10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-14057

KINDRED HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

Delaware	61-1323993
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
680 South Fourth Street Louisville, KY	40202
(Address of principal executive offices)	(Zip Code)

(502) 596-7300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of Common Stock	Outstanding at October 31, 2016
Common stock, $0.25 par value	85,160,436 shares

1 of 90

KINDRED HEALTHCARE, INC.

FORM 10-Q

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Statement of Operations – for the three months ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015	3
	Condensed Consolidated Statement of Comprehensive Income (Loss) – for the three months ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015	4
	Condensed Consolidated Balance Sheet – September 30, 2016 and December 31, 2015	5
	Condensed Consolidated Statement of Cash Flows – for the three months ended September 30, 2016 and 2015 and for the nine months ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	86
Item 4.	Controls and Procedures	87
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	88
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 6.	Exhibits	89

2

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958
Salaries, wages and benefits		957,644			922,140			2,812,812			2,704,920
Supplies		95,500			96,551			294,326			288,059
Rent		98,415			95,436			296,025			282,955
Other operating expenses		217,364			207,837			649,915			617,681
General and administrative expenses (exclusive of depreciation and      amortization expense included below)		310,407			307,500			998,559			1,043,986
Other income		(446	)		(650	)		(1,909	)		(1,699	)
Litigation contingency expense		-			31,462			2,840			130,387
Impairment charges		324,289			-			338,208			6,726
Restructuring charges		81,463			3,349			88,223			8,793
Depreciation and amortization		40,382			39,329			121,320			116,889
Interest expense		59,862			56,440			175,417			176,128
Investment income		(1,810	)		(432	)		(2,561	)		(2,203	)
		2,183,070			1,758,962			5,773,175			5,372,622
Income (loss) from continuing operations before income taxes		(389,543	)		5,554			(299,607	)		(98,664	)
Provision for income taxes		281,752			12,523			311,470			9,183
Loss from continuing operations		(671,295	)		(6,969	)		(611,077	)		(107,847	)
Discontinued operations, net of income taxes:
Income (loss) from operations		(12	)		2,269			2,422			(1,744	)
Gain on divestiture of operations		-			-			179			983
Income (loss) from discontinued operations		(12	)		2,269			2,601			(761	)
Net loss		(671,307	)		(4,700	)		(608,476	)		(108,608	)
(Earnings) loss attributable to noncontrolling interests:
Continuing operations		(14,305	)		(9,900	)		(40,341	)		(30,482	)
Discontinued operations		(1	)		1			(6	)		32
		(14,306	)		(9,899	)		(40,347	)		(30,450	)
Loss attributable to Kindred	$	(685,613	)	$	(14,599	)	$	(648,823	)	$	(139,058	)
Amounts attributable to Kindred stockholders:
Loss from continuing operations	$	(685,600	)	$	(16,869	)	$	(651,418	)	$	(138,329	)
Income (loss) from discontinued operations		(13	)		2,270			2,595			(729	)
Net loss	$	(685,613	)	$	(14,599	)	$	(648,823	)	$	(139,058	)
Loss per common share:
Basic:
Loss from continuing operations	$	(7.89	)	$	(0.20	)	$	(7.51	)	$	(1.65	)
Discontinued operations:
Income (loss) from operations		-			0.03			0.03			(0.02	)
Gain on divestiture of operations		-			-			-			0.01
Income (loss) from discontinued operations		-			0.03			0.03			(0.01	)
Net loss	$	(7.89	)	$	(0.17	)	$	(7.48	)	$	(1.66	)
Diluted:
Loss from continuing operations	$	(7.89	)	$	(0.20	)	$	(7.51	)	$	(1.65	)
Discontinued operations:
Income (loss) from operations		-			0.03			0.03			(0.02	)
Gain on divestiture of operations		-			-			-			0.01
Income (loss) from discontinued operations		-			0.03			0.03			(0.01	)
Net loss	$	(7.89	)	$	(0.17	)	$	(7.48	)	$	(1.66	)
Shares used in computing loss per common share:
Basic		86,869			86,184			86,766			83,960
Diluted		86,869			86,184			86,766			83,960
Cash dividends declared and paid per common share	$	0.12		$	0.12		$	0.36		$	0.36

See accompanying notes.

