<PAGE>
                                                                    EXHIBIT 10.2


                              Settlement Agreement



         This Settlement Agreement is entered into by and between the Centers
for Medicare and Medicaid Services, United States Department of Health and Human
Services ("CMS") and Beverly Enterprises, Inc. ("Beverly"), through their
authorized representatives (collectively referred to as the "Parties"), to
resolve the Medicare reimbursement issues set forth below.

         Beverly is a corporation that operates, through subsidiaries, nursing
facilities that are providers under the Medicare program. CMS is the agency of
the federal government that administers the Medicare program. CMS, through its
fiscal intermediary, is auditing certain Medicare costs reported by Beverly for
certain years. In order to avoid the delay, inconvenience, uncertainty, and
expense of concluding those audits and of subsequent protracted litigation of
the results thereof, the Parties have reached a full and final settlement as set
forth below. By entering into this settlement, Beverly does not admit to any
liability or otherwise concede the accuracy of any reimbursement position taken
by CMS or its fiscal intermediary.


     In consideration of the mutual promises, covenants, and obligations set
forth below, and for good and valuable consideration as stated herein, the
Parties hereby agree as follows:

1.       Beverly agrees to pay to CMS the sum of Thirty-five Million Dollars
         ($35,000,000) within thirty days of execution of this Settlement
         Agreement.

2.       CMS and Beverly agree that payment of the amount set forth in Paragraph
         One (1) above is in full and final satisfaction of any and all
         outstanding CMS administrative claims that were specifically excluded
         from the prior settlement agreement between the United States of
         America and Beverly entered into on or about February 3, 2000 (the "DOJ
         Agreement") involving "Covered Conduct", as that term is defined in the
         DOJ Agreement, including, without limitation, all of the facility



<PAGE>


         specific rate recalculations and routine cost limit exception request
         revisions described in paragraphs nine through eleven (9-11) of the DOJ
         Agreement.

3.       CMS and Beverly agree that payment of the amount set forth in Paragraph
         One (1) above is in full and final satisfaction of any and all
         outstanding claims involving cost reporting issues for all of Beverly's
         cost reporting periods ending on or before December 31, 2000,
         including, without limitation, all of the administrative claims
         described in paragraph eight (8) of the DOJ Agreement and any and all
         outstanding claims involving Medicare reimbursement for bad debt to
         Beverly for Beverly's fiscal years 1999 and 2000.

4.       (a) CMS and Beverly agree that Beverly's Medicare claims for
         reimbursement of bad debt for fiscal year 2001 and afterwards shall be
         made based upon the policies, procedures, and documentation agreed upon
         by Beverly and CMS in the protocol attached to this Agreement as
         Exhibit A, the terms of which are hereby incorporated by reference into
         this Agreement. The Parties acknowledge that all or part of the bad
         debt protocol attached as Exhibit A may be modified or superceded by
         statutory, regulatory or policy changes regarding bad debt
         reimbursement, but that in any event, Beverly will be treated no
         differently than any Medicare provider of skilled nursing facility
         services with respect to reimbursement for bad debt.

         (b) CMS and Beverly further agree that Beverly has provided CMS with a
         written description of how Beverly calculates bad debt reimbursement
         and reports 75% of that amount for purposes of interim payments so that
         CMS can verify that this process is consistent with the protocol
         attached as Exhibit A. CMS agrees to complete that verification as soon
         as reasonably practicable, but within no more than 180 days after
         execution of this Agreement. Upon verification that Beverly's process
         is consistent with Exhibit A, CMS will instruct the fiscal intermediary
         to include in Beverly's next interim payment reimbursement for bad debt
         as reported on Beverly's Periodic Interim Payment submissions from
         January 1, 2001 through the date of verification, and to include
         payments to Beverly for bad debt claims in subsequent interim payments
         made to Beverly.

         (c) CMS and Beverly further agree that Beverly's Medicare bad debt
         claims for fiscal year 2001 and subsequent years shall be audited and



<PAGE>


         final settlement made through review of a sample of bad debt
         documentation.

5.       CMS will instruct its fiscal intermediary to issue Beverly's Home
         Office Cost Statements for fiscal years 1996 and 1997, which had been
         completed as of February 28, 2002, to the state Medicaid programs set
         forth on Exhibit B to this Agreement.

6.       CMS will direct its fiscal intermediary to inform state Medicaid
         programs in writing that Beverly's Medicare cost reports as filed (and
         Home Office Cost Statements as filed other than those referred to in
         paragraph 5 above that were completed as of February 28, 2002) for
         fiscal years 1996 through 2000 represent final, settled cost
         statements, and that no further adjustments will be made by Medicare
         through audit for those fiscal years.

