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                                                                   EXHIBIT 10.43

                          CORPORATE INTEGRITY AGREEMENT
                                   BETWEEN THE
                           OFFICE OF INSPECTOR GENERAL
                                     OF THE
                     DEPARTMENT OF HEALTH AND HUMAN SERVICES
                                       AND
                            BEVERLY ENTERPRISES, INC.

A.       PREAMBLE

         Beverly Enterprises, Inc., hereby enters into this Corporate Integrity
Agreement ("CIA") with the Office of Inspector General ("OIG") of the United
States Department of Health and Human Services ("HHS") to ensure compliance by
Beverly Enterprises, Inc. and the subsidiaries and affiliates through which it
operates (these entities are collectively referred to hereinafter as "Beverly"),
and Beverly's officers, directors and employees with the requirements of
Medicare, Medicaid and all other Federal health care programs (as defined in 42
U.S.C. Section 1320a-7b(f)) (hereinafter collectively referred to as the
"Federal health care programs.") Beverly's compliance with the terms and
conditions in this CIA shall constitute an element of Beverly's present
responsibility with regard to participation in the Federal health care programs.
Contemporaneously with this CIA, Beverly is entering into a Settlement Agreement
with the United States, and this CIA is incorporated by reference into the
Settlement Agreement.

II.       TERM OF THE CIA

         The period of the compliance obligations assumed by Beverly under this
CIA shall be nine years from the effective date of this CIA, or for the period
of time Beverly remains obligated by the payment terms of the Settlement
Agreement, whichever is shorter, but in any event for not less than five years.
The effective date of this CIA will be the date on which the final signatory of
this CIA executes this CIA.

II.      CORPORATE INTEGRITY OBLIGATIONS

         Beverly currently operates a Compliance Program. Beverly agrees that
during the term of this CIA, its Compliance Program will be operated in a manner
that meets the requirements of this CIA.

         A. Compliance Officers and Committees. Beverly shall maintain or
establish the following positions and committees during the term of this CIA. If
Beverly changes its structure in a way that affects these positions and
committees, Beverly shall ensure that under the new structure Beverly devotes at
least equal resources to its Compliance Program as are devoted under the
structure described in this section.

                  1. Audit and Compliance Committee of the Board of Directors.
Beverly currently has an Audit Committee and a Litigation/Compliance Committee
of the


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Board of Directors and will maintain during the term of this CIA an Audit and
Compliance Committee of the Board of Directors (the "Board Committee") comprised
of four or more outside directors of Beverly Enterprises, Inc. The Board
Committee shall be responsible for the review of matters related to the
Compliance Program, this CIA, and compliance with requirements of Federal health
care programs. The Board Committee shall meet at least semi-annually. When new
members of the Board Committee are appointed or the responsibilities or
authorities of the Board Committee are substantially changed, Beverly shall
notify the OIG, in writing, within 15 days of such a change.

                  2. Compliance Officer. Beverly has appointed a Compliance
Officer, who is and shall be responsible for developing and implementing
policies, procedures, and practices designed to ensure compliance with the
requirements of Federal health care programs and the obligations set forth in
this CIA. The Compliance Officer shall be a member of senior management of
Beverly (i.e., not subordinate to Beverly's general counsel or CFO) with
unrestricted access to the Board Committee, who shall make regular (at least
semi-annual) reports regarding compliance matters directly to the CEO and the
Board Committee, and who shall be authorized to report to the Board Committee at
any time. The Compliance Officer is and shall remain responsible for monitoring
the day-to-day activities engaged in by Beverly to further its compliance
objectives as well as for any reporting obligations created under this CIA. The
Compliance Officer, or his or her designees who have been directed to bring all
issues concerning Beverly's compliance with Federal health care program
requirements to the attention of the Compliance Officer, shall also review the
portions of all Beverly internal audit reports that relate to Federal health
care program compliance and take all reasonable steps to ensure that problems
identified by the Compliance Program or internal audits are appropriately
addressed through corrective action plans. In the event a new Compliance Officer
is appointed during the term of this CIA, Beverly shall notify the OIG, in
writing, within 15 days of such a change. Should it become necessary to pursue
employment of a new Compliance Officer, Beverly shall appoint an acting
Compliance Officer who shall be granted authority equal to that of the
Compliance Officer.

                  3. Compliance Committee. Beverly has appointed a Compliance
Working Group ("Compliance Committee"). The Compliance Committee includes and
shall continue to include the Compliance Officer and other appropriate officers
and/or department heads as necessary to meet the requirements of this CIA within
Beverly's corporate structure (e.g., representatives of each major function,
such as internal audit, quality management, labor relations, Medicare coverage
and compliance group, prospective payment group, and regulatory review group).
The Compliance Officer shall chair the Compliance Committee and the Committee
shall support the Compliance Officer in fulfilling his/her responsibilities.


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                  4. Compliance Liaisons. Beverly has designated its Group Vice
Presidents as Compliance Liaisons. During the term of this CIA, Group Vice
Presidents (or their compliance equivalent within Beverly) shall perform the
role of Compliance Liaisons. Compliance Liaisons are and shall continue to be
responsible for monitoring and ensuring execution of the Compliance Program and
the relevant requirements of this CIA at their operational level and at the
groups and Beverly facilities for which the Compliance Liaison is responsible.
Compliance Liaisons are and shall remain responsible for: providing leadership
and support regarding compliance issues at the group and facility levels;
developing and distributing written compliance-related materials; ensuring the
provision of appropriate training and the proper documentation of such training;
ensuring the appropriate distribution of internal and external audit reports and
monitoring of corrective action related to such reports or other identified
compliance-related issues; ensuring proper reporting and responses to
compliance-related issues; and monitoring facilities' Executive Directors and
group-level staff in the execution of their compliance- related functions.
Compliance Liaisons shall be responsible for supervising staff at each group
level who will assist the Compliance Liaison in fulfilling his or her compliance
functions. Group level compliance functions are currently performed by Group
Vice Presidents, group HR managers, group business office consultants and group
clinical managers/nurse consultants. If these group functions change, Beverly
shall devote equal resources to the group-level compliance functions. Compliance
Liaisons shall certify annually that all plans of correction related to
identified problems in facilities or Beverly operations for which they are
responsible have been implemented and that all Compliance Program concerns have
been reported. Such certifications shall be maintained by the Compliance Officer
and shall be available to the OIG upon request. False certifications by the
Compliance Liaison shall be grounds for immediate termination, and proper
execution of Compliance Liaison duties shall be a major component of the
performance evaluations of Group Vice Presidents (or the Compliance Liaison
equivalent within Beverly).

                  5. Executive Directors. Each Beverly facility is managed by an
Executive Director. The Executive Directors will continue to be responsible for
compliance in their facilities. Execution of compliance duties shall be a major
component of the performance evaluations of Executive Directors. Should it
become necessary to pursue employment of a new Executive Director, Beverly shall
appoint an acting Executive Director who shall be granted authority equal to
that of the Executive Director to carry out all required duties, including those
with respect to Beverly's Compliance Program.

