of housekeeping and laundry services in many centers to a third party service provider; and
-	a $0.3 million decrease in overtime for all staff;
	Offset in part by:
-	an increase of $1.6 million in staff compensation and benefits to remain competitive in local markets.

Self-insurance for workers’ compensation and general and professional liability insurance expense increased $0.7 million, or 5.5%, to $14.2 million for the three months ended September 30, 2012 as compared to $13.5 million for the three months ended September 30, 2011, which was driven by increased claims related activity in our general and professional liability programs.

Other operating costs increased $3.0 million, or 2.4%, to $124.9 million for the three months ended September 30, 2012 from $121.9 million for the three months ended September 30, 2011.  The increase was attributable to the following:

-	a $3.4 million increase in purchased services driven by a $3.7 million increase related to outsourced housekeeping and laundry services, which was partially offset by a $0.3 million decrease in other purchased services;
-	a $2.1 million increase in taxes primarily due to increased provider tax rates from a number of states in which we operate; and
-	a $0.5 million increase in miscellaneous administrative expenses;
	Offset in part by:
-	a $1.7 million decrease in supplies of which $0.1 million relates to housekeeping and laundry supplies now included in our outsourcing arrangement discussed above; and
-	a $1.3 million decrease in contract labor mostly driven by reduced expense related to our affiliated therapy services because of lower skilled customer base.

Operating administrative expenses decreased $1.6 million, or 15.7%, to $8.5 million for the three months ended September 30, 2012 compared to $10.1 million for the three months ended September 30, 2011, primarily due to lower salaries, benefits, contract labor, travel, utilities and office lease expense in accordance with our cost mitigation plans necessitated by the impact of the CMS Final Rule.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Center rent expense increased $0.7 million, or 1.9%, to $36.3 million for the three months ended September 30, 2012 from $35.6 million for the three months ended September 30, 2011.  The increase was primarily attributable to the scheduled inflationary increases in accordance with our lease agreements.

Depreciation and amortization increased $0.5 million, or 7.5%, to $7.3 million for the three months ended September 30, 2012 from $6.8 million for the three months ended September 30, 2011.  The increase was due to new property and equipment placed into service since September 30, 2011.

The provision for losses on accounts receivable increased $0.3 million, or 6.7%, to $4.8 million for the three months ended September 30, 2012 from $4.5 million for the three months ended September 30, 2011.   The increase in provision was related to higher reserves recorded on older accounts receivable balances.

Rehabilitation Therapy Services

Total net revenues from the Rehabilitation Therapy Services segment decreased $1.4 million, or 2.3%, to $60.9 million for the three months ended September 30, 2012 from $62.4 million for the three months ended September 30, 2011. The revenue decrease was the result of:

-	a decrease of $2.0 million attributable to decreased billable minutes, due to the loss of 5 contracts, net of new contracts; loss of two large nonaffiliated chains in conjunction with a decrease in same store affiliated business;
	Offset in part by
-	an increase of $0.6 million attributable to an increase in revenue per minute due to significant growth in Part B and other revenue as well as nonaffiliated rate increases combined with an affiliated market basket rate increase.

Operating salaries and benefits expenses decreased $2.5 million, or 4.6%, to $51.8 million for the three months ended September 30, 2012 from $54.3 million for the three months ended September 30, 2011.  The decrease is a reflection of staffing adjustments made to accommodate the decrease in volume in conjunction with increased productivity and decreased benefits costs, but partially offset by increases in wage rates to stay competitive with local markets.

Operating administrative expenses decreased $0.8 million, or 34.4%, to $1.5 million for the three months ended September 30, 2012 compared to $2.3 million for the three months ended September 30, 2011, primarily due to lower professional fees and benefits in accordance with our cost mitigation plans necessitated by the impact of the CMS Final Rule.

Medical Staffing Services

Total net revenues from the Medical Staffing Services segment increased $0.4 million, or 1.68%, to $22.1 million for the three months ended September 30, 2012 from $21.8 million for the three months ended September 30, 2011.  The increase was primarily the result of:

-	an increase of $0.6 million due to an increase in billable hours for nurse staffing; and
-	an increase of $0.1 million due to an increase in therapy and staffing hours;
	Offset in part by
-	a decrease of $0.3 million due to lower fees earned from the temporary placement of physicians.

Operating salaries and benefits expenses increased $0.3 million, or 1.8%, to $16.5 million for the three months ended September 30, 2012 as compared to $16.2 million for the three months ended September 30, 2011. The increase in operating salaries and benefits is due to increase in bill hours as well as wage rate increases to remain competitive in local markets.

Corporate

General and administrative expenses not directly attributed to segments decreased $0.4 million, or 2.5%, to $14.4 million for the three months ended September 30, 2012 from $14.8 million for the three months ended September 30, 2011.  The decrease was primarily due to decreased professional and consultant fees.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Interest expense not directly attributed to operating segments decreased $0.4 million, or 7.3%, to $4.5 million for the three months ended September 30, 2012 from $4.9 million for the three months ended September 30, 2011 due to lower aggregate indebtedness.

The following discussion of the “Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011” is based, in part, on the financial information presented in Note 7 – “Segment Information” in our consolidated financial statements included in this Form 10-Q.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

The following summarizes our results of operations on a consolidated basis.  A more detailed discussion and analysis of the results of operations of each of our segments (Inpatient Services, Rehabilitation Therapy Services, Medical Staffing Services and Corporate) is provided below under “Segment Information.”

Total net revenues decreased $29.5 million or 2.1%, to $1,376.1 million for the nine months ended September 30, 2012 from $1,405.6 million for the nine months ended September 30, 2011.  We reported net income for the nine months ended September 30, 2012 of $0.5 million and net loss of $291.3 million for the nine months ended September 30, 2011.

The decrease in net revenues for the 2012 period included $29.9 million of reduced revenues in our Inpatient Services segment and a $0.8 million decrease in nonaffiliated revenues from our Rehabilitation Therapy Services, which were partially offset by a $1.3 million increase in nonaffiliated revenues from our Medical Staffing segment.

Operating salaries and benefits decreased $9.9 million, or 1.3%, to $780.0 million (56.7% of net revenues) for the nine months ended September 30, 2012 from $789.9 million (56.2% of net revenues) for the nine months ended September 30, 2011.  The decrease resulted primarily from decreased wages and benefits in our housekeeping and laundry departments following the outsourcing of the majority of our housekeeping and laundry services.

Self-insurance for workers’ compensation and general and professional liability insurance expense increased $0.1 million, or 0.2%, to $43.7 million (3.2% of net revenues) for the nine months ended September 30, 2012 from $43.6 million (3.1% of net revenues) for the nine months ended September 30, 2011. The increase resulted primarily from increased claims-related activity in our general and professional liability programs.

Other operating costs increased $8.0 million, or 2.5%, to $324.4 million (23.6% of net revenues) for the nine months ended September 30, 2012 from $316.3 million (22.5% of net revenues) for the nine months ended September 30, 2011.  The increase was primarily due to increased provider taxes, coupled with increases in purchased services for housekeeping and laundry services.

Center rent expense increased $2.2 million, or 2.0%, to $109.5 million (8.0% of net revenues) for the nine months ended September 30, 2012 from $107.4 million (7.6% of net revenues) for the nine months ended September 30, 2011.  The increase was primarily attributable to the scheduled inflationary increases in accordance with our lease agreements.

General and administrative expenses increased $1.4 million, or 3.1%, to $46.5 million (3.4% of net revenues) for the nine months ended September 30, 2012 from $45.2 million (3.2% of net revenues) for the nine months ended September 30, 2011.  The increase was primarily due to increased benefits.

Depreciation and amortization increased $2.3 million, or 10.1%, to $25.6 million (1.9% of net revenues) for the nine months ended September 30, 2012 from $23.2 million (1.7% of net revenues) for the nine months ended September 30, 2011.  The increase was due to new property and equipment placed into service since September 30, 2011.

The provision for losses on accounts receivable increased $1.0 million, or 6.8%, to $15.2 million (1.1% of net revenues) for the nine months ended September 30, 2012 from $14.2 million (1.0% of net revenues) for the nine months ended September 30, 2011.  The increase resulted primarily from higher reserves recorded on older accounts receivable balances.

Net interest expense decreased $1.4 million, or 9.5%, to $13.3 million (1.0% of net revenues) for the nine months ended September 30, 2012 from $14.7 million (1.0% of net revenues) for the nine months ended September 30, 2011 due to lower aggregate indebtedness.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Segment Information

The following table sets forth the amount and percentage of certain elements of total net revenues for the nine months ended September 30 (dollars in thousands):

	2012					2011
Inpatient Services	$	1,220,673		88.7	%	$	1,250,568		89.0	%
Rehabilitation Therapy Services	187,010			13.6		188,355			13.4
Medical Staffing Services	68,541			5.0		67,388			4.8
Corporate	15			—		36			—
Intersegment Eliminations	(100,134		)	(7.3	)	(100,789		)	(7.2	)
Total net revenues	$	1,376,105		100.0	%	$	1,405,558		100.0	%

Inpatient Services revenues include revenues billed to patients for therapy and medical staffing provided by our affiliated operations.  The following table sets forth a summary of the intersegment revenues for the nine months ended September 30 (in thousands):

	2012		2011
Rehabilitation Therapy Services	$	98,152	$	98,710
Medical Staffing Services	1,982		2,079
Total intersegment revenue	$	100,134	$	100,789

The following table sets forth the amount of net segment income for the nine months ended September 30 (in thousands):

	2012			2011
Inpatient Services	$	65,104		$	101,196
Rehabilitation Therapy Services	11,381			8,495
Medical Staffing Services	4,345			4,082
Net segment income before Corporate	80,830			113,773
Corporate	(62,928		)	(62,741		)
Net segment income	$	17,902		$	51,032

Our reportable segments are strategic business units that provide different products and services.  They are managed separately because each business has different marketing strategies due to differences in types of customers, distribution channels and capital resource needs.  We evaluate the operational strengths and performance of each segment based on financial measures, including net segment income.  Net segment income is defined as earnings before income tax expense, restructuring costs and discontinued operations.  Net segment income for the nine months ended September 30, 2012 for (1) our Inpatient Services segment decreased $36.1 million, or 35.7%, to $65.1 million, (2) our Rehabilitation Therapy Services segment increased $2.9 million, or 34.0%, to $11.4 million and (3) our Medical Staffing Services segment increased $0.3 million in comparison to the nine months ended September 30, 2011, due to the factors discussed below for each segment.  We use net segment income among other things to help identify opportunities for improvement and assist in allocating resources to each segment. 

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Inpatient Services

Total net revenues decreased $29.9 million, or 2.4%, to $1,220.7 million for the nine months ended September 30, 2012 from $1,250.6 million for the nine months ended September 30, 2011.  The decrease was primarily the result of:

-	a decrease of $58.9 million in Medicare revenues as a result of a $38.0 million decrease in revenues from lower Medicare Part A rates primarily resulting from the CMS Final Rule parity rate adjustment, a $23.6 million decrease due to a decreased customer base, offset in part by a $2.7 million increase in Medicare Part B revenues; and
-	a decrease of $6.0 million in private revenues mostly due to a lower customer base;
	Offset in part by:
-	a $28.6 million increase in Medicaid revenues consisting of $17.0 million increase from higher rates and an $11.6 million increase related to higher customer base;
-	a $2.9 million increase in hospice revenues primarily due to organic growth;
-	a $1.9 million increase in managed care and commercial insurance revenues driven primarily by improved customer base; and
-	a $1.6 million increase in other revenue including from veterans' coverage and other various inpatient services.

Operating salaries and benefits expenses decreased $7.0 million, or 1.2%, to $570.2 million for the nine months ended September 30, 2012 from $577.2 million for the nine months ended September 30, 2011.  The decrease was attributable to the following:

-	a decrease of $11.8 million due to the outsourcing of housekeeping and laundry services in many centers to a third party service provider; and
-	a $1.9 million decrease in overtime for all staff;
	Offset in part by:
-	an increase of $6.7 million in staff compensation and benefits to remain competitive in local markets.

Self-insurance for workers’ compensation and general and professional liability insurance expense increased $0.2 million, or 0.5%, to $40.7 million for the nine months ended September 30, 2012 as compared to $40.5 million for the nine months ended September 30, 2011, which was driven by increased claims related activity in our general and professional liability self-insurance programs.

Other operating costs increased $12.2 million, or 3.4%, to $374.3 million for the nine months ended September 30, 2012 from $362.2 million for the nine months ended September 30, 2011.  The increase was attributable to the following:

-	a $10.1 million increase in purchased services driven by an $11.6 million increase related to outsourced housekeeping and laundry services which was partially offset by a $1.5 million decrease in other purchased services; and
-	a $7.7 million increase in taxes, primarily due to increased provider tax rates from a number of states in which we operate;
	Offset in part by:
-	a $3.2 million decrease in supplies of which $0.5 million relates to housekeeping and laundry supplies now included in our outsourcing arrangement discussed above;
-	a $2.2 million decrease in contract labor mostly driven by reduced expense related to our affiliated therapy services because of our lower skilled customer base as well as reduced contract labor in our nursing services; and
-	a $0.3 million decrease in miscellaneous administrative expenses.

Operating administrative expenses decreased $3.8 million, or 12.4%, to $26.6 million for the nine months ended September 30, 2012 compared to $30.4 million for the nine months ended September 30, 2011, primarily due to lower salaries, benefits, contract labor, supplies, travel, meals, meetings, utilities and office lease expense in accordance with our cost mitigation plans necessitated by the impact of the CMS Final Rule.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Center rent expense increased $2.1 million, or 2.0%, to $108.6 million for the nine months ended September 30, 2012 from $106.5 million for the nine months ended September 30, 2011.  The increase was primarily attributable to the scheduled inflationary increases in accordance with our lease agreements.

Depreciation and amortization increased $2.1 million, or 10.8%, to $21.4 million for the nine months ended September 30, 2012 from $19.3 million for the nine months ended September 30, 2011.  The increase was due to new property and equipment placed into service since September 30, 2011.

The provision for losses on accounts receivable increased $0.4 million, or 2.7%, to $13.8 million for the nine months ended September 30, 2012 from $13.4 million for the nine months ended September 30, 2011. The increase in provision was related to higher reserves recorded on older accounts receivable balances.