3

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Net loss	$	(671,307	)	$	(4,700	)	$	(608,476	)	$	(108,608	)
Other comprehensive income (loss):
Available-for-sale securities (Note 12):
Change in unrealized investment gains (losses)		278			(978	)		1,461			(841	)
Reclassification of gains realized in net loss		(1,333	)		-			(1,202	)		-
Net change		(1,055	)		(978	)		259			(841	)
Interest rate swaps (Note 1):
Change in unrealized gain (losses)		2,022			(909	)		(3,761	)		(2,173	)
Reclassification of ineffectiveness realized in net loss		-			59			-			88
Reclassification of losses realized in net loss, net of payments		18			12			411			-
Net change		2,040			(838	)		(3,350	)		(2,085	)
Income tax expense (benefit) related to items of other     comprehensive income (loss)		(427	)		699			1,389			1,149
Other comprehensive income (loss)		558			(1,117	)		(1,702	)		(1,777	)
Comprehensive loss		(670,749	)		(5,817	)		(610,178	)		(110,385	)
Earnings attributable to noncontrolling interests		(14,306	)		(9,899	)		(40,347	)		(30,450	)
Comprehensive loss attributable to Kindred	$	(685,055	)	$	(15,716	)	$	(650,525	)	$	(140,835	)

See accompanying notes.

4

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except per share amounts)

	September 30,			December 31,
	2016			2015
ASSETS
Current assets:
Cash and cash equivalents	$	139,430		$	98,758
Insurance subsidiary investments		105,346			106,638
Accounts receivable less allowance for loss of $67,761 ─ September 30, 2016 and $62,896 ─ December 31, 2015		1,266,545			1,194,868
Inventories		25,262			27,791
Income taxes		12,416			11,790
Other		94,876			61,054
		1,643,875			1,500,899
Property and equipment		2,070,421			2,162,398
Accumulated depreciation		(1,192,870	)		(1,190,402	)
		877,551			971,996
Goodwill		2,422,473			2,669,810
Intangible assets less accumulated amortization of $96,854 ─  September 30, 2016 and $94,221 ─ December 31, 2015		804,602			755,655
Insurance subsidiary investments		195,517			204,498
Deferred tax assets		-			104,130
Acquisition deposit		-			18,489
Other		283,322			242,782
Total assets (a)	$	6,227,340		$	6,468,259
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	203,426		$	187,061
Salaries, wages and other compensation		390,743			404,925
Due to third party payors		57,945			36,251
Professional liability risks		61,036			64,099
Other accrued liabilities		280,305			394,246
Long-term debt due within one year		27,889			24,630
		1,021,344			1,111,212
Long-term debt		3,316,174			3,086,348
Professional liability risks		283,048			263,273
Deferred tax liabilities		200,334			-
Deferred credits and other liabilities		354,246			301,379
Commitments and contingencies (Note 14)
Equity:
Stockholder's equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 85,187 shares ─ September 30, 2016 and    83,792 shares ─ December 31, 2015		21,297			20,948
Capital in excess of par value		1,717,165			1,737,747
Accumulated other comprehensive loss		(4,334	)		(2,632	)
Accumulated deficit		(905,137	)		(256,209	)
		828,991			1,499,854
Noncontrolling interests		223,203			206,193
Total equity		1,052,194			1,706,047
Total liabilities (a) and equity	$	6,227,340		$	6,468,259

(a) The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements.

See accompanying notes.

5

KINDRED HEALTHCARE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(In thousands)