A.    Written Standards.

                  1. Code of Conduct. Beverly has established a Code of Conduct
and Business Ethics ("Code of Conduct").


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                           a. CONTENTS. The Code of Conduct includes and shall
continue to include the following:

                           1) Beverly's commitment to full compliance with all
                           statutes, regulations, and guidelines applicable to
                           Federal health care programs, including its
                           commitment to prepare and submit accurate billings
                           and reports consistent with Federal health care
                           program statutes, regulations, procedures and
                           instructions otherwise communicated by appropriate
                           regulatory agencies, e.g., the Health Care Financing
                           Administration ("HCFA"), and/or fiscal intermediaries
                           or carriers;

                           2) Beverly's requirement that all of its covered
                           persons shall be expected to comply with all
                           statutes, regulations, and guidelines applicable to
                           Federal health care programs and with Beverly's own
                           Policies and Procedures (including the requirements
                           of this CIA);

                           3) the requirement that all of Beverly's covered
                           persons shall be expected to report suspected
                           violations of any statute, regulation, or guideline
                           applicable to Federal health care programs or of
                           Beverly's own Policies and Procedures;

                           4) the possible consequences to both Beverly and
                           covered persons of failure to comply with all
                           statutes, regulations, and guidelines applicable to
                           Federal health care programs and with Beverly's own
                           Policies and Procedures or of failure to report such
                           non-compliance; and

                           5) the right of all covered persons to use the
                           Confidential Disclosure Program, as well as Beverly's
                           commitment to confidentiality and non-retaliation
                           with respect to disclosures.

                           b. DEFINITIONS. For the purposes of this CIA, a
"covered person" is any of Beverly's officers, directors or employees who
provide patient-care to Federal health care program beneficiaries or who are
involved in Beverly's billings or related submissions to Federal health care
programs.

                           c. DISTRIBUTION AND CERTIFICATION. Beverly currently
requires the Code of Conduct to be distributed to all employees during each
employee's orientation and thereafter, as revisions occur or replacement copies
are needed. Within 90 days of the effective date of this CIA, Beverly shall
distribute the Code of Conduct to all covered persons who have not already
received a copy of the current Code of Conduct. Within 90 days of the effective
date of the CIA, each covered person shall certify, in writing, that he or she
has received, read, understands, and will abide by Beverly's Code of Conduct.
New covered persons shall continue to receive the Code of


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Conduct during orientation and shall complete the required certification within
30 days after becoming a covered person or within 90 days of the effective date
of the CIA, whichever is later. The certifications required by this section
shall be made available to the OIG upon request. The promotion of, and adherence
to, the Code of Conduct is and shall continue to be an element in evaluating the
performance of all covered persons. Beverly will annually review the Code of
Conduct and will revise or supplement it as necessary. Beverly shall distribute
revisions and supplements to the Code of Conduct to covered persons within 30
days of such changes being completed. Covered persons shall certify on an annual
basis that they have received, read, understand and will abide by the Code of
Conduct.

                           d. COVERED CONTRACTOR REQUIREMENTS. For each of its
Covered Contractors, Beverly shall: (1) require in its contract with the Covered
Contractor that the Covered Contractor acknowledges Beverly's Compliance Program
and Code of Conduct; (2) ensure that the Code of Conduct is provided (either by
Beverly or the Covered Contractor) to all Covered Contractors; (3) require in
the contract with the Covered Contractor that the Covered Contractor obtain and
retain (subject to review by Beverly and/or the OIG) signed certification from
all of its employees who provide patient care to Federal health care program
beneficiaries at Beverly facilities that they have received, read, and
understand the Code of Conduct and agree to abide by the requirements of the
Compliance Program. Beverly shall require future contracts with Covered
Contractors to include the above-described provisions. Within 90 days of the
execution of this CIA, Beverly shall attempt in good faith to reform contracts
with its then-current Covered Contractors to include a provision pursuant to
which the contractors will provide assurance satisfactory to Beverly that these
requirements will be met. For the purposes of this CIA, a "Covered Contractor"
is an entity (or individual) that, although not a covered person, nevertheless
provides patient care to Federal health care program beneficiaries in Beverly
facilities or participates in Beverly's billings or related submissions to
Federal health care programs for Beverly on a regular basis (i.e., more often
than two weeks over a 52-week period).

                  2. Policies and Procedures. Beverly has developed written
Policies and Procedures regarding its Compliance Program and its compliance with
relevant Federal and state health care statutes, regulations, and guidelines,
including the requirements of the Federal health care programs. Beverly shall
continue to assess and update as necessary the Policies and Procedures at least
annually and more frequently, as appropriate. The Policies and Procedures will
be available to OIG upon request. Beverly shall continue to ensure that relevant
portions of the Policies and Procedures are distributed to the appropriate
covered persons. Compliance staff or supervisors are and


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shall continue to be available to explain any and all Policies and Procedures.
At a minimum, the Policies and Procedures shall specifically address:

                           a. measures intended to ensure that Beverly fully
complies with the particular provisions of Titles XVIII and XIX of the Social
Security Act, 42 U.S.C. Sections 1395-1395ggg (1999) and 1396-1396v (1997), and
all regulations (including but not limited to 42 C.F.R. Parts 442 and 483) and
guidelines promulgated pursuant to these statutes, including:

                                    1) consistent with the provisions of 42
C.F.R. Part 483, policies requiring use of a coordinated interdisciplinary
approach to providing care to patients, including, but not limited to, policies
addressing resident assessment and care planning; nutrition, diabetes care and
wound care; infection control; abuse and neglect policies and reporting
procedures; appropriate drug therapies; appropriate mental health services;
provision of basic care needs; incontinence care; resident rights and restraint
use; activities of daily living (ADL) care; therapy services; quality of life,
including accommodation of needs and activities; and assessment of patient
competence to make treatment decisions; and

                                    2) policies addressing compliance with the
requirements applicable to Medicare's Prospective Payment System ("PPS") for
skilled nursing facilities, including, but not limited to, billing and cost
report preparation policies and procedures;

                           b. measures designed to ensure that compliance issues
identified internally (e.g., through reports to supervisors, internal audits) or
externally (e.g., audits performed by Beverly's audit or accounting firm(s) or
any other externally performed reviews) are promptly and appropriately
investigated and, if the investigation substantiates compliance issues, Beverly
implements appropriate corrective action plans and monitors compliance with such
plans;

                           c. non-retaliation policies and methods for employees
to make disclosures or otherwise report on compliance issues to Beverly
management through the Confidential Disclosure Program required by section
III.E; and

                           d. disciplinary policies designed to ensure that
individuals whose conduct has contributed to a violation of Beverly's Compliance
Program or of Federal health care program requirements are retrained, and/or
disciplined, and/or terminated, as appropriate.

         C. Training and Education. Beverly shall continue to conduct
semi-annual training programs and shall ensure that the training meets the
following requirements. The training requirements are cumulative (not exclusive)
so that one person may be required to attend training in both general and
substantive areas. Persons providing the training must continue to be
knowledgeable about the relevant subject area. All training


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requirements set forth below shall become effective within 90 days of the
effective date of this CIA and shall be repeated annually during the term of the
CIA.

                  1. General Training. Beverly shall continue to conduct and
document training regarding its Compliance Program and Code of Conduct for each
covered person. As part of its first semi-annual training program conducted
following implementation of this CIA, Beverly will provide general training to
each covered person. Beverly shall provide at least two hours of general
training to each covered person during each year while the CIA is in effect.
This general training shall explain Beverly's:

                           a. Corporate Integrity Agreement requirements;

                           b. Compliance Program (including the Policies and
                  Procedures as they pertain to general compliance issues); and

                           c. Code of Conduct.