Rehabilitation Therapy Services

Total net revenues from the Rehabilitation Therapy Services segment decreased $1.3 million, or 0.7%, to $187.0 million for the nine months ended September 30, 2012 from $188.4 million for the nine months ended September 30, 2011. The revenue decrease was the result of:

-	a decrease of $2.7 million attributable to decreased billable minutes due to the loss of 5 contracts, net of new contracts; loss of two large nonaffiliated chains and four hospital contracts in conjunction with a decrease in same store affiliated business;
	Offset in part by:
-	an increase of $1.4 million attributable to increased revenue per minute due to significant growth in Part B and other revenue as well as nonaffiliated rate increases combined with an affiliated market basket rate increase.

Operating salaries and benefits expenses decreased $3.8 million, or 2.3%, to $158.2 million for the nine months ended September 30, 2012 from $161.9 million for the nine months ended September 30, 2011.  The decrease was driven by the aforementioned decline in service volume coupled with productivity improvements and decreases in paid mileage, health insurance and paid time off.

Operating administrative expenses decreased $0.9 million, or 12.0%, to $6.3 million for the nine months ended September 30, 2012 compared to $7.1 million for the nine months ended September 30, 2011, primarily due to lower professional fees and benefits in accordance with our cost mitigation plans necessitated by the impact of the CMS Final Rule.

Medical Staffing Services

Total net revenues from the Medical Staffing Services segment increased $1.2 million, or 1.7%, to $68.5 million for the nine months ended September 30, 2012 from $67.4 million for the nine months ended September 30, 2011.  The increase was primarily the result of:

-	an increase of $1.0 million due to an increase in billable hours for nurse staffing; and
-	an increase of $0.8 million due to an increase in therapy and staffing hours;
	Offset in part by:
-	a decrease of $0.7 million due to lower fees earned from the temporary placement of physicians.

Operating salaries and benefits expenses increased $0.8 million, or 1.7%, to $51.6 million for the nine months ended September 30, 2012 as compared to $50.8 million for the nine months ended September 30, 2011. The increase is due to the increase in staffing hours referenced above.

Corporate

General and administrative expenses not directly attributed to segments increased $1.4 million, or 3.1%, to $46.5 million for the nine months ended September 30, 2012 from $45.2 million for the nine months ended September 30, 2011.  The increase was primarily due to increased benefits.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Interest expense not directly attributed to operating segments decreased $1.4 million, or 9.3%, to $13.4 million for the nine months ended September 30, 2012 from $14.8 million for the nine months ended September 30, 2011 due to lower aggregate indebtedness.

Liquidity and Capital Resources

For the three months ended and as of September 30, 2012, our net income was $1.3 million and our working capital was $159.3 million. As of September 30, 2012, we had cash and cash equivalents of $63.8 million, $60.0 million available on our revolving credit facility and $88.9 million in borrowings. As of September 30, 2012, we were in compliance with the covenants contained in the credit agreement governing our revolving credit facility and our term loan indebtedness as described under "Loan Agreements" below.

Based on current levels of operations, we believe that our operating cash flows, existing cash reserves and availability for borrowing under our revolving credit facility will provide sufficient funds for our operations, capital expenditures (both discretionary and nondiscretionary) as discussed in our 2011 Form 10-K under “Capital Expenditures”, scheduled debt service payments and our other commitments (as described in the table under “Obligations and Commitments” of our 2011 Form 10-K) at least through the next twelve months. We believe our long-term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness. Although our credit agreement, which is described under “Loan Agreements” below, contains restrictions on our ability to incur indebtedness, we currently believe that we will be able to refinance existing indebtedness or incur additional indebtedness, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing debt or equity securities, on terms that are acceptable to us or at all.

Since April 2007, we have relied on our cash flows to provide for operational needs and capital expenditures, and have not relied on revolving credit borrowings. However, there can be no assurance that our operations will continue to provide sufficient cash flow or that refinancing sources will be available in the future, particularly given current economic conditions. We anticipate that we will be able to utilize our revolving credit facility if needed, as we expect to remain in compliance with the covenants contained in our credit agreement for at least the next twelve months. In December 2011, we voluntarily paid down $50 million of term loans in conjunction with amending our credit agreement.  The amendment increased our interest rate by 1.25% in return for greater flexibility to our financial covenants. As a result of the expected negative impact of the CMS Final Rule on our business, we implemented a broad-based mitigation initiative, which includes infrastructure cost reductions without affecting the quality of our patient care. These reductions in infrastructure costs were, and continue to be, necessary to mitigate the impact on our business and remain in compliance with financial covenants under our credit agreement.   While we do not anticipate that any of our lenders will be unable to lend under our revolving credit facility if we determine to borrow funds, no assurance can be given that one or more of our lenders will be able to fulfill their commitments.  We do not depend on cash flows from discontinued operations or sales of assets to provide for future liquidity.

Cash Flows

During the three months ended September 30, 2012, net cash provided by operating activities was $26.4 million as compared to $17.9 million during the three months ended September 30, 2011. The increase of $8.5 million was primarily due to decreased operating costs (excluding the non-cash loss on asset impairment of $317.1 million in the three months ended September 30, 2011) and decreased accounts receivable balances. For additional information, please see “Results of Operations” above.

During the nine months ended September 30, 2012, net cash provided by operating activities was $30.8 million as compared to $49.3 million during the nine months ended September 30, 2011.  The decrease of $18.5 million was primarily due to increased operating costs (excluding the non-cash loss on asset impairment of $317.1 million in the nine months ended September 30, 2011) and temporary cash usage from the impact of timing differences on scheduled payroll and accounts payable disbursement cycles.  For additional information, please see “Results of Operations” above.

Net cash used for investing activities of $5.9 million for the three months ended September 30, 2012 and $24.0 million for the nine months ended September 30, 2012 were primarily for capital expenditures.

Net cash used for financing activities was $0.3 million for the three months ended September 30, 2012 and $0.9 million for the nine months ended September 30, 2012, which were attributable to repayments of long-term debt and capital lease obligations.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Capital Expenditures

We incurred capital expenditures, related primarily to improvements in continuing operations, as reflected in our consolidated statements of cash flows, of $6.7 million and $24.6 million for the three months and nine months ended September 30, 2012, respectively.

Loan Agreements

In October 2010, we entered into a $285.0 million senior secured credit facility (the “Credit Agreement”) with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent. The Credit Agreement provides for $150.0 million in term loans ($87.3 million was outstanding at September 30, 2012), a $60.0 million revolving credit facility ($30.0 million of which may be utilized for letters of credit) and a $75.0 million letter of credit facility funded by proceeds of additional term loans ($74.8 million was utilized at September 30, 2012). The revolving credit facility was undrawn on September 30, 2012. The final maturity date of the term loans and the letter of credit facility is October 18, 2016 and the revolving credit facility terminates on October 18, 2015.

Availability of amounts under the revolving credit facility is subject to compliance with financial covenants, including an interest coverage test and a leverage covenant. The Credit Agreement contains customary events of default, such as a failure by us to make payment of amounts due, defaults under other agreements evidencing indebtedness, certain bankruptcy events and a change of control (as defined in the Credit Agreement). The Credit Agreement also contains customary covenants restricting certain actions, including incurrence of indebtedness, liens, payment of dividends, repurchase of stock, acquisitions and dispositions, mergers and investments. Our obligations under the Credit Agreement are guaranteed by most of our subsidiaries and are collateralized by our assets and the assets of most of our subsidiaries.

In December 2011, we amended the Credit Agreement and the associated $50.0 million voluntary repayment effectively satisfied any required quarterly principal payments until the facility's maturity in 2016. Accrued interest is payable at the end of an interest period, but no less frequently than every three months. Upon amendment, borrowings under the Credit Agreement bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at our option, either (a) the greater of 1.75% or LIBOR, adjusted for statutory reserves or (b) an alternative base rate determined by reference to the highest of (i) the prime rate announced by Credit Suisse, (ii) the federal funds rate plus 0.5%, and (iii) the greater of 1.75% or one-month LIBOR adjusted for statutory reserves plus 1%.  As of September 30, 2012, the applicable percentage for term loans and revolving loans was 6.00% for alternative base rate loans and 7.00% for LIBOR loans.  Each year, commencing in 2012, within 90 days of the prior fiscal year end, we are required to prepay a portion of the term loans in an amount based on the prior year's excess cash flows, if any, as defined in the Credit Agreement. In addition to paying interest on outstanding loans under the Credit Agreement, we are required to pay a facility fee of 0.50% per annum to the lenders under the revolving credit facility in respect of the unused revolving commitments.

The Credit Agreement requires that at least 50% of our term loans be subject to at least a three-year hedging agreement. To satisfy this requirement, we executed two hedging instruments on January 18, 2011: a two-year interest rate cap and a two-year “forward starting” interest rate swap.  The two-year interest rate cap limits our exposure to increases in interest rates for $82.5 million of debt through December 31, 2012.  This cap is effective when LIBOR rises above 1.75%, effectively fixing the interest rate on $82.5 million of our term loans at 8.75% through December 31, 2012.  The fee for this interest rate cap arrangement was $0.3 million, which will be amortized to interest expense over the life of the arrangement.  The two-year “forward starting” interest rate swap effectively converts the interest rate on $82.5 million of our term loans to a fixed rate from January 1, 2013 through December 31, 2014.  LIBOR is fixed at 3.185%, making the all-in rate effectively a fixed 10.185% for this portion of the term loans.  There was no fee for this swap agreement.  Both arrangements qualify for hedge accounting treatment.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk because we have issued debt that is sensitive to changes in interest rates. We manage our interest rate risk exposure by maintaining a mix of fixed and variable rates of interest on our debt. The following table provides information regarding our market sensitive financial instruments and constitutes a forward-looking statement.

																			Fair Value		Fair Value
	Expected Maturity Dates - the Twelve Months Ending September 30,																		September 30,		December 31,
	2013			2014			2015			2016		2017			Thereafter		Total		2012 (1)		2011 (1)
	(Dollars in thousands)
Long-term debt:
Fixed rate debt	$	944		$	691		$	—		$	—	$	—		$	—	$	1,635	$	1,677	$	2,450
Rate	8.6		%	8.5		%	—			—		—			—
Variable rate debt	$	—		$	—		$	—		$	—	$	87,298		$	—	$	87,298	$	88,975	$	72,096
Rate	—			—			—			—		8.75		%	—
Interest rate hedges:																			$	2,359	$	2,049
Cap	$	82,500		$	—		$	—		$	—	$	—		$	—
Maximum rate	1.75		%	—			—			—		—			—
Variable to fixed	$	—		$	—		$	82,500		$	—	$	—		$	—
Average pay rate	—			—			3.185		%	—		—			—
Average receive rate	—			—			1.75		%	—		—			—

(1)     The fair value of fixed and variable rate debt was determined based on the current rates offered for debt with similar risks and maturities.

ITEM 4.  CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as controls and procedures that are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated  and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding  required disclosure.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer, William A. Mathies, and our Chief Financial Officer, L. Bryan Shaul, of the effectiveness of the Company’s disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012.

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

For a description of our legal proceedings, see Note 5(b) – “Commitments and Contingencies – Litigation” of our consolidated financial statements included in this Form 10-Q, which is incorporated by reference to this item.

ITEM 1A. RISK FACTORS

There have been no material changes in our assessment of our risk factors from those set forth in our 2011 Form 10-K and our Form 10-Q for the quarter ended June 30, 2012.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

ITEM 6. EXHIBITS

2.1	Agreement and Plan of Merger dated June 20, 2012, by and among Sun Healthcare Group, Inc., Genesis HealthCare LLC and Jam Acquisition LLC (incorporated by reference to Exhibit 2.1 to our Form 8-K filed on June 20, 2012) (the Exhibits and Disclosure Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request)
31.1	Section 302 Sarbanes-Oxley Certification by Chief Executive Officer
31.2	Section 302 Sarbanes-Oxley Certification by Chief Financial Officer
32.1	Section 906 Sarbanes-Oxley Certification by Chief Executive Officer
32.2	Section 906 Sarbanes-Oxley Certification by Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURE

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.

SUN HEALTHCARE GROUP, INC.

By:  /s/ L. Bryan Shaul                                       

L. Bryan Shaul

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

October 30, 2012

44

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, William A. Mathies, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sun 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(s) 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 the 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;

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 30, 2012	/s/ William A. Mathies
	William A. Mathies Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, L. Bryan Shaul, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sun 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(s) 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 the 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;

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 30, 2012	/s/ L. Bryan Shaul
	L. Bryan Shaul Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

WRITTEN STATEMENT

PURSUANT TO

18 U.S.C. SECTION 1350

   The undersigned, William A. Mathies, the Chief Executive Officer (Principal Executive Officer), of Sun Healthcare Group, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(i)   the Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 of the Company (the "Report") fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

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

Date: October 30, 2012	/s/ William A. Mathies
	William A. Mathies

EX-32.2

EXHIBIT 32.2

WRITTEN STATEMENT

PURSUANT TO

18 U.S.C. SECTION 1350

   The undersigned, L. Bryan Shaul, the Chief Financial Officer (Principal Financial Officer), of Sun Healthcare Group, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(i)   the Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 of the Company (the "Report") fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