7.       At a time and place to be mutually agreed upon, CMS shall facilitate a
         meeting between representatives of CMS, Beverly, and CMS' fiscal
         intermediary in order to discuss record keeping, cost reporting, cost
         allowance, audit, and other issues.

8.       This Agreement and the Exhibits hereto constitute the entire agreement
         between the Parties, and this Agreement may not be amended except in a
         writing signed by both Parties.

9.       The undersigned represent and warrant that they are authorized to
         execute this Agreement and, for those signing on behalf of CMS, that
         they do so in their official capacities.

10.      This Agreement may be executed in counterparts, each of which
         constitutes an original and all of which constitute one and the same
         agreement.

11.      This Agreement is effective on the date of the signature of the last
         signatory to this Agreement, and is binding on the successors,
         transferees, agents and assigns of the parties.



<PAGE>


Centers for Medicare and Medicaid Services

Date:
     ---------------------

By:
   -----------------------
[name and title]


Beverly Enterprises, Inc

Date:
     ---------------------

By:
   -----------------------
[name and title]
<PAGE>
EXHIBIT A

BAD DEBT REPORTING, DOCUMENTATION, AND AUDITING PROTOCOL


BEVERLY ENTERPRISES WILL PROVIDE THE CENTERS FOR MEDICARE AND MEDICAID SERVICES
("CMS"), AND/OR ITS DESIGNATED AGENTS, THE FOLLOWING INFORMATION RELATED TO BAD
DEBTS CLAIMED ON ANY BEVERLY ENTERPRISES COST REPORTS TO BE FILED FOR PERIODS
BEGINNING WITH THE YEAR 2001 WITH CMS FOR PAYMENT UNDER THE MEDICARE PROGRAM:


REPORTING AND DOCUMENTATION

o        Medicare bad debt listings (inpatient, outpatient and ESRD) that
         support the amounts claimed in the cost report. The listings should
         contain the following information that is necessary to determine the
         allowability of the bad debts:

1.       Beneficiary's name and account number (health insurance number);

2.       Date of covered service;

3.       Date the first bill was sent to patient, or the party responsible for
         the patient's personal financial obligations, if billing is required
         under the procedures for Medicare patients entitled to Medicaid;

4.       Date of write-off of bad debt;

5.       Amount written off as bad debt; and

6.       Deductible and coinsurance amounts charged to beneficiary.

o        Bad debt collection policy that describes, for all classes of patients:
         (1) when the first bill is to be sent to the patient or responsible
         party, if applicable, (2) the time intervals when the follow-up letters
         are to be sent and/or telephone calls are to be made if the provider
         uses an internal collection process, (3) the dollar thresholds for
         accounts that are to be sent to the outside collection agency, and (4)
         the point at which the account is written off.

If the patient files are stored electronically, the collection policy should
contain codes that are used on the electronic print screens to identify the type
of action (e.g., first bill, first follow-up notice, referral to collection
agency) taken on the account.

o        If the patient accounts are referred to an outside collection
         agency(s), a copy of the contract with the collection agency(s) is
         needed to determine whether both Medicare and non-Medicare
         uncollectible accounts are handled in a similar manner.

o        Medicare, and if necessary non-Medicare, patient files containing the
         documentation of the collection effort.

If the patient files are stored electronically, capability to access the print
screen that details the charges to the patient, the billing date, to whom the
bill was sent, and the number/code and the date of the follow-up letters or
phone calls, and/or referral to



<PAGE>


collection agency (if any). Also, on request by auditor, capability to print a
sample of the actual letters to the patient.

o        If a collection agency(s) is used at any time during the collection
         process, a copy of the collection agency report(s) that shows for each
         patient account: the name of the patient, date account placed with the
         agency(s), and balance at the end of the provider's fiscal year.

o        If no collection effort was exerted on some or all of the bad debts
         claimed, documented evidence that the patient(s) was indigent.

o        For Medicaid patients, when there is satisfactory documentation that
         the state payment formula would result in zero payment, then the
         write-off may occur before 120 days have passed.

FOR MEDICARE PATIENTS WHO ARE ENTITLED TO MEDICAID:

In general, the following information must be provided:

o        Evidence that the patient is eligible for Medicaid (Title XIX) at the
         time services were rendered.

o        Copies of the bills for Medicare deductible and/or coinsurance amounts
         that were sent to the state Medicaid Agency.

o        Copies of the remittance advice from the state Medicaid Agency showing
         that the provider's claims for the Medicare deductible and coinsurance
         amounts were denied.