                  2. Specific Training. Each covered person who is involved
directly in the delivery of patient care or in the preparation or submission of
information (including claims, bills, and reports) to any Federal health care
program will continue to receive specific training pertinent to his or her
responsibilities (as described below) in addition to the general training
provided above. At least annually, two hours of specific training to covered
persons who are involved directly in the delivery of patient care or in the
preparation or submission of information (including claims, bills, and reports)
to any Federal health care program will include a discussion of:

                           a. the submission of accurate information, e.g.,
                  Minimum Data Set ("MDS"), to Federal health care programs, if
                  relevant to the person's duties;

                           b. policies, procedures and other requirements
                  applicable to the documentation of medical records, if
                  relevant to the person's duties;

                           c. the personal obligation of each individual
                  involved in the patient care, documentation, or reimbursement
                  processes to ensure that such information provided is
                  accurate;

                           d. applicable statutes, regulations, program
                  requirements and directives relevant to the person's duties;

                           e. the legal sanctions for improper submissions to
                  Federal health care programs; and

                           f. examples of relevant billing practices found to
                  have been improper.

                  3. New Covered Persons. New covered persons shall be cycled
into Beverly's training programs and shall participate in the next training
cycle after they become a covered person. New covered persons involved directly
in the delivery of patient care or in the preparation or submission of
information (including claims, bills,


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and reports) to any Federal health care program shall be supervised by trained
covered persons until they have completed the specific training relevant to
their delivery of patient care and/or their preparation or submission of
information to Federal health care programs. New covered persons involved
directly in the delivery of patient care or in the preparation or submission of
information (including claims, bills, and reports) to any Federal health care
program shall have begun to receive specific training within 30 days of
employment, and shall have completed specific training within 90 days of
employment.

                  4. Certifications and Retention. An attendance log shall
document the attendance of each person who is required to attend training. The
Executive Director, Compliance Liaison or other person providing the training
shall certify the accuracy of the attendance log. The attendance log shall
specify the type of training received and the date received. The Compliance
Officer shall retain the attendance logs and certifications as well as the
specific course materials and make all of these logs, certifications and
materials available to OIG upon request.

         D. Review Procedures. Beverly performs certain reviews as part of its
Compliance Program and its ongoing operations. Beverly will continue these
reviews and modify them as necessary to comply with certain additional reviews
required by this CIA. The review procedures described in this section shall be
performed on an annual basis for each calendar year during the term of this CIA.
The Annual Reports required by this CIA will include reports on the findings and
results of all of the review procedures required by this section during the year
covered by that Annual Report.

                  1. Statistical Sampling and Appraisal Method. All matters
related to this CIA that involve statistical sampling or appraisal shall be
conducted using the OIG's Office of Audit Services Statistical Sampling
Software, also known as "RAT-STATS," available on the Internet at
www.hhs.gov/oas/ratstat.html. Wherever the CIA requires the use of a random
sample, the sample shall be selected and appraised using RAT-STATS and Beverly
shall retain all of the supporting documentation related to the selection and
appraisal of the samples.

                  2. Beverly Quality Reviews. Beverly currently performs Quality
Reviews under its "Beverly Quality System." The Quality Reviews (including
Quality Review Follow-ups) are described in a June 1999 notebook, which Beverly
has furnished to the OIG. Beverly shall continue to conduct its Quality Reviews
in the manner described in the June 1999 notebook or in a manner that devotes at
least equal resources to performing the function of quality review at Beverly
Facilities. Beverly shall notify the OIG within 15 days of any material changes
to the form, manner, or frequency of these Quality Reviews.


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                  3. Independent Review Organization. Beverly shall retain an
entity, such as an accounting, auditing or consulting firm (hereinafter
"Independent Review Organization" or "IRO"), to perform review procedures to
assist Beverly and the OIG in assessing the adequacy of Beverly's submissions to
Federal health care programs and its compliance with this CIA. The IRO must be
independent from Beverly and must have expertise in the billing, reporting and
other requirements of the Federal health care programs from which Beverly seeks
reimbursement. The IRO must be retained to conduct the review of the first year
(2000) within 120 days of the effective date of this CIA. The IRO shall produce
a separate report for each engagement. The IRO will conduct two separate types
of engagements. One will be an analysis of Beverly's claims submissions to the
Federal health care programs to assist Beverly and OIG in determining compliance
with all applicable statutes, regulations, and directives/guidance ("submissions
engagement"). The submissions engagement will assess, in part, Beverly's
internal audits, which are described below. The second engagement will determine
whether Beverly is in compliance with this CIA ("compliance engagement").

                  4. Beverly's MDS (Minimum Data Set) Audit. Beverly's Internal
Audit Department ("Internal Audit") shall implement and oversee an MDS Audit,
which will review Medicare (Part A) claims and will focus on the minimum data
set ("MDS"). Beverly shall ensure that the MDS Audit is conducted by qualified
individuals (including, but not limited to, clinical and medical personnel). To
the extent any facility personnel are involved in the MDS Audits, Beverly shall
ensure that the individual who was involved in preparing the original claim
(including through input in the entries on the MDS) on behalf of a Beverly
facility is not involved in the review of that particular facility's claims
submissions to Federal health care programs. In order to ensure the integrity of
the MDS Audit process, Beverly will issue a policy emphasizing the importance of
accurately completing the reviews discussed below, and the possible
consequences, up to and including termination, for failure to comply with this
policy. The MDS Audit shall consist of a variable appraisal (dollar amount in
error) sample. Because this engagement is designed as a variable appraisal, for
the purposes of determining dollar amounts associated with errors, the final
sampling unit will be a single claim (UB-92) and each associated MDS.

         The MDS Audit shall consist of a two-stage process of claim reviews.
The first stage shall be conducted using a random sample of a minimum of 15% of
Beverly's facilities, but in no event less than seventy-five (75) facilities.
Beverly shall retain copies of all of its work papers compiled with respect to
its internal audits, which work papers shall be available to the OIG upon
request.

                           a. FIRST STAGE. The first stage of the MDS Audit
shall consist of a probe sample of thirty (30) claims at each facility selected
as part of the random sample.


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The Compliance Officer, or his or her designee, shall select a stratified random
sample of paid Medicare claims (UB-92) throughout the year for each of the
facilities previously selected by the Compliance Officer. The probe sample
cannot be used as part of any full sample reviewed during the second stage of
the MDS Audit. The probe sample will be used to identify facilities that have
exceeded a designated financial error rate and to determine the appropriate
sample sizes for expanded sample reviews of the designated facilities in
accordance with specified RAT-STATS parameters.

                           b. SELECTION OF FACILITIES FOR SECOND STAGE. The
second stage of the MDS Audit will be performed for each individual facility
selected as part of the probe sample for which the financial error rate (i.e., a
downward change in a Resource Utilization Group ("RUG") assignment that would
result in an over-payment) in the first stage was greater than 5%. Nothing in
this section shall relieve Beverly of its responsibility to correct inaccuracies
noted in its probe sample. (The 5% financial error threshold only applies to
criteria for sample expansion, not for extrapolation of an error rate.)

                           c. SECOND STAGE. The second stage shall be a full
sample of Medicare paid claims (UB-92) (randomly selected by Internal Audit
using the RAT-STATS software referenced above) during the annual reporting
period by each applicable facility. This sample shall be selected at the end of
each year. The full sample must contain a sufficient number of sample units to
generate sample results that provide, at a minimum, a 90% confidence interval
and a maximum precision (relative precision, i.e., semi-width of the confidence
interval) of plus or minus 25% of the point estimate (i.e., the upper and lower
bounds of the 90% confidence interval shall not exceed 125% and shall not fall
below 75% of the midpoint of the confidence interval, respectively).