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

Date: October 30, 2012	/s/ L. Bryan Shaul
	L. Bryan Shaul

XML

Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011		Dec. 31, 2011
Segment Reporting Information [Line Items]
Revenue from external customers	$ 460,470		$ 468,676		$ 1,376,105		$ 1,405,558
Intersegment revenues	0		0		0		0
Total net revenues	460,470		468,676		1,376,105		1,405,558
Operating salaries and benefits	259,379		263,932		779,976		789,874
Self-insurance for workers' compensation and general and professional liability insurance	15,237		14,545		43,744		43,643
Other operating costs	97,619		93,705		289,614		276,999
General and Administrative Expense	25,082	[1]	27,787	[1]	81,281	[1]	84,489	[1]
Provision for losses on accounts receivable	5,250		4,604		15,157		14,198
Segment operating income (loss)	57,903		64,103		166,333		196,355
Center rent expense	36,647		35,952		109,546		107,394
Depreciation and amortization	8,654		8,163		25,588		23,241
Interest, net	4,458		4,834		13,297		14,688
Net segment income (loss)	8,144		15,154		17,902		51,032
Identifiable segment assets	737,913		785,300		737,913		785,300
Goodwill	34,905		35,679		34,905		35,679		34,496
Segment capital expenditures	6,722		14,190		24,551		32,346
Inpatient Services [Member]
Segment Reporting Information [Line Items]
Revenue from external customers	409,750		418,097		1,220,673		1,250,568
Intersegment revenues	0		0		0		0
Total net revenues	409,750		418,097		1,220,673		1,250,568
Operating salaries and benefits	191,048		193,403		570,169		577,160
Self-insurance for workers' compensation and general and professional liability insurance	14,237		13,501		40,683		40,480
Other operating costs	124,858		121,890		374,346		362,158
General and Administrative Expense	8,523	[1]	10,112	[1]	26,624	[1]	30,387	[1]
Provision for losses on accounts receivable	4,758		4,460		13,802		13,438
Segment operating income (loss)	66,326		74,731		195,049		226,945
Center rent expense	36,323		35,642		108,606		106,487
Depreciation and amortization	7,276		6,770		21,420		19,331
Interest, net	(53)		(33)		(81)		(69)
Net segment income (loss)	22,780		32,352		65,104		101,196
Identifiable segment assets	381,223		384,576		381,223		384,576
Goodwill	30,297		31,071		30,297		31,071
Segment capital expenditures	6,081		12,934		22,408		27,309
Rehabiliation Therapy Services [Member]
Segment Reporting Information [Line Items]
Revenue from external customers	29,032		29,568		88,858		89,645
Intersegment revenues	31,885		32,791		98,152		98,710
Total net revenues	60,917		62,359		187,010		188,355
Operating salaries and benefits	51,809		54,298		158,170		161,925
Self-insurance for workers' compensation and general and professional liability insurance	601		633		1,820		1,918
Other operating costs	2,130		2,374		6,991		7,082
General and Administrative Expense	1,514	[1]	2,309	[1]	6,284	[1]	7,139	[1]
Provision for losses on accounts receivable	374		73		1,154		713
Segment operating income (loss)	4,489		2,672		12,591		9,578
Center rent expense	154		140		432		394
Depreciation and amortization	267		236		778		689
Interest, net	0		0		0		0
Net segment income (loss)	4,068		2,296		11,381		8,495
Identifiable segment assets	17,605		16,254		17,605		16,254
Goodwill	75		75		75		75
Segment capital expenditures	200		149		758		1,102
Medical Staffing Services [Member]
Segment Reporting Information [Line Items]
Revenue from external customers	21,686		20,996		66,559		65,309
Intersegment revenues	432		757		1,982		2,079
Total net revenues	22,118		21,753		68,541		67,388
Operating salaries and benefits	16,522		16,231		51,637		50,789
Self-insurance for workers' compensation and general and professional liability insurance	335		344		1,049		1,043
Other operating costs	2,948		2,989		8,411		8,548
General and Administrative Expense	596	[1]	540	[1]	1,831	[1]	1,804	[1]
Provision for losses on accounts receivable	118		71		201		47
Segment operating income (loss)	1,599		1,578		5,412		5,157
Center rent expense	170		170		508		513
Depreciation and amortization	191		187		562		561
Interest, net	0		0		(3)		1
Net segment income (loss)	1,238		1,221		4,345		4,082
Identifiable segment assets	19,806		20,039		19,806		20,039
Goodwill	4,533		4,533		4,533		4,533
Segment capital expenditures	40		63		151		136
Corporate [Member]
Segment Reporting Information [Line Items]
Revenue from external customers	2		15		15		36
Intersegment revenues	0		0		0		0
Total net revenues	2		15		15		36
Operating salaries and benefits	0		0		0		0
Self-insurance for workers' compensation and general and professional liability insurance	64		67		192		202
Other operating costs	0		0		0		0
General and Administrative Expense	14,449	[1]	14,826	[1]	46,542	[1]	45,159	[1]
Provision for losses on accounts receivable	0		0		0		0
Segment operating income (loss)	(14,511)		(14,878)		(46,719)		(45,325)
Center rent expense	0		0		0		0
Depreciation and amortization	920		970		2,828		2,660
Interest, net	4,511		4,867		13,381		14,756
Net segment income (loss)	(19,942)		(20,715)		(62,928)		(62,741)
Identifiable segment assets	298,364		343,550		298,364		343,550
Goodwill	0		0		0		0
Segment capital expenditures	401		1,044		1,234		3,799
Intersegment, Eliminations [Member]
Segment Reporting Information [Line Items]
Revenue from external customers	0		0		0		0
Intersegment revenues	(32,317)		(33,548)		(100,134)		(100,789)
Total net revenues	(32,317)		(33,548)		(100,134)		(100,789)
Operating salaries and benefits	0		0		0		0
Self-insurance for workers' compensation and general and professional liability insurance	0		0		0		0
Other operating costs	(32,317)		(33,548)		(100,134)		(100,789)
General and Administrative Expense	0	[1]	0	[1]	0	[1]	0	[1]
Provision for losses on accounts receivable	0		0		0		0
Segment operating income (loss)	0		0		0		0
Center rent expense	0		0		0		0
Depreciation and amortization	0		0		0		0
Interest, net	0		0		0		0
Net segment income (loss)	0		0		0		0
Identifiable segment assets	20,915		20,881		20,915		20,881
Goodwill	0		0		0		0
Segment capital expenditures	$ 0		$ 0		$ 0		$ 0

[1] General and administrative expenses include operating administrative expenses.

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements Derivative Instruments Recognized in OCI (Details) (Designated as Hedging Instrument [Member], Interest Rate Contract [Member], Cash Flow Hedging [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Other Comprehensive Income (Loss) [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Interest rate hedging agreements	$ 36	$ 535	$ 263	$ 1,153
Other Income [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Interest rate hedging agreements	$ 0	$ 0	$ 0	$ 0

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Discontinued Operations

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements [Abstract]

Discontinued Operations

Discontinued Operations

The results of operations of assets to be disposed of, disposed assets and the losses related to these divestitures have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of comprehensive income as their operations and cash flows have been (or will be) eliminated from our ongoing operations and we will not have any significant continuing involvement in their operations after their disposal.

During the nine months ended September 30, 2012, we developed plans to dispose of eight skilled nursing centers and one assisted living center, which are classified as discontinued operations. The disposal plans for these centers involves the sale of the centers to unaffiliated third-party operators. All of these centers are located in either the Oklahoma or the Rhode Island markets. All of the centers described above were formerly part of our Inpatient Services segment, and their historical results have been reclassified to discontinued operations for all periods presented in accordance with GAAP.  As of September 30, 2012, the $4.9 million in assets held for sale for these centers consisted of (i) a net carrying amount of $3.2 million of property and equipment, (ii) $1.2 million of other non-current assets and (iii) $0.5 million of prepaid expenses and other assets.

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

	For the Three Months Ended
	September 30, 2012									September 30, 2011
	Inpatient Services			Other			Total			Inpatient Services			Other			Total
Net operating revenues	$	12,330		$	—		$	12,330		$	17,998		$	—		$	17,998
Loss from discontinued operations, net (1)	$	(2,690	)	$	(12	)	$	(2,702	)	$	(2,020	)	$	(11	)	$	(2,031	)

(1) Net of related tax benefit of $1,727 and $1,313, respectively

	For the Nine Months Ended
	September 30, 2012									September 30, 2011
	Inpatient Services			Other			Total			Inpatient Services			Other			Total
Net operating revenues	$	42,631		$	—		$	42,631		$	57,676		$	—		$	57,676
Loss from discontinued operations, net (1)	$	(8,283	)	$	(18	)	$	(8,301	)	$	(5,007	)	$	(29	)	$	(5,036	)

(1) Net of related tax benefit of $4,378 and $3,276, respectively

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Fair Value of Financial Instruments Fair Value Hierarchy (Details) (Other Long-Term Liabilities [Member], Designated as Hedging Instrument [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair Value, Measurements, Recurring [Member] | Fair Value [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate hedging agreements	$ 2,359	$ 2,049
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate hedging agreements	0	0
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate hedging agreements	2,359	2,049
Interest Rate Contract [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Interest rate hedging agreements	$ 2,359	$ 2,049

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Carrying Amount [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents, fair value	$ 63,801	$ 57,908
Restricted cash, fair value	14,606	16,059
Long-term debt and capital lease obligations, including current portion, fair value	88,933	89,785
Carrying Amount [Member] | Interest Rate Contract [Member] | Designated as Hedging Instrument [Member] | Other Long-Term Liabilities [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Interest rate hedging agreements, fair value	2,359	2,049
Fair Value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents, fair value	63,801	57,908
Restricted cash, fair value	14,606	16,059
Long-term debt and capital lease obligations, including current portion, fair value	88,975	74,545
Fair Value [Member] | Interest Rate Contract [Member] | Designated as Hedging Instrument [Member] | Other Long-Term Liabilities [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Interest rate hedging agreements, fair value	$ 2,359	$ 2,049

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Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended			9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011	Sep. 30, 2012		Sep. 30, 2011	Jun. 30, 2012	Dec. 31, 2011		Jun. 30, 2011	Dec. 31, 2010
Loss Contingencies [Line Items]
Restricted cash, current	$ 14,252			$ 14,252				$ 15,706
Restricted cash, non-current	354			354				353
Total assets	749,844			749,844				755,666
Self insurance liabilites, noncurrent	158,224			158,224				157,267
Total liabilities	519,439			519,439				530,210
Employee health insurance liability	7,213			7,213				6,978
Self Insurance [Member]
Loss Contingencies [Line Items]
Gross balance, beginning of period	206,448		205,501	208,097		210,556
Less: anticipated insurance	(24,656)		(28,423)	(24,656)		(28,423)	(24,656)	(24,320)		(28,423)	(30,200)
Net balance, beginning of period	181,792		177,078	183,777		180,356
Current year provision, continuing operations	15,237		14,545	43,744		43,643
Current year provision, discontinued operations	793		870	2,678		2,611
Claims paid, continuing operations	(8,594)		(10,091)	(30,611)		(36,599)
Claims paid, discontinued operations	(2,277)		(1,119)	(7,445)		(3,708)
Amounts paid for administrative services and other	(2,323)		(2,506)	(7,515)		(7,526)
Gross balance, end of period	209,284		207,200	209,284		207,200
Plus: anticipated insurance	(24,656)		(28,423)	(24,656)		(28,423)	(24,656)	(24,320)		(28,423)	(30,200)
Net balance, end of period	184,628		178,777	184,628		178,777
Self Insurance Restricted Cash, Current	14,055			14,055				15,586
Self Insurance Restricted Cash, Non-Current	0			0				0
Self Insurance Restricted Cash	14,055	[1]		14,055	[1]			15,586	[1]
Anticipated insurance recoveries, current	3,303	[2]		3,303	[2]			3,254	[2]
Anticipated insurance recoveries, noncurrent	21,353	[2]		21,353	[2]			21,066	[2]
Anticipated insurance recoveries	24,656	[2]		24,656	[2]			24,320	[2]
Self Insurance Assets	38,711			38,711				39,906
Self insurance liabilities, current	51,060			51,060				50,832
Self insurance liabilites, noncurrent	158,224			158,224				157,267
Self Insurance Reserve	209,284	[3]		209,284	[3]			208,099	[3]
Collateral Deposits and Other [Member]
Loss Contingencies [Line Items]
Restricted cash	551	[1]		551	[1]			473	[1]
Revolving Credit Facility [Member]
Loss Contingencies [Line Items]
Letters of credit	57,438			57,438				55,335
Professional Liability [Member] | Self Insurance [Member]
Loss Contingencies [Line Items]
Gross balance, beginning of period	118,506		109,315	120,856		113,971
Less: anticipated insurance	(2,388)		(2,273)	(2,388)		(2,273)	(2,388)	(2,390)		(2,273)	(2,100)
Net balance, beginning of period	116,118		107,042	118,466		111,871
Current year provision, continuing operations	8,135		7,664	23,770		23,012
Current year provision, discontinued operations	467		482	1,501		1,431
Claims paid, continuing operations	(4,819)		(6,382)	(17,933)		(24,174)
Claims paid, discontinued operations	(1,664)		(604)	(5,847)		(2,330)
Amounts paid for administrative services and other	(649)		(788)	(2,369)		(2,396)
Gross balance, end of period	119,976		109,687	119,976		109,687
Plus: anticipated insurance	(2,388)		(2,273)	(2,388)		(2,273)	(2,388)	(2,390)		(2,273)	(2,100)
Net balance, end of period	117,588		107,414	117,588		107,414
Self Insurance Restricted Cash, Current	5,725			5,725				6,254
Self Insurance Restricted Cash, Non-Current	0			0				0
Self Insurance Restricted Cash	5,725	[1]		5,725	[1]			6,254	[1]
Anticipated insurance recoveries, current	483	[2]		483	[2]			524	[2]
Anticipated insurance recoveries, noncurrent	1,905	[2]		1,905	[2]			1,866	[2]
Anticipated insurance recoveries	2,388	[2]		2,388	[2]			2,390	[2]
Self Insurance Assets	8,113			8,113				8,644
Self insurance liabilities, current	29,442			29,442				28,758
Self insurance liabilites, noncurrent	90,534			90,534				92,099
Self Insurance Reserve	119,976	[3]		119,976	[3]			120,857	[3]
Workers' Compensation [Member] | Self Insurance [Member]
Loss Contingencies [Line Items]
Gross balance, beginning of period	87,942		96,186	87,241		96,585
Less: anticipated insurance	(22,268)		(26,150)	(22,268)		(26,150)	(22,268)	(21,930)		(26,150)	(28,100)
Net balance, beginning of period	65,674		70,036	65,311		68,485
Current year provision, continuing operations	7,102		6,881	19,974		20,631
Current year provision, discontinued operations	326		388	1,177		1,180
Claims paid, continuing operations	(3,775)		(3,709)	(12,678)		(12,425)
Claims paid, discontinued operations	(613)		(515)	(1,598)		(1,378)
Amounts paid for administrative services and other	(1,674)		(1,718)	(5,146)		(5,130)
Gross balance, end of period	89,308		97,513	89,308		97,513
Plus: anticipated insurance	(22,268)		(26,150)	(22,268)		(26,150)	(22,268)	(21,930)		(26,150)	(28,100)
Net balance, end of period	67,040		71,363	67,040		71,363
Self Insurance Restricted Cash, Current	8,330			8,330				9,332
Self Insurance Restricted Cash, Non-Current	0			0				0
Self Insurance Restricted Cash	8,330	[1]		8,330	[1]			9,332	[1]
Anticipated insurance recoveries, current	2,820	[2]		2,820	[2]			2,730	[2]
Anticipated insurance recoveries, noncurrent	19,448	[2]		19,448	[2]			19,200	[2]
Anticipated insurance recoveries	22,268	[2]		22,268	[2]			21,930	[2]
Self Insurance Assets	30,598			30,598				31,262
Self insurance liabilities, current	21,618	[4]		21,618	[4]			22,074	[4]
Self insurance liabilites, noncurrent	67,690	[4]		67,690	[4]			65,168	[4]
Self Insurance Reserve	$ 89,308	[3],[4]		$ 89,308	[3],[4]			$ 87,242	[3],[4]

[1] Total restricted cash includes cash collateral deposits posted and other cash deposits held by third parties. Total restricted cash above excludes $551 and $473 at September 30, 2012 and December 31, 2011, respectively, held for bank collateral, various mortgages, bond payments and capital expenditures on HUD-insured buildings.