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Cash flows from operating activities:
Net loss	$	(671,307	)	$	(4,700	)	$	(608,476	)	$	(108,608	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense		34,914			31,867			103,306			95,325
Amortization of intangible assets		5,468			7,728			18,251			22,196
Amortization of stock-based compensation costs		3,015			3,194			13,058			15,764
Amortization of deferred financing costs		3,987			3,554			11,262			10,155
Payment of capitalized lender fees related to debt issuance		(42	)		-			(7,375	)		(28,012	)
Provision for doubtful accounts		10,009			11,014			30,955			29,817
Deferred income taxes		(84,173	)		3,556			(54,875	)		(894	)
Impairment charges		324,289			-			338,208			6,726
Gain on divestiture of discontinued operations		-			-			(179	)		(983	)
Other		6,303			3,485			7,262			10,457
Change in operating assets and liabilities:
Accounts receivable		(42,832	)		25,990			(143,953	)		(13,399	)
Inventories and other assets		11,871			8,767			(3,522	)		44,181
Accounts payable		11,995			(353	)		24,451			(12,788	)
Income taxes		364,925			37,491			365,705			33,646
Due to third party payors		24,809			15,008			20,317			(3,965	)
Other accrued liabilities		32,851			(14,311	)		(76,347	)		(6,551	)
Net cash provided by operating activities		36,082			132,290			38,048			93,067
Cash flows from investing activities:
Routine capital expenditures		(21,873	)		(35,422	)		(68,703	)		(80,691	)
Development capital expenditures		(8,386	)		(5,760	)		(27,112	)		(12,066	)
Acquisitions, net of cash acquired		(49,329	)		(2,002	)		(77,040	)		(663,757	)
Acquisition deposits		-			-			18,489			195,000
Sale of assets		3,739			3,884			4,962			7,061
Proceeds from senior unsecured notes offering held in escrow		-			-			-			1,350,000
Interest in escrow for senior unsecured notes		-			-			-			23,438
Purchase of insurance subsidiary investments		(22,427	)		(16,357	)		(75,422	)		(59,186	)
Sale of insurance subsidiary investments		31,875			15,987			78,478			50,780
Net change in insurance subsidiary cash and cash equivalents		(14,680	)		(2,633	)		8,479			(8,396	)
Proceeds from note receivable		-			25,000			-			25,000
Net change in other investments		51			176			(33,347	)		375
Other		(150	)		1,383			(1,277	)		590
Net cash provided by (used in) investing activities		(81,180	)		(15,744	)		(172,493	)		828,148
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		489,200			259,700			1,267,200			1,414,850
Repayment of borrowings under revolving credit		(388,100	)		(349,700	)		(1,215,800	)		(1,319,850	)
Proceeds from issuance of term loan, net of discount		-			-			198,100			199,000
Proceeds from other long-term debt		-			-			750			-
Repayment of Gentiva debt		-			-			-			(1,177,363	)
Repayment of term loan		(3,508	)		(3,003	)		(10,019	)		(9,008	)
Repayment of other long-term debt		(276	)		(500	)		(826	)		(1,400	)
Payment of deferred financing costs		(50	)		(301	)		(342	)		(3,284	)
Issuance of common stock in connection with employee benefit plans		-			329			-			534
Payment of costs associated with issuance of common stock and tangible equity units		-			-			-			(915	)
Payment of dividend for mandatory redeemable preferred stock		(2,904	)		(2,703	)		(8,558	)		(8,135	)
Dividends paid		(10,224	)		(10,065	)		(30,517	)		(30,067	)
Contributions made by noncontrolling interests		4,993			1,492			11,261			1,492
Distributions to noncontrolling interests		(4,694	)		(10,685	)		(35,240	)		(31,823	)
Purchase of noncontrolling interests		-			-			(1,000	)		-
Other		35			245			108			1,457
Net cash provided by (used in) financing activities		84,472			(115,191	)		175,117			(964,512	)
Change in cash and cash equivalents		39,374			1,355			40,672			(43,297	)
Cash and cash equivalents at beginning of period		100,056			119,536			98,758			164,188
Cash and cash equivalents at end of period	$	139,430		$	120,891		$	139,430		$	120,891
Supplemental information:
Interest payments	$	73,755		$	81,474		$	181,227		$	147,924
Income tax payments (refunds)		1,075			(27,414	)		2,184			(26,275	)
Issuance of common stock in Gentiva Merger (see Note 2)		-			15			-			177,456
Non-cash contribution made by noncontrolling interest		-			-			2,800			-

See accompanying notes.

6

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, a home health, hospice and community care business, inpatient rehabilitation hospitals (“IRFs”), a contract rehabilitation services business, nursing centers, and assisted living facilities across the United States (collectively, the “Company” or “Kindred”). At September 30, 2016, the Company’s hospital division operated 94 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 22 states. The Company’s Kindred at Home division primarily provided home health, hospice, and community care services from 647 sites of service in 40 states. The Company’s Kindred Rehabilitation Services division operated 19 IRFs and 104 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs), and provided rehabilitation services primarily in hospitals and long-term care settings in 46 states. The Company’s nursing center division operated 91 nursing centers and seven assisted living facilities in 19 states.

Gentiva merger

On October 9, 2014, the Company entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for the Company’s acquisition of Gentiva (the “Gentiva Merger”). On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

Discontinued operations

The Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains associated with these transactions were classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Assets held for sale at September 30, 2016 have been measured at the lower of carrying value or estimated fair value less costs of disposal. See Note 5 for a summary of discontinued operations and assets held for sale.