                           d. CLAIM REVIEWS. For each claim selected in the
first and second stage, the associated MDS and the medical record documentation
supporting the MDS will be reviewed. The review process shall entail an
evaluation of the MDS and verification that each entry that affects the RUG code
outcome for the MDS is supported by the medical record for the corresponding
period of time consistent with the assessment reference date ("ARD") specified
on the MDS. In addition, data from the MDS will be re-entered into Beverly's
Grouper (MDS data entry software program) to verify that the correct RUG code
assignment was properly assigned on the UB-92. A financial error will be logged
if there is insufficient support for an MDS data point(s) that results in a
downward change in RUG assignment that would result in an overpayment.

                  5. Ongoing Internal Audits. If Beverly becomes aware that any
facilities (including those not selected to be included as part of an annual MDS
Audit) are potentially experiencing noncompliance with the Federal health care
program requirements for claims submissions, Beverly shall, after reasonably
determining further


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review is warranted, in addition to its other CIA obligations, conduct an
internal audit to review the situation. If warranted, Internal Audit shall
obtain a plan of correction and conduct appropriate follow-up to ensure that any
inappropriate or improper practice related to claims submission identified is
appropriately addressed, and shall report all such instances to the OIG, as
specified in this CIA.

                  6. Submissions Engagement. The Submissions Engagement shall be
performed by the aforementioned Independent Review Organization. As part of the
Submissions Engagement, the IRO shall review Beverly's performance of the MDS
Audit. The IRO shall review and evaluate the processes and controls used by
Internal Audit in the MDS Audit. In addition, the IRO shall conduct its own
analysis of a random sample of 10% of the claims reviewed in the MDS Audit. The
reviews conducted by the IRO will follow the same standards set forth above with
respect to the manner in which Internal Audit is to implement and oversee its
review process, including, but not limited to, an evaluation of the MDS and
verification that each entry that affects the RUG code outcome for the MDS is
supported by the medical record. With respect to the entry of MDS data, the
Independent Review Organization shall use its own MDS data entry software
program to compare resulting outputs (i.e., RUGs).

                  The results of the reviews performed by Internal Audit and the
reviews performed by the IRO will be communicated to the OIG in the annual
report. Each annual Submission Engagement analysis shall include the following
components in its methodology:

                  1. Submissions Engagement Objective: a clear statement of the
         objective intended to be achieved by the submissions engagement and the
         procedure or combination of procedures that will be applied to achieve
         the objective.

                  2. Submissions Engagement Population: the identity of the
         population, which is the group about which information is needed and an
         explanation of the methodology used to develop the population and
         provide the basis for this determination.

                  3. Sources of Data: a full description of the source of the
         information upon which the submissions engagement conclusions will be
         based, including the legal or other standards applied, documents relied
         upon, payment data, and/or any contractual obligations.

                  4. Sampling Unit: a definition of the sampling unit (submitted
         claim), which is any of the designated elements that comprise the
         population of interest.

                  5. Sampling Frame: the identity of the sampling frame, which
         is the totality of the sampling units from which the sample will be
         selected.

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The Submissions Engagement shall provide:

         a.       findings regarding Beverly's documentation, billing, and
                  reporting (e.g., reporting of MDS and other information
                  relevant to RUG) operations (including, but not limited to,
                  the operation of the reporting system, strengths and
                  weaknesses of this system, internal controls, effectiveness of
                  the system);

         b.       findings regarding whether Beverly is submitting accurate
                  claims and resident assessments (MDS);

         c.       findings regarding Beverly's procedures and adequacy of
                  controls to correct inaccurate claims and resident assessments
                  (MDS);

         d.       findings regarding whether Beverly has complied with its
                  obligations under the Settlement Agreement: (1) not to
                  resubmit to any Federal health care program payers any
                  previously denied claims related to the conduct addressed in
                  the Settlement Agreement, and its obligations not to appeal
                  any such denials of claims for any reason associated with the
                  conduct addressed in the Settlement Agreement; and (2) not to
                  charge to, or otherwise seek payment from, Federal payers for
                  unallowable costs (as defined in the Settlement Agreement) and
                  its obligations to identify and adjust any past charges of
                  unallowable costs; and

         e.       findings regarding the steps Beverly is taking and adequacy of
                  controls to bring its operations into compliance or to correct
                  problems (including whether Beverly has effectively
                  implemented corrective action plans to address such problems)
                  identified by these engagements, internal or external audits,
                  or fiscal intermediary audits.

The OIG may obtain documentation from Beverly regarding the work Beverly has
performed on these reviews, to assist the OIG in determining the appropriateness
of the filings.

                  7. Cost Reports. Beverly's Internal Audit will continue its
practice of testing Medicaid cost report processes and data in connection with
its facility audits performed at 10% of Beverly's facilities on an annual basis.
These facility audits include tests of square footage statistics, payroll costs,
other operating costs and the proper classification of costs as reported in the
facilities' general ledgers. In addition, Internal Audit randomly selects five
Medicaid cost reports of facilities in states where the cost report has an
effect upon Medicaid reimbursement. For these cost reports, Internal Audit tests
the classification of costs from the general ledgers to the cost report. The IRO
will continue its practice of reviewing the results of Internal Audit's facility
audits and tests of Medicaid cost reports. The IRO will review and test 10% of
Internal Audit's work for reliance in its financial statement audit of Beverly.
If there is any change in this Internal Audit procedure, based upon a change in
the manner in which Beverly is reimbursed by


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the Federal health care programs, Beverly will notify the OIG within two (2)
weeks of making any such change.

         As part of the IRO's submissions engagement, the IRO shall perform
agreed-upon-procedures on selected Medicaid cost reports, designed to assist the
parties in determining that the expenses as reported in the facility's financial
statements are accurately summarized in cost reports and that the cost reports
are filed in accordance with Federal health care program requirements. The IRO
shall randomly select for audit at least five cost reports submitted to states
in which the cost report has an effect on Medicaid reimbursement. These five
randomly selected cost reports by the IRO will not necessarily be the same cost
reports as those randomly selected for review by Beverly's Internal Audit, as
set forth in the preceding paragraph.

         Beverly shall report the findings of all of the audits described above
as part of its Annual Report. The OIG may obtain documentation from Beverly
regarding the work Beverly has performed on these reviews, to assist the OIG in
determining the appropriateness of the filings.

                  8. Compliance Engagement. An Independent Review Organization
shall also conduct a compliance engagement, under which it shall perform
agreed-upon-procedures designed to assist the parties in determining whether
Beverly's program, policies, procedures, and operations comply with the terms of
this CIA. This engagement shall include section by section findings regarding
the requirements of this CIA. Beverly shall report the findings of the IRO's
compliance engagement in its Annual Report to the OIG.

                  9. Verification/Validation. In the event that the OIG has
reason to believe that Beverly's Submissions Engagement or Compliance Engagement
fails to conform to its obligations under the CIA or indicates improper
submissions not otherwise adequately addressed in the audit report, and thus
determines that it is necessary to conduct an independent review to determine
whether or the extent to which Beverly is complying with its obligations under
this CIA, Beverly agrees to pay for the reasonable cost of any such review or
engagement by the OIG or any of its designated agents.

         E. Confidential Disclosure Program. Beverly operates a Confidential
Disclosure Program, which includes a toll-free telephone Hotline. The
Confidential Disclosure Program enables covered persons and other individuals to
disclose, to the Compliance Officer or some other person who is not in the
disclosing individual's chain of command, any identified issues or questions
associated with Beverly's policies, practices or procedures with respect to a
Federal health care program, believed by the individual to be inappropriate.
Beverly shall continue to publicize the existence of the hotline (e.g., in
training, e-mail, intranet, newsletters to employees).