[2] Anticipated insurance recovery assets are presented as Other Assets (both current and long-term) in our September 30, 2012 and December 31, 2011 consolidated balance sheets.

[3] Total self-insurance liabilities above exclude $7,213 and $6,978 at September 30, 2012 and December 31, 2011, respectively, related to our employee health insurance liabilities.

[4] Total self-insurance liabilities for workers’ compensation claims are collateralized, in addition to the restricted cash, by letters of credit of $57,438 as of September 30, 2012 and $55,335 as of December 31, 2011.

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Commitments and Contingencies Litigation (Details) (USD $) In Millions, unless otherwise specified	0 Months Ended	1 Months Ended
	Feb. 26, 2011	Nov. 30, 2010
Compensatory Damages [Member]
Loss Contingencies [Line Items]
Litigation settlement		$ 2.75
Punitive Damages [Member]
Loss Contingencies [Line Items]
Litigation settlement	$ 24.75	$ 40.00

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements

9 Months Ended

Sep. 30, 2012

Long-Term Debt, Capital Lease Obligations and Hedging Arrangements [Abstract]

Long-Term Debt, Capital Lease Obligations and Hedging Arrangements

Long-Term Debt, Capital Lease Obligations and Hedging Arrangements

Long-term debt and capital lease obligations consisted of the following as of the periods indicated (in thousands):

	September 30, 2012			December 31, 2011
Revolving loans	$	—		$	—
Mortgage note payable due monthly through 2014,
interest at a rate of 8.5%, collateralized by real property
with carrying values totaling $0.7 million	1,498			2,076
Term loans	87,298			87,389
Capital leases	137			320
Total long-term obligations	88,933			89,785
Less amounts due within one year	(944		)	(1,017		)
Long-term obligations, net of current portion	$	87,989		$	88,768

The scheduled or expected maturities of long-term obligations as of September 30, 2012, were as follows (in thousands):

For the twelve months ending September 30:
2013	$	944
2014	691
2015	—
2016	—
2017	87,298
	$	88,933

We manage interest expense using a mix of fixed and variable rate debt, and, to help manage borrowing costs, we may enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount.   We also may enter into interest rate cap agreements that effectively limit the maximum interest rate that we pay on an agreed to notional principal amount.  We use interest rate hedges to manage interest rate risk related to borrowings.  Our intent is to only enter into such arrangements that qualify for hedge accounting treatment in accordance with GAAP.  Accordingly, we designate all such arrangements as cash-flow hedges and perform initial and quarterly effectiveness testing using the hypothetical derivative method.  To the extent that such arrangements are effective hedges, changes in fair value are recognized through other comprehensive income.  Ineffectiveness, if any, would be recognized in earnings.

Our credit agreement requires that at least 50% of our term loans be subject to at least a three-year hedging agreement. To satisfy this requirement, we executed two hedging instruments on January 18, 2011: a two-year interest rate cap and a two-year “forward starting” interest rate swap.  The two-year interest rate cap limits our exposure to increases in interest rates for $82.5 million of debt through December 31, 2012.  This cap is effective when LIBOR rises above 1.75%, effectively fixing the interest rate on $82.5 million of our term loans at 8.75% through December 31, 2012.  The fee for this interest rate cap arrangement was $0.3 million, which will be amortized to interest expense over the life of the arrangement.  The two-year “forward starting” interest rate swap effectively converts the interest rate on $82.5 million of our term loans to a fixed rate from January 1, 2013 through December 31, 2014.  LIBOR is fixed at 3.185%, making the all-in rate effectively a fixed 10.185% for this portion of the term loans.  There was no fee for this swap agreement.  Both arrangements qualify for hedge accounting treatment.

The fair values of our hedging agreements as presented in the consolidated balance sheets are as follows (in thousands):

	Derivatives
	September 30, 2012			December 31, 2011
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:	Other Long-Term			Other Long-Term
Interest rate hedging agreements	Liabilities	$	2,359	Liabilities	$	2,049

The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the three months ended September 30 is as follows (in thousands):

	Amount of Loss in Other Comprehensive Loss				Gain Reclassified from Accumulated Other Comprehensive Loss to Income (ineffective portion)
	2012		2011		2012		2011
Derivatives designated as cash flow hedges:
Interest rate hedging agreements	$	36	$	535	$	—	$	—

The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the nine months ended September 30 is as follows (in thousands):

	Amount of Loss in Other Comprehensive Loss				Gain Reclassified from Accumulated Other Comprehensive Income to Income (ineffective portion)
	2012		2011		2012		2011
Derivatives designated as cash flow hedges:
Interest rate hedging agreements	$	263	$	1,153	$	—	$	—

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Income Taxes (Details) (USD $)	3 Months Ended		9 Months Ended		36 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Income Tax Contingency [Line Items]
Income tax expense	$ 2,932,000	$ 2,203,000	$ 6,021,000	$ 16,715,000
Valuation allowance	17,900,000		17,900,000
Cumulative Loss from Continuing Operations					217,000,000
Effective income rax rate	42.00%	33.00%	41.00%	39.00%
Statutory income tax rate			35.00%
Loss Asset Impairment		317,100,000			324,000,000
Tax benefit from loss on impairment		1,800,000
Section 382 annual base limitation	7,400,000		7,400,000
Net operating loss carryforward	144,900,000		144,900,000
U.S. [Member]
Income Tax Contingency [Line Items]
Net operating loss carryforward	$ 47,000,000		$ 47,000,000

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CONSOLIDATED BALANCE SHEETS (unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 63,801	$ 57,908
Restricted cash	14,252	15,706
Accounts receivable, net of allowance for doubtful accounts of $59,728 and $67,640 at September 30, 2012 and December 31, 2011, respectively	199,787	202,229
Prepaid expenses and other assets	27,323	29,075
Assets held for sale	4,946	0
Deferred tax assets	61,629	63,170
Total current assets	371,738	368,088
Property and equipment, net	143,288	148,298
Intangible assets, net	33,358	35,294
Goodwill	34,905	34,496
Restricted cash, non-current	354	353
Deferred tax assets	125,409	123,974
Other assets	40,792	45,163
Total assets	749,844	755,666
Current liabilities:
Accounts payable	47,427	55,888
Accrued compensation and benefits	58,212	61,101
Accrued self-insurance obligations, current portion	58,273	57,810
Other accrued liabilities	47,602	43,139
Current portion of long-term debt and capital lease obligations	944	1,017
Total current liabilities	212,458	218,955
Accrued self-insurance obligations, net of current portion	158,224	157,267
Long-term debt and capital lease obligations, net of current portion	87,989	88,768
Unfavorable lease obligations, net	5,268	7,110
Other long-term liabilities	55,500	58,110
Total liabilities	519,439	530,210
Commitments and contingencies
Stockholders' equity:
Preferred stock of $.01 par value, authorized 3,333 shares, zero shares issued and outstanding as of September 30, 2012 and December 31, 2011	0	0
Common stock of $.01 par value, authorized 41,667 shares, 25,538 and 25,146 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively	255	251
Additional paid-in capital	731,473	726,861
Accumulated deficit	(499,907)	(500,427)
Accumulated other comprehensive loss, net	(1,416)	(1,229)
Total stockholders' equity	230,405	225,456
Total liabilities and stockholders' equity	$ 749,844	$ 755,666

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities:
Net income (loss)	$ 1,287	$ (309,406)	$ 520	$ (291,347)
Adjustments to reconcile net income (loss) to net cash provided by operating activities, including discontinued operations:
Depreciation and amortization	8,654	8,335	25,740	23,879
Amortization of favorable and unfavorable lease intangibles	(507)	(492)	(1,527)	(1,466)
Provision for losses on accounts receivable	5,403	4,975	15,866	15,479
Loss on sale of assets, including discontinued operations, net	188	1,925	257	1,925
Loss on asset impairment	0	317,091	0	317,091
Stock-based compensation expense	1,233	2,359	5,041	5,160
Deferred taxes	386	(105)	229	9,871
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	7,641	23	(13,568)	(12,555)
Restricted cash	78	52	1,453	(1,876)
Prepaid expenses and other assets	1,800	(1,600)	4,125	(1,410)
Accounts payable	2,756	1,595	(7,358)	(1,906)
Accrued compensation and benefits	(5,666)	(11,717)	(2,889)	(12,298)
Accrued self-insurance obligations	3,821	3,618	1,420	(294)
Other accrued liabilities	(36)	2,104	4,386	1,158
Other long-term liabilities	(667)	(880)	(2,920)	(2,098)
Net cash provided by operating activities	26,371	17,877	30,775	49,313
Cash flows from investing activities:
Capital expenditures	(6,722)	(14,190)	(24,551)	(32,346)
Proceeds from sale of assets	781	1,809	781	1,809
Acquisitions, net of cash acquired	0	0	(260)	(356)
Net cash used for investing activities	(5,941)	(12,381)	(24,030)	(30,893)
Cash flows from financing activities:
Principal repayments of long-term debt and capital lease obligations	(277)	(2,806)	(852)	(8,404)
Net cash used for financing activities	(277)	(2,806)	(852)	(8,404)
Net increase in cash and cash equivalents	20,153	2,690	5,893	10,016
Cash and cash equivalents at beginning of period	43,648	88,489	57,908	81,163
Cash and cash equivalents at end of period	$ 63,801	$ 91,179	$ 63,801	$ 91,179

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Asset Impairment (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Goodwill [Line Items]
Goodwill, Impairment Loss		$ 314,700,000
Impairment of Intangible Assets (Excluding Goodwill)		2,400,000
Historical Revenue Growth - lower		1.40%		1.40%
Historical Revenue Growth - Upper		6.20%		6.20%
Historical Expense Growth - lower		2.90%		2.90%
Historical Expense Growth - upper		5.60%		5.60%
Fair Value Inputs, Discount Rate		10.50%
Prospective net decrease in Medicare Reimbursement rates		11.10%		11.10%
Market basket increase		2.70%		2.70%
Productivity adjustment		(1.00%)		(1.00%)
Parity Adjustment		(12.60%)		(12.60%)
Loss on asset impairment	$ 0	$ 317,091,000	$ 0	$ 317,091,000

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Debt Instrument [Line Items]
Property and equipment, net	$ 143,288	$ 148,298
Total long-term obligations	88,933	89,785
Less amounts due within one year	(944)	(1,017)
Long-term obligations, net of current portion	87,989	88,768
Mortgage note payable [Member]
Debt Instrument [Line Items]
Interest rate	8.50%
Long-term debt, gross	1,498	2,076
Term loans [Member]
Debt Instrument [Line Items]
Long-term debt, gross	87,298	87,389
Capital leases [Member]
Debt Instrument [Line Items]
Long-term debt, gross	137	320
Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Revolving loans	0	0
Assets Used As Collateral [Member] | Mortgage note payable [Member]
Debt Instrument [Line Items]
Property and equipment, net	$ 700

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements Fair Value of Hedging Instruments (Details) (Interest Rate Contract [Member], Designated as Hedging Instrument [Member], Other Long-Term Liabilities [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Interest Rate Contract [Member] | Designated as Hedging Instrument [Member] | Other Long-Term Liabilities [Member]
Derivatives, Fair Value [Line Items]
Interest rate hedging agreements	$ 2,359	$ 2,049

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Nature of Business

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements [Abstract]

Nature of Business

Nature of Business

References throughout this document to the Company include Sun Healthcare Group, Inc. and our consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this report has been written in the first person. In this document, the words “we,” “our” and “us” refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.

Business

Our subsidiaries provide long-term, post-acute and related specialty healthcare in the United States.  We operate through three principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, and (iii) medical staffing services.  Inpatient services represent the most significant portion of our business.  Our continuing operations include 190 healthcare centers in 23 states as of September 30, 2012.

Pending Merger with Genesis HealthCare LLC

On June 20, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Genesis HealthCare LLC, a Delaware limited liability company (“Genesis”), and Jam Acquisition LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of Genesis (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into us, with us continuing as the surviving corporation and an indirect wholly-owned subsidiary of Genesis (the “Merger”). Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of our common stock, other than treasury shares, shares held by us (other than shares held in a fiduciary capacity that are beneficially owned by third parties), Genesis, Merger Sub or any wholly-owned subsidiary of Genesis or us and shares held by stockholders who perfect their appraisal rights under Delaware law, will be converted into the right to receive $8.50 in cash, without interest (the “Merger Consideration”). At the effective time of the Merger, outstanding equity awards with respect to shares of our common stock (whether vested or unvested) will be canceled and converted into the right to receive a cash amount equal to the difference between the Merger Consideration and the exercise price, if any, of such awards. We anticipate that the total amount of funds necessary to pay the aggregate Merger Consideration will be approximately $230 million, not including refinancing of our existing indebtedness or payment of related transaction fees and expenses.