Recently issued accounting requirements

In October 2016, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which alters how an entity needs to consider indirect interests in a variable interest entity (“VIE”) held through an entity under common control. The amendment eliminates the distinction between the full attribution and proportionate approach, leaving the entity to only consider the latter when evaluating a VIE held through common control. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In August 2016, the FASB issued authoritative guidance to eliminate diversity in practice related to the cash flow statement classification of eight specific cash flow issues, which include debt prepayment or extinguishment costs, maturity of a zero coupon bond, settlement of contingent consideration liabilities after a business combination, proceeds from insurance settlements and distribution from certain equity method investees. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on its consolidated statement of cash flows.

In June 2016, the FASB issued authoritative guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for annual periods beginning after December 15, 2019 and early adoption is permitted beginning after December 15, 2018. The Company is still evaluating its transition approach and the impact of adoption on its business, financial position, results of operations, and liquidity.

7

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In May 2016, the FASB finalized its amendments to the guidance in the new revenue standard on contracts with customers and specifically, collectability, non-cash consideration, presentation of sales taxes, and completed contracts. The amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for interim and annual periods beginning on or after December 15, 2017 with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that requires the tax effects related to share-based payments to be recorded through the income statement at settlement. Under the new guidance, tax benefits in excess of or less than the tax effect of compensation expenses will no longer be recorded in equity for purpose of simplification, which is expected to reduce administrative complexities but could increase the volatility of income tax expense. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB finalized its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. Under the new amendments, the FASB confirmed that a principal in an arrangement controls a good or service before it is transferred to a customer but revised the structure of indicators when an entity is the principal. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for annual and interim periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Under the new guidance, the equity method of accounting should be applied prospectively from the date significant influence is obtained. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB issued authoritative guidance clarifying that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. Under the new guidance, an entity will still need to evaluate whether it is possible that the counterparty will perform under the contract as part of the assessment for hedge accounting. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and expects no material impact on liquidity.

8

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In August 2014, the FASB issued authoritative guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances. The guidance is effective for annual and interim periods ending after December 15, 2016. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB finalized a one-year deferral of the new revenue standard with an updated effective date for interim and annual periods beginning on or after December 15, 2017. Entities are not permitted to adopt the standard earlier than the original effective date, which was on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

9

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the nine months ended September 30, 2016 and 2015 (in thousands):

For the nine months ended September 30, 2016	Amounts attributable to Kindred stockholders			Noncontrolling interests			Total equity
Balance at December 31, 2015	$	1,499,854		$	206,193		$	1,706,047
Comprehensive income (loss):
Net income (loss)		(648,823	)		40,347			(608,476	)
Other comprehensive loss		(1,702	)		-			(1,702	)
		(650,525	)		40,347			(610,178	)
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(3,079	)		-			(3,079	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		434			-			434
Stock-based compensation amortization		13,058			-			13,058
Dividends paid		(30,517	)		-			(30,517	)
Contributions made by noncontrolling interests		-			14,061			14,061
Distributions to noncontrolling interests		-			(35,240	)		(35,240	)
Purchase of noncontrolling interests		(234	)		(2,158	)		(2,392	)
Balance at September 30, 2016	$	828,991		$	223,203		$	1,052,194
For the nine months ended September 30, 2015
Balance at December 31, 2014	$	1,441,867		$	44,105		$	1,485,972
Comprehensive income (loss):
Net income (loss)		(139,058	)		30,450			(108,608	)
Other comprehensive loss		(1,777	)		-			(1,777	)
		(140,835	)		30,450			(110,385	)
Issuance of common stock in connection with employee benefit plans		534			-			534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(10,055	)		-			(10,055	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		1,806			-			1,806
Stock-based compensation amortization		15,764			-			15,764
Dividends paid		(30,067	)		-			(30,067	)
Acquired noncontrolling interests		-			149,817			149,817
Contributions made by noncontrolling interests		-			1,492			1,492
Distributions to noncontrolling interests		-			(31,823	)		(31,823	)
Issuance of common stock in Gentiva Merger		177,456			-			177,456
Balance at September 30, 2015	$	1,456,470		$	194,041		$	1,650,511

10

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In March 2014, the Company entered into an interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under its Third Amended and Restated Term Loan Facility (as defined below). On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated, or otherwise modified. The interest rate swap had an effective date of April 9, 2014, will expire on April 9, 2018, and continues to apply to the Term Loan Facility (as defined below). The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

In January 2016, the Company entered into three interest rate swap agreements to hedge its floating interest rate on an aggregate of $325 million of debt outstanding under its Fourth Amended and Restated Term Loan Facility (as defined below). The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. The Company is required to make payments based upon a fixed interest rate of 1.862% and 1.855% calculated on the notional amount of $175 million and $150 million, respectively. In exchange, the Company will receive interest on $325 million at a variable interest rate that is based upon the three-month LIBOR rate, subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders’ equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months and nine months ended September 30, 2016 and 2015, the ineffectiveness related to the interest rate swaps was immaterial.