<PAGE>   14


         The Confidential Disclosure Program shall continue to emphasize a
non-retribution, non-retaliation policy, and include a reporting mechanism for
anonymous, confidential communication. Upon receipt of a disclosure, the
Compliance Officer (or designee) shall gather the information in such a way as
to elicit all relevant information from the disclosing individual. The
Compliance Officer (or designee) shall make a preliminary good faith inquiry
into the allegations set forth in every disclosure to ensure that he or she has
obtained all of the information necessary to determine whether a further review
should be conducted. For any disclosure that is sufficiently specific so that
the Compliance Officer or his or her designee reasonably determines further
review is warranted, the Compliance Officer shall conduct such further review of
the allegations and ensure that appropriate follow-up is conducted and that any
inappropriate or improper practice identified is appropriately addressed.

         The Compliance Officer shall continue to maintain a confidential
disclosure log, which shall continue to include a record and summary of each
allegation received, the status of the respective investigations, and any
corrective action taken in response to the investigation. In its Annual Reports,
Beverly shall provide: (1) its Monthly Customer Response Report Summaries; and
(2) the more detailed Customer Response Report Log Entries for all calls
categorized as "Quality Management" or "Billing" or any other calls that relate
to Federal health care program billings or requests for reimbursement that
relate to the period of the Annual Report. Beverly shall maintain and make
available to the OIG upon request any other documents related to confidential
disclosures (including their investigation and resolution) for at least two
years after the reporting year in which the matter was resolved.

         F.  Ineligible Persons and Criminal Background Checks.

                  1. Definition of Ineligible Person. For purposes of this CIA,
an "Ineligible Person" shall be any individual or entity who: (i) is currently
excluded, suspended, debarred or otherwise ineligible to participate in the
Federal health care programs; or (ii) has been convicted of a criminal offense
related to the provision of health care items or services (unless that person
has been reinstated in the Federal health care programs after a period of
exclusion, suspension, debarment, or ineligibility).

                  2. Screening Requirements. Beverly currently has policies and
procedures as part of its hiring process regarding the screening of prospective
employees and contractors to prevent the hiring of, or contracting with, any
Ineligible Person. Beverly shall continue to screen all employees and
prospective contractors prior to engaging their services by: (i) requiring
applicants to disclose whether they are Ineligible Persons; and (ii) reviewing
the General Services Administration's List of Parties Excluded from Federal
Programs (available through the Internet at http://www.arnet.gov/epls) and the
HHS/OIG List of Excluded Individuals/Entities (available through the Internet at


<PAGE>   15


http://www.hhs.gov/oig) (these lists will hereinafter be referred to as the
"Exclusion Lists").

                  3. Review and Removal Requirement. Within 120 days of the
effective date of this CIA, Beverly will review its list of current employees
and contractors against the Exclusion Lists. (For purposes of this paragraph, a
contractor is a person or entity that Beverly pays directly.) Thereafter,
Beverly will review the list semi-annually. If Beverly has notice that an
employee or contractor has become an Ineligible Person, Beverly will remove such
person from responsibility for, or involvement with, Beverly's business
operations related to the Federal health care programs and shall remove such
person from any position for which the person's salary or the items or services
rendered, ordered, or prescribed by the person are paid in whole or part,
directly or indirectly, by Federal health care programs or otherwise with
Federal funds at least until such time as the person is reinstated into
participation in the Federal health care programs. This paragraph does not
impose any requirement on Beverly with respect to the screening of individual
physicians who have no employment or contractual relationship with Beverly, even
if such physicians provide services to residents of Beverly Nursing Facilities.

                  4. Pending Charges and Proposed Exclusions. If Beverly has
notice that an employee or contractor is charged with a criminal offense related
to any Federal health care program, or is proposed for exclusion during his or
her employment or contract, Beverly shall take all appropriate actions to ensure
that the responsibilities of that employee or contractor do not adversely affect
the quality of care rendered to any patient or resident, or the accuracy of any
claims submitted to any Federal health care program.

                  5. Criminal Background Checks. Beverly conducts criminal
background checks of potential employees pursuant to its Compliance Program.
Beverly shall ensure that it: (a) complies with all Federal and state
requirements regarding criminal background checks for covered persons; and (b)
performs and completes a timely criminal background check on all individuals
offered employment in a position that involves direct care of patients (and the
offer of employment must be conditioned upon the results of the check). For the
purposes of this CIA: (1) in states where Beverly or a vendor performs the
background check, a timely criminal background check means a check completed
within 15 days of the offer of employment to the individual; or (2) in states
where Beverly or its vendor must use a state agency to conduct the criminal
background check, a timely criminal background check means a check conducted and
completed as soon as reasonably possible (including providing the relevant
information to the state agency prior to the offer of employment).

         G. Notification of Proceedings. Within 30 days of discovery, Beverly
shall notify OIG, in writing, of any ongoing investigation or legal proceeding
conducted or brought by a governmental entity or its agents involving an
allegation that Beverly has committed


<PAGE>   16


a crime or has engaged in fraudulent activities. This notification shall include
a description of the allegation, the identity of the investigating or
prosecuting agency, and the status of such investigation or legal proceeding.
Beverly shall also provide written notice to OIG within 30 days of the
resolution of the matter, and shall provide OIG with a description of the
findings and/or results of the proceedings, if any.

         H. Reporting.

                  1. Reporting of Overpayments. Beverly shall continue to review
its quarterly and annual costs reports and PIP requests as well as its internal
and external audit reports. If, during any of its reviews or by any other means,
Beverly identifies or learns of any billing, reporting, or other policies,
procedures and/or practices that have resulted in an overpayment, Beverly shall
continue its practice of correcting the overpayment by revising the next
quarterly PIP request or filing an amended cost report, as appropriate and
unless otherwise instructed by the payor, and shall take appropriate action to
prevent the underlying problem and the overpayments from recurring. Within 30
days of each quarterly PIP request, Beverly shall continue to file with its
fiscal intermediary a Quarterly Adjustment Report setting forth the existence of
any billing errors, overpayments, or other technical, process, or documentation
errors related to the reimbursement process. If an overpayment cannot be
addressed in a Quarterly Adjustment Report, Beverly shall notify the payor
within 30 days of discovering the overpayment and take remedial steps within 60
days of discovery (or such additional time as may be agreed to by the payor) to
repay the overpayment and correct the problem, including preventing the
underlying problem and the overpayments from recurring.

                  2. Reporting of Material Deficiencies. If Beverly determines
that there is a material deficiency, Beverly shall notify the OIG within 30 days
of discovering the material deficiency. The notification to the OIG shall
include: (a) a complete description of the material deficiency (including the
relevant facts, persons involved, and legal and program authorities); (b) the
amount of overpayment (if any) due to the material deficiency; (c) Beverly's
actions (and future plans of action) to correct the material deficiency and to
prevent such material deficiency from recurring; (d) the payor's name, address,
and contact person where the overpayment (if any) was sent; and (e) the date of
the check and identification number (or electronic transaction number) on which
the overpayment (if any) was repaid.

                  3. Definition of "Overpayment." For purposes of this CIA, an
"overpayment" shall mean the amount of money Beverly has received in excess of
the amount due and payable under the Federal health care programs' statutes,
regulations or program directives, including carrier and intermediary
instructions.

                  4. Definition of "Material Deficiency." For purposes of this
CIA, a "material deficiency" means: (i) a substantial overpayment from any
Federal health care


<PAGE>   17


program; (ii) a matter that a reasonable person would consider a potential
violation of 42 U.S.C. Sections 1320a-7, 1320a-7a or 1320a-7b, or another
criminal or civil law applicable to any Federal health care program (even though
not reported under subsection (i) as a substantial overpayment); or (iii) a
violation of the obligation to provide items or services of a quality that meets
professionally recognized standards of health care where such violation has
occurred in one or more instances that presents an imminent danger to the
health, safety or well-being of a Federal health care program beneficiary or
places the beneficiary unnecessarily in high-risk situations. A material
deficiency may be the result of an isolated event or a series of occurrences.