In connection with the proposed Merger, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on August 8, 2012. Our stockholders approved the proposed Merger at a special stockholders meeting on September 5, 2012.  The transaction is expected to close in December 2012 subject to the satisfaction of customary closing conditions, including, among other things, (i) the receipt of remaining regulatory approvals, (ii) the absence of any law or order prohibiting the consummation of the Merger, (iii) subject to certain materiality exceptions, the accuracy of our representations and warranties in the Merger Agreement, (iv) the performance in all material respects of our covenants in the Merger Agreement, (v) the absence of any material adverse effect on us between June 20, 2012 and consummation of the Merger and (vi) compliance by us with our obligations under certain third party contracts.

Transaction Costs

During the three and nine months ended September 30, 2012, we incurred $1.0 million and $2.9 million, respectively, of transaction costs in connection with the pending merger with Genesis. These costs consist primarily of legal fees and financial advisory fees.

Other Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with our customary accounting practices and accounting principles generally accepted in the United States (“GAAP”) for interim financial statements.  In our opinion, the accompanying interim consolidated financial statements are a fair statement of our financial position at September 30, 2012, and our consolidated results of operations and cash flows for the three and nine month periods ended September 30, 2012 and 2011.  These statements are unaudited, and certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations of the Securities and Exchange Commission.  The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of only normal recurring items.  Readers of these statements should refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of significant contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include determination of impairment for goodwill and other long-lived assets, third-party payor settlements, allowances for doubtful accounts, self-insurance obligations, loss accruals and income taxes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

The Financial Accounting Standards Board issued an Accounting Standards Update in June 2011 regarding the presentation of comprehensive income within financial statements.  GAAP now requires that comprehensive income and its components of net income and other comprehensive income be presented in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive statements.  This new guidance is now effective for us and our accompanying consolidated financial statements have been presented with one single continuous statement of comprehensive income.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the 2012 financial statement presentation.  We have reclassified the results of operations of nine skilled nursing centers of our Inpatient Services segment (see Note 4 – “Discontinued Operations”) for all periods presented to discontinued operations within the consolidated statements of comprehensive income, in accordance with GAAP.

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CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Accounts receivable, allowance for doubtful accounts	$ 59,728	$ 67,640
Stockholders' equity:
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	3,333	3,333
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	41,667	41,667
Common stock, shares issued (in shares)	25,538	25,146
Common stock, shares outstanding (in shares)	25,538	25,146

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Discontinued Operations (Tables)

9 Months Ended

Sep. 30, 2012

Discontinued Operations Abstract

Schedule of Disposal Groups, Including Discontinued Operations, Income Statement, Balance Sheet and Additional Disclosures

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

	For the Three Months Ended
	September 30, 2012									September 30, 2011
	Inpatient Services			Other			Total			Inpatient Services			Other			Total
Net operating revenues	$	12,330		$	—		$	12,330		$	17,998		$	—		$	17,998
Loss from discontinued operations, net (1)	$	(2,690	)	$	(12	)	$	(2,702	)	$	(2,020	)	$	(11	)	$	(2,031	)

(1) Net of related tax benefit of $1,727 and $1,313, respectively

	For the Nine Months Ended
	September 30, 2012									September 30, 2011
	Inpatient Services			Other			Total			Inpatient Services			Other			Total
Net operating revenues	$	42,631		$	—		$	42,631		$	57,676		$	—		$	57,676
Loss from discontinued operations, net (1)	$	(8,283	)	$	(18	)	$	(8,301	)	$	(5,007	)	$	(29	)	$	(5,036	)

(1) Net of related tax benefit of $4,378 and $3,276, respectively

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Document And Entity Information (USD $)	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012	Sep. 30, 2011
Entity Information [Line Items]
Entity Registrant Name	SUN HEALTHCARE GROUP INC
Entity Central Index Key	0000904978
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 67,895,221
Entity Common Stock, Shares Outstanding		25,538,944
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012

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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value, by Balance Sheet Grouping

The estimated fair values of our financial instruments were as follows (in thousands):

	September 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	63,801	$	63,801	$	57,908	$	57,908
Restricted cash	$	14,606	$	14,606	$	16,059	$	16,059
Long-term debt and capital lease obligations,
including current portion	$	88,933	$	88,975	$	89,785	$	74,545
Interest rate hedging agreements	$	2,359	$	2,359	$	2,049	$	2,049

Fair Value, Financial Instruments

The following tables summarize the valuation of our financial instruments by the above pricing levels as of September 30, 2012 and December 31, 2011, respectively (in thousands):

	September 30, 2012
	Total	Unadjusted Quoted Market Prices (Level 1)	Significant Other Observable Inputs (Level 2)
Interest rate hedging agreements – liability	$2,359	$—	$2,359

	December 31, 2011
	Total	Unadjusted Quoted Market Prices (Level 1)	Significant Other Observable Inputs (Level 2)
Interest rate hedging agreements - liability	$2,049	$—	$2,049

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Income Statement [Abstract]
Total net revenues	$ 460,470	$ 468,676	$ 1,376,105	$ 1,405,558
Costs and expenses:
Operating salaries and benefits	259,379	263,932	779,976	789,874
Self-insurance for workers' compensation and general and professional liability insurance	15,237	14,545	43,744	43,643
Operating administrative expenses	10,635	12,962	34,744	39,333
Other operating costs	97,619	93,705	289,614	276,999
Center rent expense	36,647	35,952	109,546	107,394
General and administrative expenses	14,447	14,825	46,537	45,156
Depreciation and amortization	8,654	8,163	25,588	23,241
Provision for losses on accounts receivable	5,250	4,604	15,157	14,198
Interest, net of interest income of $94, $103, $229, and $243, respectively	4,458	4,834	13,297	14,688
Transaction costs	1,034	0	2,871	0
Loss on sale of assets, net	189	809	189	809
Restructuring costs	0	2,426	0	2,728
Loss on asset impairment	0	317,091	0	317,091
Total costs and expenses	453,549	773,848	1,361,263	1,675,154
Income (loss) before income taxes and discontinued operations	6,921	(305,172)	14,842	(269,596)
Income tax expense	2,932	2,203	6,021	16,715
Income from continuing operations	3,989	(307,375)	8,821	(286,311)
Discontinued operations:
Loss from discontinued operations, net	(2,702)	(2,031)	(8,301)	(5,036)
Net income (loss)	1,287	(309,406)	520	(291,347)
Loss from cash flow hedge, net of related tax benefit of $24, $357, $124, and $769, respectively	(36)	(535)	(263)	(1,153)
Other comprehensive loss, net of tax	(36)	(535)	(263)	(1,153)
Comprehensive income (loss)	$ 1,251	$ (309,941)	$ 257	$ (292,500)
Basic earnings per common and common equivalent share:
Income (loss) from continuing operations	$ 0.15	$ (11.73)	$ 0.33	$ (11.00)
Loss from discontinued operations, net	$ (0.10)	$ (0.08)	$ (0.31)	$ (0.19)
Net income (loss)	$ 0.05	$ (11.81)	$ 0.02	$ (11.19)
Diluted earnings per common and common equivalent share:
Income (loss) from continuing operations	$ 0.15	$ (11.73)	$ 0.33	$ (11.00)
Loss from discontinued operations, net	$ (0.10)	$ (0.08)	$ (0.31)	$ (0.19)
Net income (loss)	$ 0.05	$ (11.81)	$ 0.02	$ (11.19)
Weighted average number of common and common equivalent shares outstanding:
Basic	27,082	26,203	26,732	26,038
Diluted	27,082	26,203	26,732	26,038

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The provision for income taxes of $2.9 million and $6.0 million for the three and nine months ended September 30, 2012, respectively, results in an effective tax rate of approximately 42% and 41%, respectively. The provision for income taxes was $2.2 million and $16.7 million for the three and nine months ended September 30, 2011, respectively. Excluding the impact of the $317.1 million loss on asset impairment and its related $1.8 million income tax benefit, the effective tax rate would have been approximately 33% and 39% for the three and nine months ended September 30, 2011, respectively. The rates for 2012 and 2011 differ from the statutory tax rate of 35% primarily due to state taxes.

The realization of our deferred tax assets is dependent upon generation of taxable income during periods in which deductions and/or credits can be utilized.  As a result, we consider the level of historical taxable income, historical non-recurring credits and charges, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income in determining the amount of the valuation allowance.  The valuation allowance of $17.9 million at September 30, 2012 and December 31, 2011 relates primarily to state net operating loss (“NOL”) carryforwards and other deferred tax assets for which realization is uncertain.

In evaluating the need to establish a valuation allowance on our net deferred tax assets, all items of positive evidence (e.g., future sources of taxable income, including the ability to reliably forecast and to continue our mitigation initiatives implemented in 2011) and negative evidence (e.g., impact of the Centers for Medicare and Medicaid Services ("CMS") final rule for skilled nursing facilities for the 2012 federal fiscal year, which commenced on October 1, 2011 (the "CMS Final Rule") and subsequent impairment of goodwill in 2011) were considered.  We were in a cumulative pre-tax book loss of approximately $217 million for the three-year period ended December 31, 2011.  However, because approximately $324 million of the book expenses (principally related to our 2011 non-cash loss on asset impairment for goodwill and other intangibles) were not deductible for tax purposes, we generated taxable income and utilized existing net operating loss carryforwards in each of the last three years.  As a result of the negative impact of the CMS Final Rule on our business, we commenced a broad based mitigation initiative in 2011, which includes infrastructure cost reductions. Our ability to generate sufficient future taxable income to realize our deferred tax assets is dependent on our ability to continue our mitigation initiatives. Based upon our current estimates of future taxable income, we believe that we will more likely than not realize our net deferred tax assets.  However, if we are unable to continue realizing enough savings through our mitigation initiative to offset the negative impact of the CMS Final Rule, we may be required to increase our valuation allowance in future periods.

After consideration of the November 2010 restructuring of our former parent company, which, among other matters resulted in Sabra Health Care REIT, Inc. holding substantially all of our former parent’s owned real property, and utilization of NOL carryforwards through 2011, the Internal Revenue Code (“IRC”) Section 382 annual base limitation to be applied to our tax attribute carryforwards is approximately $7.4 million. Accordingly, our NOL and tax credit carryforwards have been reduced to take into account this limitation and the respective carryforward periods for these tax attributes.  As a result of unused IRC Section 382 limitations from prior years and post-ownership change NOLs, we estimate there is approximately $47.0 million of NOLs which can be used to offset U.S. taxable income in 2012.  Considering annual IRC Section 382 limitations and built-in gains, we estimate a total of approximately $144.9 million of utilizable NOL carryforwards to offset taxable income in 2012 and future years.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements [Abstract]

Commitments and Contingencies

Commitments and Contingencies

(a) Insurance

We self-insure for certain insurable risks, including general and professional liabilities, workers' compensation liabilities and employee health insurance liabilities, through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary by the states in which we operate. There is a risk that amounts funded to our self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments.  This liability includes an estimate of the development of reported losses and losses incurred but not reported.  Provisions for changes in insurance reserves are made in the period of the related coverage.  An independent actuarial analysis is prepared twice a year to assist management in determining the adequacy of the self-insurance obligations booked as liabilities in our financial statements.  The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. Any adjustments resulting from such reviews are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

We evaluate the adequacy of our self-insurance reserves on a quarterly basis and perform detailed actuarial analyses semi-annually in the second and fourth quarters. The analyses use generally accepted actuarial methods in evaluating the workers’ compensation reserves and general and professional liability reserves.  For both the workers’ compensation reserves and the general and professional liability reserves, those methods include reported and paid loss development methods, expected loss method and the reported and paid Bornhuetter-Ferguson methods.  Reported loss methods focus on development of case reserves for incurred losses through claims closure.  Paid loss methods focus on development of claims actually paid to date.  Expected loss methods are based upon an anticipated loss per unit of measure.  The Bornhuetter-Ferguson method is a combination of loss development methods and expected methods.

The foundation for most of these methods is our actual historical reported and/or paid loss data, over which we have effective internal controls.  We utilize third-party administrators (“TPAs”) to process claims and to provide us with the data utilized in our semi-annual actuarial analyses.  The TPAs are under the oversight of our in-house risk management and legal functions.  The purpose of these functions is to properly administer the claims so that the historical data is reliable for estimation purposes.  Case reserves, which are approved by our legal and risk management departments, are determined based on our estimate of the ultimate settlement of individual claims.  In instances where our historical data are not statistically credible, stable, or mature, we supplement our experience with skilled nursing industry benchmark reporting and payment patterns.

The use of multiple methods tends to eliminate any biases that one particular method might have.  Management’s judgment based upon each method’s inherent limitation is applied when weighting the results of each method.  The results of each of the methods are estimates of ultimate losses which include the case reserves plus an estimate for future development of these reserves based on past trends, and an estimate for losses incurred but not reported. These results are compared by accident year, and an estimated unpaid loss and allocated loss adjustment expense is determined for the open accident years based on judgment reflecting the range of estimates produced by the methods.

