A lawsuit that threatened to cripple Skilled Healthcare Group Inc. has quietly come to a close, with the nursing home operator emerging relatively unscathed.
Foothill Ranch-based Skilled is set to pay $50 million to settle a class-action lawsuit over staffing levels at its 22 California nursing homes.
The sum is sizable, but nothing like the $677 million a Humboldt County jury ordered Skilled to pay in July.
The jury verdict made national headlines, wreaked havoc on Skilled’s stock and threatened to send the company into bankruptcy.
“We hope that we’ve got this chapter behind us,” Chief Executive Boyd Hendrickson said on a conference call with investors and analysts last week. “Going forward, we’re excited about the future of the company.”
Skilled operates about 100 nursing homes and assisted living facilities in California and six other states. It also provides hospice, home healthcare and physical, occupational and speech therapy.
Payment
The company, which didn’t admit wrongdoing in the settlement, is set to borrow $50 million against a $100 million line of credit to make payments.
Skilled’s “cash generated from operations, cash on hand and the remaining borrowings available” should be enough to cover debt payments and fund the business for the near term, Chief Financial Officer Dev Ghose said on the call.
The company had long-term debt and capital leases of about $500 million as of June 30.
The settlement calls for an outside monitor to track Skilled’s nursing home staffing levels for two years.
Complying with that is expected to cost Skilled about $13 million through 2012, Ghose said.
Most of that cost will be in dealing with regulatory oversight, rather than hiring more people. Skilled maintained during the trial that its staffing was adequate.
“We (believe) that we have been adequately and appropriately staffed prior to and during this trial,” Hendrickson said.
Skilled’s maintained “good standing” throughout the legal proceedings, Hendrickson said.
Analysts had expected Skilled to settle the case, since bankruptcy would have turned the plaintiffs into unsecured creditors and put them in back of the line for getting paid.
‘Enormous’
The size of the initial verdict “was so enormous that it would have called the future viability of Skilled into question,” said Robert Mains, an analyst with Morgan Keegan & Co., a Memphis-based investment bank. “And I don’t think that was the intent of anybody—not the plaintiffs, not the plaintiffs’ lawyers.”
If the jury verdict had stood, it would have exceeded Skilled’s available credit lines and insurance coverage, the company said.
Settling the case is “an accommodation that was acceptable to everybody,” Mains said.
Northern California’s Janssen Law Firm, which represented the plaintiffs, said in a statement it was satisfied with the settlement, which “reflects the best possible recovery” for its clients.
For Skilled, the settlement is somewhat of an administrative burden but isn’t expected to “impair their ability to deliver the type of care they want to deliver nor grow going forward,” Mains said.
Stock
The settlement news lifted a cloud on Skilled’s stock, which had bounced wildly since the verdict.
Skilled’s shares, which lost 75% of their value on July 7, the day of the verdict announcement, shot up 25% after the company said it struck a settlement. The company had a market value of about $160 million last week.
“Wall Street doesn’t like uncertainty and there is massive uncertainty when you have a potentially bankrupting (verdict) out there,” Mains said. “Now, life can go forward and investors can focus on the things Skilled does well, which is attracting and treating high-acuity, short-stay patients.”
Skilled, which Mains called one of the more efficient nursing home operators, could offset some of the added compliance costs with “improved operations,” he said.
One downside: scrutiny of Skilled’s staffing levels could mean it has to turn away patients in cases where nurse staffing levels don’t meet requirements, according to Mains.
Court Date
Humboldt County Superior Court Judge Bruce Watson has set a Nov. 29 hearing to finalize the settlement.
The lawsuit was filed in 2006 on behalf of 32,000 California patients of Skilled, the country’s 10th largest nursing home operator.
Skilled doesn’t expect any similar issues to arise in other markets. It does expect that the controls it is putting into place to comply with the injunction will insulate it from further suits in California, according to Roland Rapp, Skilled’s general counsel.
Skilled also operates nursing homes in Texas, Iowa, Kansas, Missouri, Nevada and New Mexico.