IV.      NEW BUSINESS UNITS OR LOCATIONS

         A. Notice of New Business Units or Locations. Prior to purchasing,
establishing, selling, or divesting a facility, Beverly shall notify the OIG in
writing of the proposed action. This notification shall include the location of
the existing or new operation(s), phone number, fax number, Federal health care
program provider number(s) (if any), and the corresponding payor(s) (contractor
specific) that has issued each provider number. Beverly shall further notify the
OIG in writing once such proposed purchase, establishment, sale, or divestiture
has been completed.

         B. Obligations of New Business Units and Locations. Once a new business
unit or location has been established, all covered persons at such locations
shall be subject to the requirements in this CIA that apply to new covered
persons (e.g., completing certifications and undergoing training).


V.       IMPLEMENTATION AND ANNUAL REPORTS

         A. Implementation Report. Within 150 days after the effective date of
this CIA, Beverly shall submit a written report to OIG summarizing the status of
its implementation of the requirements of this CIA. This Implementation Report
shall include:

                  1. the name, address, phone number and position description of
all of the individuals in positions described in section III.A;

                  2. a copy of Beverly's Code of Conduct required by section
III.B.1;

                  3. the summary of the Policies and Procedures required by
section III.B.2;

                  4. a description of the training programs required by section
III.C, including a description of the targeted audiences and a schedule of when
the training sessions were held;

                  5. a certification by the Compliance Officer that, to the best
of his or her knowledge:

                           a. the Policies and Procedures required by section
III.B have been developed, are being implemented, and have been distributed to
all pertinent covered persons;


<PAGE>   18


                           b. all covered persons have completed the Code of
Conduct certification required by section III.B.1; and

                           c. all covered persons have completed the training
and executed the certification required by section III.C.

                  6. a description of the confidential disclosure program
required by section III.E;

                  7. the identity of the Independent Review Organization(s) and
the proposed start and completion date of the engagements for the first year;

                  8. a summary of personnel actions taken pursuant to section
III.F; and

                  9. a list of all of Beverly's locations (including mailing
addresses), the corresponding name under which each location is doing business,
the corresponding phone numbers and fax numbers, each location's Federal health
care program provider identification number(s), and the name, address, and
telephone number of the payor (specific contractor) that issued each provider
identification number.

         B. Annual Reports. Beverly shall submit to OIG Annual Reports with
respect to the status and findings of Beverly's compliance activities for each
of the calendar years for which this CIA has been in effect, starting with
calendar year 2000. Each Annual Report shall be due on March 31 of the year
following the calendar year covered in the Annual Report (e.g., the Annual
Report for year 2000 shall be due on March 31, 2001). Each Annual Report shall
include:

                  1. any change in the identity or position description of
individuals in positions described in section III.A;

                  2. a certification by the Compliance Officer that, to the best
of his or her knowledge:

                           a. all covered persons have completed the annual Code
of Conduct certification required by section III.B.1;

                           b. all covered persons have completed the training
and executed the certification required by section III.C; and

                           c. Beverly has complied with its obligations under
the Settlement Agreement: (i) not to resubmit to any Federal health care program
payors any previously denied claims related to the conduct addressed in the
Settlement Agreement, and its obligation not to appeal any such denials of
claims; and (ii) not to charge to or otherwise seek payment from Federal or
state payors for unallowable costs (as defined in the Settlement Agreement) and
its obligation to identify and adjust any past charges of unallowable costs; and

                           d. Beverly has effectively implemented all plans of
correction related to problems identified under this CIA, Beverly's Compliance
Program, or internal audits;


<PAGE>   19


                  3. notification (including the actual change or a detailed
description of the change) of any changes or amendments to the Policies and
Procedures required by section III.B and the reasons for such changes (e.g.,
change in contractor policy);


                  4. a complete copy of the original reports prepared pursuant
to the Independent Review Organization's submissions and compliance engagements,
including all of the information required in section III.D;

                  5. Beverly's response/corrective action plan to any issues
raised by the Independent Review Organization;

                  6. a summary of material deficiencies identified and reported
pursuant to section III.H and the corresponding corrective action plans;

                  7. a report of the aggregate overpayments that have been
returned to the Federal health care programs that were discovered as a direct or
indirect result of implementing this CIA and a summary of the corrective actions
taken to address such overpayments. Overpayment amounts shall be broken down
into the following categories: Medicare, Medicaid (report each applicable state
separately) and other Federal health care programs;

                  8. a copy of the (1) Monthly Customer Response Report
Summaries; and (2) the Customer Response Report Log Entries for all calls
categorized as "Quality Management" or "Billing" or any other calls that relate
to the quality of care provided to patients or to billing or requests for
reimbursement, as required by section III.E;

                  9. a description of any personnel actions (other than hiring)
taken by Beverly as a result of the obligations in section III.F, and the name,
title, and responsibilities of any person that falls within the ambit of section
III.F.4, and the actions taken in response to the obligations set forth in that
section;

                  10. a summary describing any ongoing investigation or legal
proceeding conducted or brought by a governmental entity involving an allegation
that Beverly has committed a crime or has engaged in fraudulent activities,
which was required to have been reported pursuant to section III.G. The
statement shall include a description of the allegation, the identity of the
investigating or prosecuting agency, and the status of such investigation, legal
proceeding or requests for information; and

                  11. a description of all changes to the most recently provided
list (as updated) of Beverly's locations (including mailing addresses), the
corresponding name under which each location is doing business, the
corresponding phone numbers and fax numbers, each location's Federal health care
program provider identification number(s) and the payor (specific contractor)
that issued each provider identification number.

         C. Certifications. The Implementation Report and Annual Reports shall
include a certification by the Compliance Officer, under penalty of perjury,
that: (1) Beverly is in compliance with all of the requirements of this CIA
(unless the non-compliance is clearly


<PAGE>   20


and explicitly described in the Annual Report), to the best of his or her
knowledge; and (2) the Compliance Officer has reviewed the Report and has made
reasonable inquiry regarding its content and believes that, upon such inquiry,
the information is accurate and truthful.

VI.      NOTIFICATIONS AND SUBMISSION OF REPORTS

         Unless otherwise stated in writing subsequent to the effective date of
this CIA, all notifications and reports required under this CIA shall be
submitted to the entities listed below:

OIG:
                           Civil Recoveries Branch - Compliance Unit
                           Office of Counsel to the Inspector General
                           Office of Inspector General
                           U.S. Department of Health and Human Services
                           Cohen Building, Room 5527
                           330 Independence Avenue, SW
                           Washington, DC 20201
                           Phone 202.619.2078
                           Fax 202.205.0604

Beverly:
                           Cletus Hess
                           Compliance Officer
                           Beverly Enterprises, Inc.
                           5111 Rogers Avenue, Suite 40-A
                           Fort Smith, AR 72919
                           Phone 877.823.8375
                           Direct 501.201.4813
                           Fax 501.201.4801; 4802


VII.     OIG INSPECTION, AUDIT AND REVIEW RIGHTS

         In addition to any other rights OIG may have by statute, regulation, or
contract, OIG or its duly authorized representative(s), may examine Beverly's
books, records, and other documents and supporting materials and/or conduct an
on-site review of any of Beverly's locations for the purpose of verifying and
evaluating: (a) Beverly's compliance with the terms of this CIA; and (b)
Beverly's compliance with the requirements of the Federal health care programs
in which it participates. The documentation described above shall be made
available by Beverly to OIG or its duly authorized representative(s) at all
reasonable times for inspection, audit or reproduction. Furthermore, for
purposes of this provision, OIG or its duly authorized representative(s) may
interview any of Beverly's employees, contractors, or agents who consent to be
interviewed at the individual's place of business during normal business hours
or at such other place and


<PAGE>   21


time as may be mutually agreed upon between the individual and OIG. Beverly
agrees to assist OIG in contacting and arranging interviews with such
individuals upon OIG's request. Beverly's employees may elect to be interviewed
with or without a representative of Beverly present.