Activity in our professional liability and workers’ compensation self-insurance reserves as of and for the periods ended September 30, 2012 and 2011 is as follows (in thousands):

	For the Three Months Ended September 30, 2012									For the Nine Months Ended September 30, 2012
	Professional Liability			Workers’ Compensation			Total			Professional Liability			Workers’ Compensation			Total
Gross balance, beginning of period	$	118,506		$	87,942		$	206,448		$	120,856		$	87,241		$	208,097
Less: anticipated insurance recoveries	(2,388		)	(22,268		)	(24,656		)	(2,390		)	(21,930		)	(24,320		)
Net balance, beginning of period	$	116,118		$	65,674		$	181,792		$	118,466		$	65,311		$	183,777
Current year provision, continuing operations	8,135			7,102			15,237			23,770			19,974			43,744
Current year provision, discontinued operations	467			326			793			1,501			1,177			2,678
Claims paid, continuing operations	(4,819		)	(3,775		)	(8,594		)	(17,933		)	(12,678		)	(30,611		)
Claims paid, discontinued operations	(1,664		)	(613		)	(2,277		)	(5,847		)	(1,598		)	(7,445		)
Amounts paid for administrative services and other	(649		)	(1,674		)	(2,323		)	(2,369		)	(5,146		)	(7,515		)
Net balance, end of period	$	117,588		$	67,040		$	184,628		$	117,588		$	67,040		$	184,628
Plus: anticipated insurance recoveries	2,388			22,268			24,656			2,388			22,268			24,656
Gross balance, end of period	$	119,976		$	89,308		$	209,284		$	119,976		$	89,308		$	209,284

	For the Three Months Ended September 30, 2011									For the Nine Months Ended September 30, 2011
	Professional Liability			Workers’ Compensation			Total			Professional Liability			Workers’ Compensation			Total
Gross balance, beginning of period	$	109,315		$	96,186		$	205,501		$	113,971		$	96,585		$	210,556
Less: anticipated insurance recoveries	(2,273		)	(26,150		)	(28,423		)	(2,100		)	(28,100		)	(30,200		)
Net balance, beginning of period	$	107,042		$	70,036		$	177,078		$	111,871		$	68,485		$	180,356
Current year provision, continuing operations	7,664			6,881			14,545			23,012			20,631			43,643
Current year provision, discontinued operations	482			388			870			1,431			1,180			2,611
Claims paid, continuing operations	(6,382		)	(3,709		)	(10,091		)	(24,174		)	(12,425		)	(36,599		)
Claims paid, discontinued operations	(604		)	(515		)	(1,119		)	(2,330		)	(1,378		)	(3,708		)
Amounts paid for administrative services and other	(788		)	(1,718		)	(2,506		)	(2,396		)	(5,130		)	(7,526		)
Net balance, end of period	$	107,414		$	71,363		$	178,777		$	107,414		$	71,363		$	178,777
Plus: anticipated insurance recoveries	2,273			26,150			28,423			2,273			26,150			28,423
Gross balance, end of period	$	109,687		$	97,513		$	207,200		$	109,687		$	97,513		$	207,200

    The anticipated insurance recoveries relate primarily to our workers’ compensation programs associated with policy years 1996 through 2001 where the claim losses have exceeded the policies' aggregate retention limits. Obligations above these retention limits are covered by our excess insurance carriers, which all have carrier ratings of at least “A,” “XIV” or better.

A summary of the assets and liabilities related to insurance risks at September 30, 2012 and December 31, 2011 is as indicated below (in thousands):

	September 30, 2012							December 31, 2011
	Professional Liability		Workers’ Compensation		Total		| |	Professional Liability		Workers’ Compensation		Total
Assets:							|
Restricted cash (1)							|
Current	$	5,725	$	8,330	$	14,055	|	$	6,254	$	9,332	$	15,586
Non-current	—		—		—		|	—		—		—
	$	5,725	$	8,330	$	14,055	|	$	6,254	$	9,332	$	15,586
							|
Anticipated insurance recoveries (2)							|
Current	$	483	$	2,820	$	3,303	|	$	524	$	2,730	$	3,254
Non-current	1,905		19,448		21,353		|	1,866		19,200		21,066
	$	2,388	$	22,268	$	24,656	|	$	2,390	$	21,930	$	24,320
Total Assets	$	8,113	$	30,598	$	38,711	|	$	8,644	$	31,262	$	39,906
Liabilities:							|
Self-insurance liabilities (3)(4)							|
Current	$	29,442	$	21,618	$	51,060	|	$	28,758	$	22,074	$	50,832
Non-current	90,534		67,690		158,224		|	92,099		65,168		157,267
Total Liabilities	$	119,976	$	89,308	$	209,284	|	$	120,857	$	87,242	$	208,099

(1) Total restricted cash includes cash collateral deposits posted and other cash deposits held by third parties.  Total restricted cash above excludes $551 and $473 at September 30, 2012 and December 31, 2011, respectively, held for bank collateral, various mortgages, bond payments and capital expenditures on HUD-insured buildings.

(2) Anticipated insurance recovery assets are presented as Other Assets (both current and long-term) in our September 30, 2012 and December 31, 2011 consolidated balance sheets.  

(3) Total self-insurance liabilities above exclude $7,213 and $6,978 at September 30, 2012 and December 31, 2011, respectively, related to our employee health insurance liabilities.

(4) Total self-insurance liabilities for workers’ compensation claims are collateralized, in addition to the restricted cash, by letters of credit of $57,438 as of September 30, 2012 and $55,335 as of December 31, 2011.

(b)  Litigation

Between June 27, 2012 and July 16, 2012, we, the members of our Board of Directors, Genesis and Merger Sub were named as defendants in connection with the transactions contemplated by the Merger Agreement in four separate purported class action lawsuits that were filed in the Superior Court of the State of California, County of Orange and in a purported class action lawsuit filed in the Court of Chancery of the State of Delaware. The Delaware lawsuit was subsequently dismissed without prejudice and the Delaware plaintiff then filed a complaint in the Superior Court of the State of California, County of Orange on July 31, 2012. On August 3, 2012, the parties to the initial four California lawsuits executed a stipulation to consolidate the first four California actions, including any subsequently filed actions with similar allegations relating to the transaction (including the action filed on July 31, 2012). The amended complaint filed in the purported consolidated action alleges, among other things, that our directors breached their fiduciary duties to our stockholders in entering into the Merger Agreement pursuant to an unfair process, and that we, Genesis and Merger Sub aided and abetted the alleged breaches of fiduciary duties. In addition, the complaint filed on July 31, 2012 alleges that the preliminary proxy statement filed by Sun on July 12, 2012 omitted or misrepresented material information. The lawsuits sought, among other things, to enjoin consummation of the Merger.

In order to minimize the expense of defending the lawsuits, to avoid the risk of delaying or adversely affecting the Merger and the related transactions and to provide additional information to our stockholders at a time and in a manner that would not cause any delay of the special meeting or the Merger, on August 29, 2012, we entered into a memorandum of understanding with the plaintiffs regarding the terms of a proposed settlement of the lawsuits, which would include the dismissal with prejudice of all claims against all of the defendants. Pursuant to the memorandum of understanding, Sun agreed to provide certain additional disclosures, which were included in a proxy supplement filed with the SEC on August 29, 2012. The proposed settlement is subject to customary conditions, including the execution of an appropriate stipulation of settlement and court approval following notice to Sun's stockholders. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding. The proposed settlement will not affect the amount of the Merger Consideration that our stockholders are entitled to receive in the Merger.

We are a party to various legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of our business, including claims that our services have resulted in injury or death to the residents of our centers and claims relating to employment and commercial matters.  The ability to predict the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties.  Although we intend to vigorously defend ourselves in these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows. In certain states in which we have operations, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions. There can be no assurance that we will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.

We operate in an industry that is extensively regulated. As such, in the ordinary course of business, we are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, the industries in which we operate are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is found to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief; and reimbursement authorities could also seek the suspension or exclusion of the provider or individual from participation in their program. We believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations or cash flows.

In November 2010, a jury verdict was rendered in a Kentucky state court against us for $2.75 million in compensatory damages and $40 million in punitive damages. On February 25, 2011, the trial court judge reduced the punitive damage award to $24.75 million. The case involves claims for professional negligence resulting in wrongful death. We disagree with the jury's verdict and believe that it is not supported by the facts of the case or applicable law. Our appeal is currently pending with the Kentucky Court of Appeals. We believe our reserves are adequate for this matter.

(c)  Other Inquiries

From time to time, fiscal intermediaries and Medicaid agencies examine cost reports filed by predecessor operators of our skilled nursing centers. If, as a result of any such examination, it is concluded that overpayments to a predecessor operator were made, we, as the current operator of such centers, may be held financially responsible for such overpayments. At this time, we are unable to predict the outcome of any existing or future examinations.

(d)  Genesis Termination Fee

The Merger Agreement contains customary representations and warranties and pre-closing covenants. It contains termination provisions for each of us and Genesis, and provides that in certain specified circumstances, we must pay Genesis a termination fee equal to $6.9 million and up to $1.0 million of reasonable, out-of-pocket expenses incurred by Genesis in connection with the Merger Agreement.

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements Maturities of Long-term Obligations (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Maturities of Long-term Debt [Abstract]
2013	$ 944
2014	691
2015	0
2016	0
2017	87,298
Total long-term obligations	$ 88,933	$ 89,785

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Schedule of Self Insurance Reserve

Activity in our professional liability and workers’ compensation self-insurance reserves as of and for the periods ended September 30, 2012 and 2011 is as follows (in thousands):

	For the Three Months Ended September 30, 2012									For the Nine Months Ended September 30, 2012
	Professional Liability			Workers’ Compensation			Total			Professional Liability			Workers’ Compensation			Total
Gross balance, beginning of period	$	118,506		$	87,942		$	206,448		$	120,856		$	87,241		$	208,097
Less: anticipated insurance recoveries	(2,388		)	(22,268		)	(24,656		)	(2,390		)	(21,930		)	(24,320		)
Net balance, beginning of period	$	116,118		$	65,674		$	181,792		$	118,466		$	65,311		$	183,777
Current year provision, continuing operations	8,135			7,102			15,237			23,770			19,974			43,744
Current year provision, discontinued operations	467			326			793			1,501			1,177			2,678
Claims paid, continuing operations	(4,819		)	(3,775		)	(8,594		)	(17,933		)	(12,678		)	(30,611		)
Claims paid, discontinued operations	(1,664		)	(613		)	(2,277		)	(5,847		)	(1,598		)	(7,445		)
Amounts paid for administrative services and other	(649		)	(1,674		)	(2,323		)	(2,369		)	(5,146		)	(7,515		)
Net balance, end of period	$	117,588		$	67,040		$	184,628		$	117,588		$	67,040		$	184,628
Plus: anticipated insurance recoveries	2,388			22,268			24,656			2,388			22,268			24,656
Gross balance, end of period	$	119,976		$	89,308		$	209,284		$	119,976		$	89,308		$	209,284

	For the Three Months Ended September 30, 2011									For the Nine Months Ended September 30, 2011
	Professional Liability			Workers’ Compensation			Total			Professional Liability			Workers’ Compensation			Total
Gross balance, beginning of period	$	109,315		$	96,186		$	205,501		$	113,971		$	96,585		$	210,556
Less: anticipated insurance recoveries	(2,273		)	(26,150		)	(28,423		)	(2,100		)	(28,100		)	(30,200		)
Net balance, beginning of period	$	107,042		$	70,036		$	177,078		$	111,871		$	68,485		$	180,356
Current year provision, continuing operations	7,664			6,881			14,545			23,012			20,631			43,643
Current year provision, discontinued operations	482			388			870			1,431			1,180			2,611
Claims paid, continuing operations	(6,382		)	(3,709		)	(10,091		)	(24,174		)	(12,425		)	(36,599		)
Claims paid, discontinued operations	(604		)	(515		)	(1,119		)	(2,330		)	(1,378		)	(3,708		)
Amounts paid for administrative services and other	(788		)	(1,718		)	(2,506		)	(2,396		)	(5,130		)	(7,526		)
Net balance, end of period	$	107,414		$	71,363		$	178,777		$	107,414		$	71,363		$	178,777
Plus: anticipated insurance recoveries	2,273			26,150			28,423			2,273			26,150			28,423
Gross balance, end of period	$	109,687		$	97,513		$	207,200		$	109,687		$	97,513		$	207,200

Summary of Assets and Liabilites Related To Insurance Risks

A summary of the assets and liabilities related to insurance risks at September 30, 2012 and December 31, 2011 is as indicated below (in thousands):

	September 30, 2012							December 31, 2011
	Professional Liability		Workers’ Compensation		Total		| |	Professional Liability		Workers’ Compensation		Total
Assets:							|
Restricted cash (1)							|
Current	$	5,725	$	8,330	$	14,055	|	$	6,254	$	9,332	$	15,586
Non-current	—		—		—		|	—		—		—
	$	5,725	$	8,330	$	14,055	|	$	6,254	$	9,332	$	15,586
							|
Anticipated insurance recoveries (2)							|
Current	$	483	$	2,820	$	3,303	|	$	524	$	2,730	$	3,254
Non-current	1,905		19,448		21,353		|	1,866		19,200		21,066
	$	2,388	$	22,268	$	24,656	|	$	2,390	$	21,930	$	24,320
Total Assets	$	8,113	$	30,598	$	38,711	|	$	8,644	$	31,262	$	39,906
Liabilities:							|
Self-insurance liabilities (3)(4)							|
Current	$	29,442	$	21,618	$	51,060	|	$	28,758	$	22,074	$	50,832
Non-current	90,534		67,690		158,224		|	92,099		65,168		157,267
Total Liabilities	$	119,976	$	89,308	$	209,284	|	$	120,857	$	87,242	$	208,099

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Nature of Business (Policies)

9 Months Ended

Sep. 30, 2012

Nature of Business [Abstract]

Business

Business

Our subsidiaries provide long-term, post-acute and related specialty healthcare in the United States.  We operate through three principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, and (iii) medical staffing services.  Inpatient services represent the most significant portion of our business.  Our continuing operations include 190 healthcare centers in 23 states as of September 30, 2012.

Reclassifications

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the 2012 financial statement presentation.  We have reclassified the results of operations of nine skilled nursing centers of our Inpatient Services segment (see Note 4 – “Discontinued Operations”) for all periods presented to discontinued operations within the consolidated statements of comprehensive income, in accordance with GAAP.