The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $8.2 million and $4.5 million at September 30, 2016 and December 31, 2015, respectively. See Note 15.

As used herein, (1) the “Term Loan Facility” refers to the Fifth Amended and Restated Term Loan Facility dated as of June 14, 2016, (2) the “Fourth Amended and Restated Term Loan Facility” refers to the Third Amended and Restated Term Loan Facility, as amended and restated as of November 25, 2014, and as further amended as of March 10, 2015, and (3) the “Third Amended and Restated Term Loan Facility” refers to a previous $225 million senior secured term loan facility dated as of June 1, 2011, as amended as of October 4, 2012, and as further amended and restated as of May 30, 2013, August 21, 2013, and April 9, 2014.

Variable interest entities

The Company follows the provisions of the authoritative guidance for determining whether an entity is a VIE. In order to determine if the Company is a primary beneficiary of a VIE for financial reporting purposes, it must consider whether it has the power to direct activities of the VIE that most significantly impact the performance of the VIE and whether the Company has the obligation to absorb losses or the right to receive returns that would be significant to the VIE. The Company consolidates a VIE when it is the primary beneficiary.

11

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Variable interest entities (Continued)

In January 2015, the Company completed the acquisition of Centerre Healthcare Corporation (“Centerre”), which operated 11 IRFs. The Company opened two IRFs during 2015 and one additional IRF during the nine months ended September 30, 2016. Each entity operating an IRF is subject to a partnership and a management services agreement with the Company. Under United States generally accepted accounting principles (“GAAP”), the Company determined that all of the entities acquired or opened qualify as VIEs and that the Company is the primary beneficiary in all but one arrangement. The Company holds an equity interest and acts as manager in each of the entities. Through the management services agreement, the Company is delegated necessary responsibilities to provide management services, administrative services and direction of the day-to-day operations. Based on the Company’s assessment of the most significant activities of the IRFs, the manager has the ability to direct the majority of those activities in 13 of the entities.

The analysis upon which the consolidation determination rests is complex, involves uncertainties, and requires significant judgment on various matters, some of which could be subject to different interpretations.

The carrying amounts and classifications of the assets and liabilities of the consolidated VIEs are as follows (in thousands):

	September 30,		December 31,
	2016		2015
Assets:
Current assets:
Cash and cash equivalents	$	50,709	$	36,798
Accounts receivable, net		34,521		36,085
Inventories		1,718		1,576
Other		3,617		3,001
		90,565		77,460
Property and equipment, net		17,561		17,100
Goodwill		275,375		271,717
Intangible assets, net		22,048		22,675
Other		34		54
Total assets	$	405,583	$	389,006
Liabilities:
Current liabilities:
Accounts payable	$	33,657	$	26,291
Salaries, wages and other compensation		2,433		3,261
Other accrued liabilities		3,721		2,784
Long-term debt due within one year		1,703		1,106
		41,514		33,442
Long-term debt		601		1,274
Deferred credits and other liabilities		6,830		4,971
Total liabilities	$	48,945	$	39,687

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for quarterly reports on Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2015 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

12

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION (Continued)

Other information (Continued)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair statement of interim results and, except as otherwise disclosed, all such adjustments are of a normal and recurring nature.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.

Correction of December 31, 2015 balance sheet

During the second quarter ended June 30, 2016, the Company corrected the balance sheet presentation of capitalized lender fees related to debt issuance. These amounts were previously presented as other long-term assets in the Company’s consolidated balance sheet, and the Company has determined that they should have been presented as a contra account to long-term debt similar to a debt discount.

The Company concluded that the correction was not material to any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with Accounting Standards Codification 250, Presentation of Financial Statements, the Company has corrected all prior periods presented. Periods not presented herein will be corrected, as applicable, in future filings. The correction had no impact on total equity, results of operations, or cash flows.