The procedures that shall be followed for documenting bad debt amounts claimed
for indigent residents will be those outlined in section L of the HCFA form 339
instructions, as follows:


Evidence of the bad debt arising from Medicare/Medicaid crossovers may include a
copy of the Medicaid remittance showing the crossover claim and resulting
Medicaid payment or non-payment. However, it may not be necessary for a provider
to actually bill the Medicaid program to establish a Medicare crossover bad debt
where the provider can establish that Medicaid would have no responsibility for
payment under the state plan. In lieu of billing the Medicaid program, the
provider must furnish documentation of:

o        Medicaid eligibility at the time services were rendered, and

o        Non-payment that would have occurred if the crossover claim had
         actually been filed with Medicaid. Non-payment must be evidenced by a
         reference to the pertinent sections of a Medicaid state plan or
         precedent records of denial of previous claim submissions for the same
         service and same category of payment.



<PAGE>


The payment calculation will be audited based on the State's Medicaid plan in
effect on the date that services were furnished. Providers should be aware of
any changes in the Medicaid payment formula that might impact the crossover
calculation, and ensure that these changes are reflected in the claimed Medicare
bad debt.

FOR INDIGENT MEDICARE PATIENTS WHO ARE NOT ENTITLED TO MEDICAID:

The following information must be provided:

o        Medicare patients' files containing documentation that the provider
         used customary methods based on the guidelines in the PRM-1, section
         312 to determine patient indigence. A patient's signed declaration of
         inability to pay medical bills cannot be considered as proof of
         indigence.

o        Backup information showing that the provider considered the patient's
         totals resources (e.g., analysis of assets that are convertible to cash
         and unnecessary for the patient's daily living, liabilities, income and
         expenses) in making the determination of indigence.

o        Evidence that the provider determined that no source other than the
         patient (e.g., Title XIX, local welfare agency, guardian) would be
         legally responsible for the patients medical bill.

AUDITING

o        Audits of claims for reimbursement of bad debts will be performed in
         accordance with the "Hospital and Skilled Nursing Facility Audit
         Program (revised and issued November, 1999)," Government Auditing
         Standards (GAS) or Generally Accepted Auditing Standards (GAAS). Any
         changes in CMS audit protocols will be incorporated into this
         agreement.

The provider must comply with any changes that are made to governing CMS
statutes, regulations or manual instructions regarding bad debt policy
subsequent to the effective date of a settlement agreement entered into between
CMS and Beverly Enterprises. All or part of this protocol may be superceded by
any such CMS statutory, regulatory or policy changes regarding bad debt policy.
<PAGE>

Beverly Enterprises
Summary of all Home Office
Cost Report Addresses

  STATE                   FILING ADDRESS
  -----                   --------------
   AL     Mr. Jesse Loving
          Director or Provider Audit and Reimb. Div
          501 Dexter Ave.
          P.O. Box 5624
          Montgomery, AL 36103-5621

   AR     Lori Bowen
          Chief Program Administrator
          Department of Human Services
          Division of Medical Services
          Office of Long Term Care
          P.O. Box 8059-Slot 402
          Little Rock, AR 72203-8059

   AZ     Jane Wright, CPA, CIA
          Arizona Dept. of Hlth Srvcs.
          Office of Cost Reporting and Review
          100 W. Clarendon, Suite 500
          Phoenix, AZ 85013

   CA     Mr. Gary Wong
          Dept. of Health Services
          Auditor Review Analysis
          591 North 7th Street
          P.O. Box 943732
          Sacramento, CA 94234-7320

   DC     Mr. Herbert Weldon, Commissioner
          Commission of Health Services
          Dept of Human Services
          825 North Capital St, NE
          Washington, DC 20020

   GA     Mr. Alan Sacks
          Georgia Nurs. Hme Reimb Div
          2 Peachtree Street, N.W.
          Suite 3829
          Atlanta, GA 30303-3159
          404-651-7882 Phone

   HI     Mr. Gary S. Mizuno
          Manager
          Audit and Reimbursement
          Hawaii Medical Srvc. Assoc.
          818 Keeaumoku Street
          Honolulu, HI 96808

   IL     Margel S. Pellicord
          Illinois Department of Public Aid
          201 S. Grand Ave. East - 2nd Floor
          Springfield, IL 62763

   ID     Mr. Kevin Londeen
          500 Baybrook Court
          Suite 300
          Boise, ID 83706