VIII.    DOCUMENT AND RECORD RETENTION

         Beverly shall maintain for inspection all documents and records: (1)
related to reimbursement from the Federal health care programs for at least
seven years after the submission of the request for reimbursement; and (2)
necessary to establishing Beverly's compliance with this CIA for at least three
years following the submission of the Annual Report covering the relevant year.

IX.      DISCLOSURES

         Subject to HHS's Freedom of Information Act ("FOIA") procedures, set
forth in 45 C.F.R. Part 5, the OIG shall make a reasonable effort to notify
Beverly prior to any release by OIG of information submitted by Beverly pursuant
to its obligations under this CIA and identified upon submission by Beverly as
trade secrets, commercial or financial information and privileged and
confidential under the FOIA rules. With respect to the disclosure of such
information, Beverly shall have all the rights set forth in 45 C.F.R. Section
5.65(d). Beverly shall refrain from identifying any information as trade
secrets, commercial or financial information and privileged and confidential
that does not meet the criteria for exemption from disclosure under FOIA.

         Nothing in this CIA, or any communication or report made pursuant to
this CIA, shall constitute or be construed as any waiver by Beverly of Beverly's
attorney-client, work product or other applicable privileges. Notwithstanding
that fact, the existence of any such privilege does not affect Beverly's
obligation to comply with the provisions of this CIA.

X.       BREACH AND DEFAULT PROVISIONS

         Beverly is expected to fully and timely comply with all of the
obligations herein throughout the term of this CIA or other time frames herein
agreed to.

         A. Stipulated Penalties for Failure to Comply with Certain Obligations.
As a contractual remedy, Beverly and OIG hereby agree that failure to comply
with certain obligations set forth in this CIA may lead to the imposition of the
following monetary penalties (hereinafter referred to as "Stipulated Penalties")
in accordance with the following provisions.

                  1. A Stipulated Penalty of $2,500 (which shall begin to accrue
on the day after the date the obligation became due) for each day, beginning 90
days after the effective date of this CIA and concluding at the end of the term
of this CIA, Beverly fails to have in place any of the following:

                           a. a Compliance Officer (or functional equivalent);


<PAGE>   22


                           b. Audit and Compliance Committee of the Board of
Directors (or its functional equivalent);

                           c. Compliance Liaisons at the Group Vice President
level (or functional equivalents);

                           d. a Compliance Committee;

                           e. a written Code of Conduct;

                           f. written Policies and Procedures;

                           g. a training program; and

                           h. a Confidential Disclosure Program.

                  2. A Stipulated Penalty of $2,500 (which shall begin to accrue
on the day after the date the obligation became due) for each day Beverly fails
meet any of the deadlines to submit the Implementation Report or the Annual
Reports to the OIG.

                  3. A Stipulated Penalty of $2,000 (which shall begin to accrue
on the date the failure to comply began) for each day Beverly:

                           a. hires or enters into a contract with an Ineligible
Person after that person has been listed by a federal agency as excluded,
debarred, suspended or otherwise ineligible for participation in the Medicare,
Medicaid or any other Federal health care program (as defined in 42 U.S.C.
Section 1320a-7b(f)) (this Stipulated Penalty shall not be demanded for any time
period during which Beverly can demonstrate that it did not discover the
person's exclusion or other ineligibility after making a reasonable inquiry (as
described in section III.F) as to the status of the person); or

                           b. employs or contracts with an Ineligible Person and
that person: (i) has responsibility for, or involvement with, Beverly's business
operations related to the Federal health care programs; or (ii) is in a position
for which the person's salary or the items or services rendered, ordered, or
prescribed by the person are paid in whole or part, directly or indirectly, by
Federal health care programs or otherwise with Federal funds (this Stipulated
Penalty shall not be demanded for any time period during which Beverly can
demonstrate that it did not discover the person's exclusion or other
ineligibility after making a reasonable inquiry (as described in section III.F)
as to the status of the person).

                  4. A Stipulated Penalty of $1,500 (which shall begin to accrue
on the date Beverly fails to grant access) for each day Beverly fails to grant
access to the information or documentation as required in section VII of this
CIA.

                  5. A Stipulated Penalty of $1,000 (which shall begin to accrue
10 days after the date that OIG provides notice to Beverly of the failure to
comply) for each day Beverly fails to comply fully and adequately with any
obligation of this CIA. In its notice to Beverly, the OIG shall state the
specific grounds for its determination that Beverly has failed to comply fully
and adequately with the CIA obligation(s) at issue and


<PAGE>   23


a basis for Beverly to cure noncompliance before accrual of any penalty that
will be deemed acceptable to the OIG.

         B.  Payment of Stipulated Penalties.

                  1. Demand Letter. Upon a finding that Beverly has failed to
comply with any of the obligations described in section X.A and determining that
Stipulated Penalties are appropriate, OIG shall notify Beverly by personal
service or certified mail of: (a) Beverly's failure to comply; and (b) the OIG's
exercise of its contractual right to demand payment of the Stipulated Penalties
(this notification is hereinafter referred to as the "Demand Letter").

         Within 10 business days of receiving the Demand Letter, Beverly shall
either: (a) cure the breach to the OIG's satisfaction and pay the applicable
stipulated penalties if any have accrued; or (b) request a hearing before an HHS
administrative law judge ("ALJ") to dispute the OIG's determination of
noncompliance, pursuant to the agreed upon provisions set forth below in section
X.D. In the event Beverly elects to request an ALJ hearing, the Stipulated
Penalties shall continue to accrue until Beverly cures, to the OIG's
satisfaction, the alleged breach in dispute. Failure to respond to the Demand
Letter in one of these two manners within the allowed time period shall be
considered a material breach of this CIA and shall be grounds for exclusion
under section X.C.

                  2. Timely Written Requests for Extensions. The OIG will
reasonably consider any timely written request by Beverly for an extension of
time to perform any act or file any notification or report required by this CIA.
Notwithstanding any other provision in this section, if OIG grants the timely
written request with respect to an act, notification, or report, Stipulated
Penalties for failure to perform the act or file the notification or report
shall not begin to accrue until one day after Beverly fails to meet the revised
deadline set by OIG. Notwithstanding any other provision in this section, if OIG
denies such a timely written request, Stipulated Penalties for failure to
perform the act or file the notification or report shall not begin to accrue
until two (2) business days after Beverly receives OIG's written denial of such
request. A "timely written request" is defined as a request in writing received
by OIG at least five (5) business days prior to the date by which any act is due
to be performed or any notification or report is due to be filed.

                  3. Form of Payment. Payment of the Stipulated Penalties shall
be made by certified or cashier's check, payable to "Secretary of the Department
of Health and Human Services," and submitted to OIG at the address set forth in
section VI.