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Segment Information

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements [Abstract]

Segment Information

Segment Information

We operate predominantly in the long-term care segment of the healthcare industry. We are a provider of long-term, sub-acute and related ancillary care services to nursing home patients.  Our reportable segments are composed of operating segments, which are aggregated, comprising strategic business units that provide different products and services. They are managed separately because each business has different marketing strategies due to differences in types of customers, distribution channels and capital resource needs.  More complete descriptions and accounting policies of the segments are described in Note 13 – “Segment Information” and  Note 2 – “Summary of Significant Accounting Policies” of our 2011 Form 10-K.  The following tables summarize, for the periods indicated, operating results and other financial information, by business segment (in thousands):

As of and for the
Three Months Ended
September 30, 2012
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	409,750		$	29,032	$	21,686	$	2		$	—		$	460,470
Intersegment revenues	—			31,885		432		—			(32,317		)	—
Total net revenues	409,750			60,917		22,118		2			(32,317		)	460,470
Operating salaries and benefits	191,048			51,809		16,522		—			—			259,379
Self-insurance for workers’ compensation and
general and professional liability insurance	14,237			601		335		64			—			15,237
Other operating costs	124,858			2,130		2,948		—			(32,317		)	97,619
General and administrative expenses(1)	8,523			1,514		596		14,449			—			25,082
Provision for losses on
accounts receivable	4,758			374		118		—			—			5,250
Segment operating income (loss)	$	66,326		$	4,489	$	1,599	$	(14,511	)	$	—		$	57,903
Center rent expense	36,323			154		170		—			—			36,647
Depreciation and amortization	7,276			267		191		920			—			8,654
Interest, net	(53		)	—		—		4,511			—			4,458
Net segment income (loss)	$	22,780		$	4,068	$	1,238	$	(19,942	)	$	—		$	8,144
Identifiable segment assets	$	381,223		$	17,605	$	19,806	$	298,364		$	20,915		$	737,913
Goodwill	$	30,297		$	75	$	4,533	$	—		$	—		$	34,905
Segment capital expenditures	$	6,081		$	200	$	40	$	401		$	—		$	6,722

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

As of and for the
Three Months Ended
September 30, 2011
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	418,097		$	29,568	$	20,996	$	15		$	—		$	468,676
Intersegment revenues	—			32,791		757		—			(33,548		)	—
Total net revenues	418,097			62,359		21,753		15			(33,548		)	468,676
Operating salaries and benefits	193,403			54,298		16,231		—			—			263,932
Self-insurance for workers’ compensation and
general and professional liability insurance	13,501			633		344		67			—			14,545
Other operating costs	121,890			2,374		2,989		—			(33,548		)	93,705
General and administrative expenses(1)	10,112			2,309		540		14,826			—			27,787
Provision for losses on
accounts receivable	4,460			73		71		—			—			4,604
Segment operating income (loss)	$	74,731		$	2,672	$	1,578	$	(14,878	)	$	—		$	64,103
Center rent expense	35,642			140		170		—			—			35,952
Depreciation and amortization	6,770			236		187		970			—			8,163
Interest, net	(33		)	—		—		4,867			—			4,834
Net segment income (loss)	$	32,352		$	2,296	$	1,221	$	(20,715	)	$	—		$	15,154
Identifiable segment assets	$	384,576		$	16,254	$	20,039	$	343,550		$	20,881		$	785,300
Goodwill	$	31,071		$	75	$	4,533	$	—		$	—		$	35,679
Segment capital expenditures	$	12,934		$	149	$	63	$	1,044		$	—		$	14,190

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

As of and for the
Nine Months Ended
September 30, 2012
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services			Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	1,220,673		$	88,858	$	66,559		$	15		$	—		$	1,376,105
Intersegment revenues	—			98,152		1,982			—			(100,134		)	—
Total net revenues	1,220,673			187,010		68,541			15			(100,134		)	1,376,105
Operating salaries and benefits	570,169			158,170		51,637			—			—			779,976
Self-insurance for workers’ compensation and
general and professional liability insurance	40,683			1,820		1,049			192			—			43,744
Other operating costs	374,346			6,991		8,411			—			(100,134		)	289,614
General and administrative expenses(1)	26,624			6,284		1,831			46,542			—			81,281
Provision for losses on
accounts receivable	13,802			1,154		201			—			—			15,157
Segment operating income (loss)	$	195,049		$	12,591	$	5,412		$	(46,719	)	$	—		$	166,333
Center rent expense	108,606			432		508			—			—			109,546
Depreciation and amortization	21,420			778		562			2,828			—			25,588
Interest, net	(81		)	—		(3		)	13,381			—			13,297
Net segment income (loss)	$	65,104		$	11,381	$	4,345		$	(62,928	)	$	—		$	17,902
Identifiable segment assets	$	381,223		$	17,605	$	19,806		$	298,364		$	20,915		$	737,913
Goodwill	$	30,297		$	75	$	4,533		$	—		$	—		$	34,905
Segment capital expenditures	$	22,408		$	758	$	151		$	1,234		$	—		$	24,551

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

As of and for the
Nine Months Ended
September 30, 2011
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	1,250,568		$	89,645	$	65,309	$	36		$	—		$	1,405,558
Intersegment revenues	—			98,710		2,079		—			(100,789		)	—
Total net revenues	1,250,568			188,355		67,388		36			(100,789		)	1,405,558
Operating salaries and benefits	577,160			161,925		50,789		—			—			789,874
Self-insurance for workers’ compensation and
general and professional liability insurance	40,480			1,918		1,043		202			—			43,643
Other operating costs	362,158			7,082		8,548		—			(100,789		)	276,999
General and administrative expenses(1)	30,387			7,139		1,804		45,159			—			84,489
Provision for losses on
accounts receivable	13,438			713		47		—			—			14,198
Segment operating income (loss)	$	226,945		$	9,578	$	5,157	$	(45,325	)	$	—		$	196,355
Center rent expense	106,487			394		513		—			—			107,394
Depreciation and amortization	19,331			689		561		2,660			—			23,241
Interest, net	(69		)	—		1		14,756			—			14,688
Net segment income (loss)	$	101,196		$	8,495	$	4,082	$	(62,741	)	$	—		$	51,032
Identifiable segment assets	$	384,576		$	16,254	$	20,039	$	343,550		$	20,881		$	785,300
Goodwill	$	31,071		$	75	$	4,533	$	—		$	—		$	35,679
Segment capital expenditures	$	27,309		$	1,102	$	136	$	3,799		$	—		$	32,346

______________________________________

(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

Measurement of Segment Income

We evaluate financial performance and allocate resources primarily based on income or loss from operations before income taxes, excluding any unusual items. The following table reconciles net segment income to consolidated income before income taxes and discontinued operations (in thousands):

	For the Three Months Ended September 30,
	2012		2011
Net segment income	$	8,144	$	15,154
Transaction costs	1,034		—
Loss on sale of assets, net	189		809
Restructuring costs	—		2,426
Loss on asset impairment	—		317,091
Consolidated income (loss) before income taxes
and discontinued operations	$	6,921	$	(305,172	)

	For the Nine Months Ended September 30,
	2012		2011
Net segment income	$	17,902	$	51,032
Transaction costs	2,871		—
Loss on sale of assets, net	189		809
Restructuring costs	—		2,728
Loss on asset impairment	—		317,091
Consolidated income (loss) before income taxes
and discontinued operations	$	14,842	$	(269,596	)

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Asset Impairment Asset Impairment

3 Months Ended

Sep. 30, 2011

Asset Impairment [Abstract]

Asset Impairment Charges

Asset Impairment

GAAP requires that goodwill, intangible assets and other long-lived assets be evaluated for potential impairment when a triggering event occurs during an interim time period. As a result of the CMS Final Rule, the prospective net decrease in Medicare reimbursement rates was 11.1%, after the application of the market basket increase of 2.7%, the productivity adjustment of (1.0)% and the parity adjustment of (12.6)%. Additionally, the CMS Final Rule changed group therapy reimbursement and introduced new change-of-therapy provisions as patients move through their post-acute stay that further reduced our revenues from the Medicare program and increased our costs of providing such services. We determined that the CMS Final Rule announcement constituted a triggering event in the three months ended September 30, 2011 for evaluating whether the recoverability of goodwill, intangible assets and other long-lived assets in the operating segments of our Inpatient Services reportable segment affected by the CMS Final Rule was impaired.

During the three months ended September 30, 2011, we recognized $317.1 million of non-cash loss on asset impairment for the healthcare facilities operating segments in our Inpatient Services reportable segment. The non-cash charges consisted of $314.7 million of goodwill impairment and $2.4 million of asset impairment for intangible assets for favorable lease obligations. During the three and nine months ended September 30, 2012, there were no triggering events for potential impairment and as such, there was no impairment charge. The 2011 charges were determined in the following manner:

Finite-Lived Intangibles

Our finite-lived intangibles include tradenames and favorable lease obligations.

When evaluating the recoverability of tradenames, we considered projections of future profitability and undiscounted cash flows for the affected portions of the Inpatient Services operating segments as compared to the carrying value of the tradenames assets. We determined that projected undiscounted cash flows were sufficient to recover the assets' carrying value. As a result, there was no impairment of tradenames during the three months ended September 30, 2011.

When evaluating the recoverability of favorable lease obligations, we considered projections of future profitability and undiscounted cash flows for the affected portions of the Inpatient Services operating segments as compared to the carrying value of the favorable lease obligation intangible assets. We determined that projected undiscounted cash flows were not sufficient to recover the full carrying value of the assets and proceeded to determine a fair value of each asset.

We determined fair value based upon estimates of market rental values for the centers associated with the favorable lease intangibles using valuations techniques broadly accepted by the long-term care industry in which we operate. We applied an industry average discount factor to the difference of this estimated market rental values to our contractually obligated lease payments over the remaining term of the leases, resulting in an appropriate estimate of fair value for the favorable lease intangible. We determined that certain favorable lease obligations had fair values less than their carrying values and recognized the $2.4 million loss on asset impairment described above.

Indefinite-Lived Intangibles

Our indefinite-lived intangibles consist of certificates of need (“CON”) obtained through our acquisitions. We evaluate the recoverability of our CON intangibles by comparing the assets' respective carrying value to estimates of fair value. We determine the estimated fair value of these intangible assets through an estimate of incremental cash flows with the intangible assets versus cash flows without the intangible assets in place coupled with estimates of market pricing to determine the highest and best use for purposes of determining fair value. The resulting fair values exceeded the assets' carrying value and thus no impairment was recognized.

Long-Lived Assets

GAAP requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows associated with these assets are not sufficient to recover the assets' carrying amounts. In estimating the undiscounted projected cash flows for our impairment assessment, we primarily used our internally prepared projections and forecast information, including adjustments for the estimated impact of the CMS Final Rule. We determined that undiscounted projected cash flows were sufficient to ensure recoverability of our long-lived assets.

Goodwill

GAAP requires that impairment be assessed for reporting units of the affected operating segments. A reporting unit is a business for which discrete financial information is produced and reviewed by operating segment management and provides services that are distinct from the other components of the operating segment.  For our Inpatient Services reportable segment, the reporting units for our annual goodwill impairment analysis were determined to be at the operating segment level, which were the divisional operating levels. The divisional operating levels of the Inpatient Services reportable segment include the northeast, southeast, central and west geographic divisions of SunBridge Healthcare Corporation (“SunBridge”) as well as the SolAmor Hospice Corporation (“SolAmor”) division and the Americare nutritional supplement division.

We determine potential impairment by comparing the net assets of each reporting unit to their respective fair values, which GAAP describes as Step 1 of goodwill impairment testing. We determine the estimated fair value of each reporting unit using a discounted projected cash flow analysis and other appropriate valuation methodologies. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit, which is referred to in GAAP as Step 2 of the impairment analysis. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the difference between the goodwill's carrying value and its implied fair value.

In estimating the projected cash flows for our impairment assessment, we primarily used our internally prepared projections and forecast information including adjustments for the estimated impact of the CMS Final Rule. Other factors in the cash flow projections include anticipated funding from other payor sources such as Medicaid funding plus our plans to manage overhead costs, capital expenditures and patient care liability costs.

The discounted cash flow model utilizes five years of projected cash flows for each reporting unit. The projected financial results are created from critical assumptions and estimates based upon management's business plan and historical trends while giving consideration to the overall economic environment. Determining fair value requires the exercise of significant judgments about appropriate discount rates, business growth rates, the amount and timing of expected future cash flows and market information relevant to our overall company value. In addition, to validate the reasonableness of our assumptions, we utilized our discounted cash flow model on a consolidated basis and compared the estimated fair value to our market capitalization as of September 30, 2011. Key assumptions in the discounted cash flow model are as follows:

Business Growth Assumptions - In determining our projected Inpatient Services revenue growth rates for our discounted cash flow model, we focus on the two primary drivers: average daily census (“ADC”) and reimbursement rates, particularly those rates impacted by the CMS Final Rule. Key revenue inputs include historical ADC adjusted for known trends and current Medicare and Medicaid rates adjusted for anticipated changes. ADC trends have been reasonably constant within a narrow range and may be influenced over the long run by a number of factors, including demographic changes in the population we serve and our ability to deliver quality service in an attractive environment. Generally long term care reimbursement rates are set annually by the payor. To estimate these rates, we evaluate the current reimbursement climate and adjust historical trends where appropriate. Significant adverse rate changes in any one year would cause us to reevaluate our projected rates.  In recent years we have generated historical revenue growth of 1.4% to 6.2% annually.  Expenses generally vary with ADC and have historically grown by approximately 2.9% to 5.6% annually.  Labor is the largest component of our expenses.  We consider labor market trends and staffing needs for the projected ADC levels in determining labor growth rates to be used in our projections. The projected growth rates used in our discounted cash flow model took into account the potential adverse effects of the current economic downturn on our projected revenue and expenses.

Terminal Value EBITDAR Multiple - Consistent with commonly accepted valuation techniques, a terminal multiple for the final year's projected results is applied to estimate our value in the final year of the analysis. That multiple is applied to the final year's projected EBITDAR from continuing operations.

Discount Rate - Market conditions indicated that a discount rate of 10.5% was appropriate at September 30, 2011. This discount rate is consistent with our overall market capitalization comparison. We consistently apply the same discount rate to the evaluation of each reporting unit.

The goodwill impairment analysis is subject to impact from uncertainties arising from such events as changes in economic or competitive conditions, the current general economic environment, material changes in Medicare and Medicaid reimbursement that could positively or negatively impact anticipated future operating conditions and cash flows, and the impact of strategic decisions. The results of our interim 2011 impairment analysis showed that goodwill in each of reporting units tested was impaired. Based on the analysis performed, we recognized a loss on impairment of $314.7 million for the three months ended September 30, 2011, which represents the full carrying value of goodwill for the SunBridge divisional operating segments of our Inpatient Services reportable segment. The SolAmor division's prospective Medicare reimbursement rates were not impacted by the CMS Final Rule and thus no interim 2011 impairment event arose for SolAmor and Americare.