   IN     Kennan Buoy
          Myers and Stauffer
          8555 North River Road, Suite 360
          Indianapolis, IN 46240
          (Rate Setting Contracters for the State)





<PAGE>

Beverly Enterprises
Summary of all Home Office
Cost Report Addresses

  STATE                   FILING ADDRESS
  -----                   --------------
   KS     Kansas Department on Aging
          New England Building
          503 S. Kansas Avenue
          Topeka, KS 66603-3404
          Attn: Director, Nurs Fac Rate Setting

   KY     Myers and Stauffer, LC
          Certified Public Accountants
          Attn:  Ada M. Gebhardt
          60 Devils Hollow Connector, Suite 200
          Frankfort, KY 40601


   LA     John C. Marchand
          State of Louisana
          Dept of Hlth and Hosp
          1201 Capitol Access Road
          Baton Rouge, LA 70821-9030


   MA     Ms Sheri Cooney
          Health Data Policy Group
          Division of Health Care Finance & Policy
          Two Boyleston Street
          Boston, MA 02116

   MD     H. Terry Hancock
          Clifton, Gunderson and Company
          Suite 500
          9515 Deereco Road
          Timonium, MD 21093

   MI     Mr. Dennis Madalinski
          Budget and Fin Admin
          Bureau of Audit and Rev. Enhanc.
          400 South Pine
          P.O. Box 30479
          Lansing, MI 48909-7979

   MN     Lori Mo
          Human Services Building
          Audit Division
          444 Lafayette Road
          St. Paul, MN 55155-3836

   MO     Marvin Bernskoetter
          Department of Social Services
          Division of Medical Services
          308 East High Street
          Jefferson City, MO 65102-6500



<PAGE>

Beverly Enterprises
Summary of all Home Office
Cost Report Addresses

  STATE                   FILING ADDRESS
  -----                   --------------
   MS     Ms. Tabitha Clifton
          Medicaid Fin. Prog. Coord.
          The Division of Medicaid
          Office of The Governor
          Suite 801, Robert E. Lee  Building
          239 North Lamar Street
          Jackson, MS 39201-1311

   NC     Chris Brady, Audit Manager
          Desk Audit Section
          Division of Medical Assistance
          2507 Mail Service Center
          Raleigh, NC 27699-2507

   NE     Dale Schallenburger
          State of Nebraska
          Department of Social Services
          301 Centennial Mall South
          Lincoln, NE 68509

   NJ     Felix A. Alamzor, Director
          Hlth Fac Rate Setting - Rm 600 CN 360
          Trenton, NJ 08625-0360

   OH     Mr. Mike Flora
          Ohio Department of Human Services
          Audits and Reimbursement Section
          30 East Broad Street, 33rd Floor
          Columbus, OH 43266-0423

   PA     Joyce B. Haskins, Director
          Department of Public Welfare
          Office of Medical Assistance
          Division of Long Term Care
          P.O. Box 2675
          Harrisburg, PA 17105

   SC     Melissa C. Davis, Director
          St Hlth and Hmn Svcs. Fin. Co.
          Div of Long Term Care Reimb
          1813 Main Street, Suite 1300
          Jefferson Executive Center
          Columbia, SC 29201

   SD     Damian Prunty
          Program Administrator
          Department of Social Services
          Off of Provider Reimb Auditing
          700 Governors Drive
          Pierre, SD 57501-2291

   TN     Donna Crutcher
          Department of State Auditing
          Suite 1500
          James K. Polk State Office Building
          Nashville, TN 37243-0264



<PAGE>

Beverly Enterprises
Summary of all Home Office
Cost Report Addresses

  STATE                   FILING ADDRESS
  -----                   --------------
   TX     Marian Dillard
          Data Development Specialist
          Texas Dept. of Human Services
          Rate Analysis Department
          701 West 51st Street
          Mail Code W-425
          Austin, TX 78751

   VA     Clifton Gunderson, P.L.L.C.
          4144-B INNSLAKE DRIVE
          Glen Allen, VA 23060-3387

   WA     Joe Perrino
          Dept of Social Health Services
          Office of Rates Management
          Aging and Adult Srvcs. Admin
          640 Woodland Square Loop SE
          Lacey, WA 98503

   WI     Randall M. Engstrom, Senior Auditor
          Bureau of Health Care Financing
          Nursing Home Section
          P.O. Box 309
          Madison, WI 53701-0309

   WV     Richard P. Brennan, Jr., Director
          Office of Audit, Research and Analysis
          3701 MacCorkle Avenue, SE
          Charleston, WV 25304