Beverly Increases Reserves for Patient Care Liability Costs.

Business Editors & Health/Medical Writers

FORT SMITH, Ark.--(BW HealthWire)--July 19, 2002

Beverly Enterprises, Inc. (NYSE:BEV) today announced that it will increase reserves for patient care liability costs related to prior policy-years by $43.3 million in the second quarter of 2002. Included in this amount is a special non-cash charge of $22.2 million to increase reserves related to the company's former nursing home operations in Florida, which were sold in early January 2002. The balance of the reserve adjustment, $21.1 million, relates to certain other states and will be included as part of "other operating expense."

Beverly also will record an additional $5 million in second quarter operating expenses to reflect increased liability costs for the current policy-year, which began May 1, 2002 ($2.5 million additional per month for May and June). Monthly accruals will continue at the higher level for the balance of 2002.

As a result of these projected increases in patient care liability costs, Beverly expects to report a loss for the second quarter of approximately $14 million (13 cents per share diluted). As previously announced, Beverly will release complete second quarter financial results on July 30.

These projected cost increases are based on a recently completed actuarial study by Aon Risk Consultants, Inc., an independent advisor that conducts semi-annual analyses of Beverly's liability claims experience to develop projected expenses. Aon has provided such services to the company for five years.

"Beverly's principal business units continue to demonstrate the very positive operating trends that we achieved during the first quarter," said William R. Floyd, Beverly Chairman and Chief Executive Officer. "Adjustments for patient care liability reserves should not detract from a very solid operating performance that would have produced on-target pro forma earnings of at least 14 cents per share. We remain in full compliance with all debt covenants, and further reduction in our overall debt level remains a priority for us." Reserves for projected prior policy-year liability costs and accruals for current-year estimated expenses are determined by semi-annual analyses conducted by Aon and reviewed by Ernst & Young LLP, Beverly's independent auditors. Patient care liability accruals for 2002 had been based initially on an October 2001 Aon actuarial study. The most recent Aon study, based on data through April 2002, shows significant and unanticipated increases in both the frequency and severity of claims from prior policy years. This adverse prior policy-year experience also led to increased forecasts for patient care liability costs for the current insurance policy-year, which began May 1, 2002.

The magnitude of these unanticipated increases in prior policy-year claim frequency and severity was particularly evident in Florida. This reflects an industry trend in that state of significant increases in lawsuits filed as a result of the passage of limited tort reform legislation in May 2001, which required that lawsuits relating to certain prior years be filed by October 5, 2001. Many of these suits were not served on Beverly until three or four months later due primarily to court backlogs.

More recently, there also has been unanticipated growth in claims and expected losses in Alabama, Arkansas, Mississippi and California - states that have been targeted by an increasingly aggressive plaintiff's bar.

"These dramatic and unanticipated increases in patient care liability costs demonstrate the soundness of our decision to sell our nursing home operations in Florida," Floyd noted. "If those facilities were still part of our nursing home portfolio, current policy-year accruals for Florida alone would total at least an additional $120 million. These runaway legal costs seriously jeopardize our nation's ability to adequately provide quality care to a growing population of frail and elderly Americans. Half the money paid for patient care liability in our profession ends up in the pockets of trial lawyers. These lawyers really are being subsidized by taxpayers, who ultimately bear the burden of higher Medicare and Medicaid costs."

Floyd added: "We continue to make significant improvements in the quality of care we provide throughout our nursing home operations, yet we continue to be penalized because of our size by a judicial system that in many states denies nursing home operators a level playing field and puts us at a distinct legal disadvantage. The dramatic and unjustified liability cost increases we're seeing throughout our profession present a compelling case for tort reform at both state and national levels.

"Within Beverly, we will continue to strategically reshape our nursing home portfolio and to develop other aggressive options to effectively manage our risk profile. We also will continue to lead the fight for equitable tort reform in the public policy arena. Well-informed voters will not permit funding for eldercare to be siphoned-off by the plaintiff's bar."

Beverly's management will discuss the company's financial and operating performance in a previously announced conference call for shareholders on Tuesday, July 30, following release of second quarter results. To ensure full disclosure of relevant information, Beverly management will have no further comment until that conference call.

Beverly shareholders may listen to that call at 8:30 a.m. EDT by dialing 800/238-9007 or 719/457-2622 and enter reservation number 442707. A recording of that conference call will be available from 11:30 a.m. EDT that day until midnight Tuesday, August 6. Shareholders may dial 888/203-1112 or 719/457-0820 and enter reservation number 442707 to access the recording.

Beverly Enterprises, Inc. and its operating subsidiaries comprise a leading provider of healthcare services to the elderly in the United States. They operate 462 skilled nursing facilities, as well as 29 assisted living centers, 53 home care and hospice centers and 153 outpatient therapy clinics. Through AEGIS Therapies, they also offer rehabilitative services on a contract basis to nursing homes operated by other care providers.