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements (Tables)

9 Months Ended

Sep. 30, 2012

Long-Term Debt, Capital Lease Obligations and Hedging Arrangements [Abstract]

Schedule of Long-term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following as of the periods indicated (in thousands):

	September 30, 2012			December 31, 2011
Revolving loans	$	—		$	—
Mortgage note payable due monthly through 2014,
interest at a rate of 8.5%, collateralized by real property
with carrying values totaling $0.7 million	1,498			2,076
Term loans	87,298			87,389
Capital leases	137			320
Total long-term obligations	88,933			89,785
Less amounts due within one year	(944		)	(1,017		)
Long-term obligations, net of current portion	$	87,989		$	88,768

Schedule of Maturities of Long-term Debt and Capital Leases

The scheduled or expected maturities of long-term obligations as of September 30, 2012, were as follows (in thousands):

For the twelve months ending September 30:
2013	$	944
2014	691
2015	—
2016	—
2017	87,298
	$	88,933

Schedule of Fair Value Hedging Instruments, Statements of Financial Performance and Financial Position, Location

The fair values of our hedging agreements as presented in the consolidated balance sheets are as follows (in thousands):

	Derivatives
	September 30, 2012			December 31, 2011
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:	Other Long-Term			Other Long-Term
Interest rate hedging agreements	Liabilities	$	2,359	Liabilities	$	2,049

Schedule of Derivative Instruments, Effect on Other Comprehensive Income (Loss) and Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss) [Table Text Block]

The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the three months ended September 30 is as follows (in thousands):

	Amount of Loss in Other Comprehensive Loss				Gain Reclassified from Accumulated Other Comprehensive Loss to Income (ineffective portion)
	2012		2011		2012		2011
Derivatives designated as cash flow hedges:
Interest rate hedging agreements	$	36	$	535	$	—	$	—

The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the nine months ended September 30 is as follows (in thousands):

	Amount of Loss in Other Comprehensive Loss				Gain Reclassified from Accumulated Other Comprehensive Income to Income (ineffective portion)
	2012		2011		2012		2011
Derivatives designated as cash flow hedges:
Interest rate hedging agreements	$	263	$	1,153	$	—	$	—

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Segment Information Measurement of Segment Income (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Transaction costs	$ 1,034,000	$ 0	$ 2,871,000	$ 0
Loss on sale of assets, net	189,000	809,000	189,000	809,000
Restructuring costs	0	(2,426,000)	0	(2,728,000)
Loss on asset impairment	0	317,091,000	0	317,091,000
Consolidated income before income taxes and discontinued operations	6,921,000	(305,172,000)	14,842,000	(269,596,000)
Operating Segments [Member]
Segment Reporting, Reconciling Item for Operating Profit (Loss) from Segment to Consolidated [Line Items]
Transaction costs	1,034,000	0	2,871,000	0
Loss on sale of assets, net	189,000	809,000	189,000	809,000
Restructuring costs	0	2,426,000	0	2,728,000
Loss on asset impairment	0	317,091,000	0	317,091,000
Consolidated income before income taxes and discontinued operations	$ 8,144,000	$ 15,154,000	$ 17,902,000	$ 51,032,000

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Nature of Business (Details) (USD $) In Millions, except Per Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2012 Segments States HealthcareCenters
Nature of Business [Abstract]
Reportable business segments	3
Number of healthcare centers	190
Number of States wIth healthcare centers	23
Merger consideration	$ 230
Per share merger consideration	$ 8.50

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Long-Term Debt, Capital Lease Obligations and Hedging Arrangements Textuals (Details) (USD $)	9 Months Ended			9 Months Ended			9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012 Term loans [Member]	Dec. 31, 2011 Term loans [Member]	Sep. 30, 2012 Interest Rate Cap [Member]	Sep. 30, 2012 Interest Rate Cap [Member] Term loans [Member]	Jan. 18, 2011 Interest Rate Cap [Member] Term loans [Member]	Sep. 30, 2012 Interest Rate Swap [Member]	Jan. 18, 2011 Interest Rate Swap [Member] Term loans [Member]
Debt Instrument [Line Items]
Percentage of debt to be hedged	50.00%
Long-term debt, gross		$ 87,298,000	$ 87,389,000			$ 82,500,000
LIBOR cap						1.75%
LIBOR fixed								3.185%
Fee for this interest rate cap				$ 300,000
Debt instrument, interest rate, percentage					8.75%		10.185%

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Income Statement [Abstract]
Interest income	$ 94	$ 103	$ 229	$ 243
Other Comprehensive Income (Loss), Unrealized Gain (Loss) on Derivatives Arising During Period, Tax	$ 24	$ 357	$ 124	$ 769

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The estimated fair values of our financial instruments were as follows (in thousands):

	September 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	63,801	$	63,801	$	57,908	$	57,908
Restricted cash	$	14,606	$	14,606	$	16,059	$	16,059
Long-term debt and capital lease obligations,
including current portion	$	88,933	$	88,975	$	89,785	$	74,545
Interest rate hedging agreements	$	2,359	$	2,359	$	2,049	$	2,049

The cash and cash equivalents and restricted cash carrying amounts approximate fair value because of the short maturity of these instruments. At September 30, 2012 and December 31, 2011, the fair value of our long-term debt, including current maturities, and our interest rate hedging agreements was based on estimates using present value techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk.

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

Level 1:     Unadjusted quoted market prices in active markets for identical assets or liabilities.

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

Level 3:    Unobservable inputs for the asset or liability.

We endeavor to utilize the best available information in measuring fair value.  The following tables summarize the valuation of our financial instruments by the above pricing levels as of September 30, 2012 and December 31, 2011, respectively (in thousands):

	September 30, 2012
	Total	Unadjusted Quoted Market Prices (Level 1)	Significant Other Observable Inputs (Level 2)
Interest rate hedging agreements – liability	$2,359	$—	$2,359

	December 31, 2011
	Total	Unadjusted Quoted Market Prices (Level 1)	Significant Other Observable Inputs (Level 2)
Interest rate hedging agreements - liability	$2,049	$—	$2,049

We currently have no other financial instruments subject to fair value measurement on a recurring basis. The fair value for our cash and cash equivalents and restricted cash disclosed above were determined by Level 1 valuation techniques and our long-term debt and capital lease obligations fair value above was determined by Level 2 valuation techniques.

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Discontinued Operations (Details) (USD $)	3 Months Ended				9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Assets of disposal group, held for sale	$ 4,900,000				$ 4,900,000
Property and equipment of disposal group, held for sale	3,200,000				3,200,000
Other noncurrent assets of disposal group, held for sale	1,200,000				1,200,000
Prepaid and other assets of disposal group, held for sale	500,000				500,000
Net operating revenues	12,330,000		17,998,000		42,631,000		57,676,000
Loss from discontinued operations, net (1)	(2,702,000)	[1]	(2,031,000)	[1]	(8,301,000)	[2]	(5,036,000)	[2]
Tax benefit	1,727,000		1,313,000		4,378,000		3,276,000
Inpatient Services [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Number of centers in discontinued operations - Skilled Nursing Center	8				8
Number of centers in discontinued operations - Assisted Living Center	1				1
Net operating revenues	12,330,000		17,998,000		42,631,000		57,676,000
Loss from discontinued operations, net (1)	(2,690,000)	[1]	(2,020,000)	[1]	(8,283,000)	[2]	(5,007,000)	[2]
Other Services [Member]
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Net operating revenues	0		0		0		0
Loss from discontinued operations, net (1)	$ (12,000)	[1]	$ (11,000)	[1]	$ (18,000)	[2]	$ (29,000)	[2]

[1] Net of related tax benefit of $1,727 and $1,313, respectively

[2] Net of related tax benefit of $4,378 and $3,276, respectively

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2012

Segment Information [Abstract]

Schedule of Segment Reporting Information, by Segment

The following tables summarize, for the periods indicated, operating results and other financial information, by business segment (in thousands):

As of and for the
Three Months Ended
September 30, 2012
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	409,750		$	29,032	$	21,686	$	2		$	—		$	460,470
Intersegment revenues	—			31,885		432		—			(32,317		)	—
Total net revenues	409,750			60,917		22,118		2			(32,317		)	460,470
Operating salaries and benefits	191,048			51,809		16,522		—			—			259,379
Self-insurance for workers’ compensation and
general and professional liability insurance	14,237			601		335		64			—			15,237
Other operating costs	124,858			2,130		2,948		—			(32,317		)	97,619
General and administrative expenses(1)	8,523			1,514		596		14,449			—			25,082
Provision for losses on
accounts receivable	4,758			374		118		—			—			5,250
Segment operating income (loss)	$	66,326		$	4,489	$	1,599	$	(14,511	)	$	—		$	57,903
Center rent expense	36,323			154		170		—			—			36,647
Depreciation and amortization	7,276			267		191		920			—			8,654
Interest, net	(53		)	—		—		4,511			—			4,458
Net segment income (loss)	$	22,780		$	4,068	$	1,238	$	(19,942	)	$	—		$	8,144
Identifiable segment assets	$	381,223		$	17,605	$	19,806	$	298,364		$	20,915		$	737,913
Goodwill	$	30,297		$	75	$	4,533	$	—		$	—		$	34,905
Segment capital expenditures	$	6,081		$	200	$	40	$	401		$	—		$	6,722

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(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

As of and for the
Three Months Ended
September 30, 2011
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	418,097		$	29,568	$	20,996	$	15		$	—		$	468,676
Intersegment revenues	—			32,791		757		—			(33,548		)	—
Total net revenues	418,097			62,359		21,753		15			(33,548		)	468,676
Operating salaries and benefits	193,403			54,298		16,231		—			—			263,932
Self-insurance for workers’ compensation and
general and professional liability insurance	13,501			633		344		67			—			14,545
Other operating costs	121,890			2,374		2,989		—			(33,548		)	93,705
General and administrative expenses(1)	10,112			2,309		540		14,826			—			27,787
Provision for losses on
accounts receivable	4,460			73		71		—			—			4,604
Segment operating income (loss)	$	74,731		$	2,672	$	1,578	$	(14,878	)	$	—		$	64,103
Center rent expense	35,642			140		170		—			—			35,952
Depreciation and amortization	6,770			236		187		970			—			8,163
Interest, net	(33		)	—		—		4,867			—			4,834
Net segment income (loss)	$	32,352		$	2,296	$	1,221	$	(20,715	)	$	—		$	15,154
Identifiable segment assets	$	384,576		$	16,254	$	20,039	$	343,550		$	20,881		$	785,300
Goodwill	$	31,071		$	75	$	4,533	$	—		$	—		$	35,679
Segment capital expenditures	$	12,934		$	149	$	63	$	1,044		$	—		$	14,190

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(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

As of and for the
Nine Months Ended
September 30, 2012
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services			Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	1,220,673		$	88,858	$	66,559		$	15		$	—		$	1,376,105
Intersegment revenues	—			98,152		1,982			—			(100,134		)	—
Total net revenues	1,220,673			187,010		68,541			15			(100,134		)	1,376,105
Operating salaries and benefits	570,169			158,170		51,637			—			—			779,976
Self-insurance for workers’ compensation and
general and professional liability insurance	40,683			1,820		1,049			192			—			43,744
Other operating costs	374,346			6,991		8,411			—			(100,134		)	289,614
General and administrative expenses(1)	26,624			6,284		1,831			46,542			—			81,281
Provision for losses on
accounts receivable	13,802			1,154		201			—			—			15,157
Segment operating income (loss)	$	195,049		$	12,591	$	5,412		$	(46,719	)	$	—		$	166,333
Center rent expense	108,606			432		508			—			—			109,546
Depreciation and amortization	21,420			778		562			2,828			—			25,588
Interest, net	(81		)	—		(3		)	13,381			—			13,297
Net segment income (loss)	$	65,104		$	11,381	$	4,345		$	(62,928	)	$	—		$	17,902
Identifiable segment assets	$	381,223		$	17,605	$	19,806		$	298,364		$	20,915		$	737,913
Goodwill	$	30,297		$	75	$	4,533		$	—		$	—		$	34,905
Segment capital expenditures	$	22,408		$	758	$	151		$	1,234		$	—		$	24,551

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(1) General and administrative expenses include operating administrative expenses.

The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, restructuring costs, transaction costs, income tax expense and discontinued operations.

The term “net segment income (loss)” is defined as earnings before restructuring costs, transaction costs, income tax expense and discontinued operations.

As of and for the
Nine Months Ended
September 30, 2011
	Inpatient Services			Rehabilitation Therapy Services		Medical Staffing Services		Corporate			Intersegment Eliminations			Consolidated
Revenues from external customers	$	1,250,568		$	89,645	$	65,309	$	36		$	—		$	1,405,558
Intersegment revenues	—			98,710		2,079		—			(100,789		)	—
Total net revenues	1,250,568			188,355		67,388		36			(100,789		)	1,405,558
Operating salaries and benefits	577,160			161,925		50,789		—			—			789,874
Self-insurance for workers’ compensation and
general and professional liability insurance	40,480			1,918		1,043		202			—			43,643
Other operating costs	362,158			7,082		8,548		—			(100,789		)	276,999
General and administrative expenses(1)	30,387			7,139		1,804		45,159			—			84,489
Provision for losses on
accounts receivable	13,438			713		47		—			—			14,198
Segment operating income (loss)	$	226,945		$	9,578	$	5,157	$	(45,325	)	$	—		$	196,355
Center rent expense	106,487			394		513		—			—			107,394
Depreciation and amortization	19,331			689		561		2,660			—			23,241
Interest, net	(69		)	—		1		14,756			—			14,688
Net segment income (loss)	$	101,196		$	8,495	$	4,082	$	(62,741	)	$	—		$	51,032
Identifiable segment assets	$	384,576		$	16,254	$	20,039	$	343,550		$	20,881		$	785,300
Goodwill	$	31,071		$	75	$	4,533	$	—		$	—		$	35,679
Segment capital expenditures	$	27,309		$	1,102	$	136	$	3,799		$	—		$	32,346

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(1) General and administrative expenses include operating administrative expenses.

Reconciliation of Operating Profit (Loss) from Segments to Consolidated

The following table reconciles net segment income to consolidated income before income taxes and discontinued operations (in thousands):

	For the Three Months Ended September 30,
	2012		2011
Net segment income	$	8,144	$	15,154
Transaction costs	1,034		—
Loss on sale of assets, net	189		809
Restructuring costs	—		2,426
Loss on asset impairment	—		317,091
Consolidated income (loss) before income taxes
and discontinued operations	$	6,921	$	(305,172	)

	For the Nine Months Ended September 30,
	2012		2011
Net segment income	$	17,902	$	51,032
Transaction costs	2,871		—
Loss on sale of assets, net	189		809
Restructuring costs	—		2,728
Loss on asset impairment	—		317,091
Consolidated income (loss) before income taxes
and discontinued operations	$	14,842	$	(269,596	)