                  4. Independence from Material Breach Determination. Except as
otherwise noted, these provisions for payment of Stipulated Penalties shall not
affect or otherwise set a standard for the OIG's decision that Beverly has
materially breached this CIA, which


<PAGE>   24


decision shall be made at the OIG's discretion and governed by the provisions in
section X.C, below.

         C.  Exclusion for Material Breach of this CIA

                  1. Notice of Material Breach and Intent to Exclude. Upon a
determination by OIG that Beverly has materially breached this CIA and that
exclusion should be imposed, the OIG shall notify Beverly by certified mail of:
(a) Beverly's material breach; and (b) OIG's intent to exercise its contractual
right to impose exclusion (this notification is hereinafter referred to as the
"Notice of Material Breach and Intent to Exclude").

                  2. Opportunity to Cure. Beverly shall have 30 days from the
date it receives the Notice of Material Breach and Intent to Exclude to
demonstrate to the OIG's satisfaction that:

                           a.   Beverly is in full compliance with this CIA;

                           b.   the alleged material breach has been cured; or

                           c.   the alleged material breach cannot be cured
within the 35-day period, but that: (i) Beverly has begun to take action to cure
the material breach; (ii) Beverly is pursuing such action with due diligence;
and (iii) Beverly has provided to OIG a reasonable timetable for curing the
material breach.

                  3. Exclusion Letter. If at the conclusion of the 30-day
period, Beverly fails to satisfy the requirements of section X.C.2, OIG may
exclude Beverly from participation in the Federal health care programs. OIG will
notify Beverly in writing of its determination to exclude Beverly (this letter
shall be referred to hereinafter as the "Exclusion Letter"). Subject to the
Dispute Resolution provisions in section X.D, below, the exclusion shall go into
effect 30 days after the date of the Exclusion Letter. The exclusion shall have
national effect and shall also apply to all other federal procurement and
non-procurement programs. If Beverly is excluded under the provisions of this
CIA, Beverly may seek reinstatement pursuant to the provisions at 42 C.F.R.
Sections 1001.3001-.3004.

                  4.  Material Breach.  A material breach of this CIA means:

                           a. a failure by Beverly to report a material
deficiency, take corrective action and pay the appropriate refunds, as provided
in section III.H;

                           b. repeated or flagrant violations of the obligations
under this CIA that have not been cured in a timely fashion, including, but not
limited to, the obligations addressed in section X.A of this CIA;

                           c. a failure to respond to a Demand Letter concerning
the payment of Stipulated Penalties in accordance with section X.B above; or

                           d. a failure to retain and use an Independent Review
Organization for review purposes in accordance with section III.D.


<PAGE>   25


         D.  Dispute Resolution

                  1. Review Rights. Upon the OIG's delivery to Beverly of its
Demand Letter or of its Exclusion Letter, and as an agreed-upon contractual
remedy for the resolution of disputes arising under the obligation of this CIA,
Beverly shall be afforded certain review rights comparable to the ones that are
provided in 42 U.S.C. Section 1320a-7(f) and 42 C.F.R. Part 1005 as if they
applied to the Stipulated Penalties or exclusion sought pursuant to this CIA.
Specifically, the OIG's determination to demand payment of Stipulated Penalties
or to seek exclusion shall be subject to review by an ALJ and, in the event of
an appeal, the Departmental Appeals Board ("DAB"), in a manner consistent with
the provisions in 42 C.F.R. Sections 1005.2-1005.21. Notwithstanding the
language in 42 C.F.R. Section 1005.2(c), the request for a hearing involving
stipulated penalties shall be made within 10 business days after receiving the
Demand Letter and the request for a hearing involving exclusion shall be made
within 30 days after receiving the Exclusion Letter.

                  2. Stipulated Penalties Review. Notwithstanding any provision
of Title 42 of the United States Code or Chapter 42 of the Code of Federal
Regulations, the only issues in a proceeding for stipulated penalties under this
CIA shall be: (a) whether Beverly was in full and timely compliance with the
obligations of this CIA for which the OIG demands payment; and (b) the period of
noncompliance. Beverly shall have the burden of proving its full and timely
compliance and the steps taken to cure the noncompliance, if any. If the ALJ
finds for the OIG with regard to a finding of a breach of this CIA and orders
Beverly to pay Stipulated Penalties, such Stipulated Penalties shall become due
and payable 20 days after the ALJ issues such a decision notwithstanding that
Beverly may request review of the ALJ decision by the DAB.

                  3. Exclusion Review. Notwithstanding any provision of Title 42
of the United States Code or Chapter 42 of the Code of Federal Regulations, the
only issues in a proceeding for exclusion based on a material breach of this CIA
shall be: (a) whether Beverly was in material breach of this CIA; (b) whether
such breach was continuing on the date of the Exclusion Letter; and (c) whether
the alleged material breach could not have been cured within the 30-day period,
but that (i) Beverly had begun to take action to cure the material breach within
that period, (ii) Beverly has pursued and is pursuing such action with due
diligence, and (iii) Beverly provided to OIG within that period a reasonable
timetable for curing the material breach. For purposes of the exclusion herein,
exclusion shall take effect only after an ALJ decision that is favorable to the
OIG. Beverly's election of its contractual right to appeal to the DAB shall not
abrogate the OIG's authority to exclude Beverly upon the issuance of the ALJ's
decision. If the ALJ sustains the determination of the OIG and determines that
exclusion is authorized, such exclusion shall take effect 20 days after the ALJ
issues such a decision, notwithstanding that Beverly may request review of the
ALJ decision by the DAB.


<PAGE>   26


                  4. Finality of Decision. The parties to this CIA agree that
the DAB's decision (or the ALJ's decision if not appealed) shall be considered
final for purposes of stipulated penalties imposed under this CIA and Beverly
agrees to waive any right it may have to appeal the decision to impose
stipulated penalties administratively, judicially or otherwise seek review by
any court or other adjudicative forum.

                  5. Reviews Independent of this CIA. Nothing in this agreement
shall affect the right of the Health Care Financing Administration or any other
Federal or State agency to enforce any statutory or regulatory authorities with
respect to Beverly's compliance with applicable Federal and State health care
program requirements or Beverly's rights to pursue its statutory, regulatory or
other legal remedies with respect to such actions.

XI.      EFFECTIVE AND BINDING AGREEMENT

         Consistent with the provisions in the Settlement Agreement pursuant to
which this CIA is entered, and into which this CIA is incorporated, Beverly and
OIG agree as follows:

         A. This CIA shall be binding on the successors, assigns, and
transferees of Beverly (except that the obligations of this CIA shall not apply
to facilities that Beverly or a Beverly successor does not own or operate);

         B. This CIA shall become final and binding on the date the final
signature is obtained on the CIA and shall supersede and replace any other
Corporate Integrity Agreements obligating Beverly or any of its facilities at
the time of execution of this CIA;

         C. Any modifications to this CIA shall be made with the prior written
consent of the parties to this CIA; and

         D. The undersigned Beverly signatories represent and warrant that they
are authorized to execute this CIA. The undersigned OIG signatory represents
that he is signing this CIA in his official capacity and that he is authorized
to execute this CIA.

                              ON BEHALF OF BEVERLY


-------------------------------------            -----------------------
David Banks                                      DATE
Chief Executive Officer
Beverly Enterprises, Inc.


<PAGE>   27


-------------------------------------            -----------------------
Mark Biros, Esq.                                 DATE
Proskauer Rose LLP
1233 20th Street, NW
Suite 800
Washington, DC 20036-2396


                  ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL
                 OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES



-------------------------------------            -----------------------
LEWIS MORRIS                                     DATE
Assistant Inspector General for Legal Affairs
Office of Inspector General
U. S. Department of Health and Human Services