The impact of this correction on the Company’s consolidated balance sheet as of December 31, 2015 was as follows:

	As previously reported		Adjustment			As revised
Other long-term assets	$	289,746	$	(46,964	)	$	242,782
Total assets		6,515,223		(46,964	)		6,468,259
Long-term debt		3,133,312		(46,964	)		3,086,348
Total liabilities and equity		6,515,223		(46,964	)		6,468,259

NOTE 2 – GENTIVA MERGER

On October 9, 2014, the Company entered into the Gentiva Merger Agreement, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

At the effective time of the Gentiva Merger, each share of common stock, par value $0.10 per share, of Gentiva (“Gentiva Common Stock”) issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by Kindred, Gentiva and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (1) $14.50 in cash (the “Cash Consideration”), without interest, and (2) 0.257 of a validly issued, fully paid and nonassessable share of Kindred common stock, par value $0.25 per share (the “Stock Consideration”). The purchase price totaled $722.3 million and was comprised of $544.8 million of Cash Consideration and $177.5 million of Stock Consideration. The Company also assumed $1.2 billion of long-term debt, which was paid off upon consummation of the Gentiva Merger.

13

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2 – GENTIVA MERGER (Continued)

The following transactions (collectively, the “Financing Transactions”) occurred in connection with the Gentiva Merger:

• the Company issued $1.35 billion aggregate principal amount of senior notes;

• the Company issued approximately 15 million shares of its common stock through two common stock offerings and issued 9.7 million shares of its common stock as the Stock Consideration;

• the Company issued 172,500 tangible equity units (the “Units”); and

• the Company amended its credit facilities.

The Company used the net proceeds from the Financing Transactions to fund the Cash Consideration for the Gentiva Merger, repay Gentiva’s existing debt, and pay related transaction fees and expenses.

Operating results in the third quarter of 2016 included transaction and integration costs totaling $1.2 million and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2016 included transaction and integration costs totaling $3.8 million, retention and severance costs totaling $0.7 million, and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results in the third quarter of 2015 included transaction and integration costs totaling $1.1 million, and retention and severance costs totaling $1.9 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2015 included transaction and integration costs totaling $35.2 million, retention and severance costs totaling $58.8 million, a lease termination charge of $0.8 million and financing costs totaling $23.4 million related to the Gentiva Merger. Transaction, integration, retention and severance costs were recorded as general and administrative expenses, the lease termination charge was recorded as rent expense and financing costs were recorded as general and administrative expenses ($6.0 million) and as interest expense ($17.4 million).

A note receivable totaling $25 million was acquired in the Gentiva Merger. The note receivable was collected in full during the third quarter of 2015 and the Company received all of the cash proceeds.

Purchase price allocation

The Gentiva Merger purchase price of $722.3 million was allocated based upon the estimated fair value of the tangible and intangible assets, and goodwill.

14

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The following is the Gentiva Merger purchase price allocation (in thousands):

Cash and cash equivalents	$	64,695
Accounts receivable		265,034
Other current assets		123,428
Property and equipment		46,732
Identifiable intangible assets:
Certificates of need (indefinite life)		256,921
Medicare certifications (indefinite life)		94,500
Trade names (indefinite life)		22,200
Trade name		15,600
Non-compete agreements		1,820
Leasehold interests		1,439
Total identifiable intangible assets		392,480
Deferred tax assets		37,429
Other assets		74,407
Current portion of long-term debt		(53,075	)
Accounts payable and other current liabilities		(319,004	)
Long-term debt, less current portion		(1,124,288	)
Deferred tax liabilities		(47,748	)
Other liabilities		(126,088	)
Noncontrolling interests		(3,992	)
Total identifiable net assets		(669,990	)
Goodwill		1,392,271
Net assets	$	722,281

The fair value allocation was measured primarily using a discounted cash flows methodology, which is considered a Level 3 input (as described in Note 15).

The value of gross contractual accounts receivable before determining uncollectable amounts totaled $278.9 million. Accounts estimated to be uncollectable totaled $13.9 million.

The weighted average life of the definite lived intangible assets consisting primarily of a trade name is three years.

The aggregate goodwill arising from the Gentiva Merger is based upon the expected future cash flows of the Gentiva operations, which reflect both growth expectations and cost savings from combining the operations of the Company and Gentiva. Goodwill is not amortized and is not deductible for income tax purposes. Goodwill was assigned to the Company’s home health reporting unit ($612.2 million), hospice reporting unit ($614.0 million) and community care reporting unit ($166.1 million).

15

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The unaudited pro forma net effect of the Gentiva Merger assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):

	Three months ended			Nine months ended
	September 30,			September 30,
	2015			2015
Revenues	$	1,764,516		$	5,435,657
Loss from continuing operations attributable to Kindred		(14,501	)		(56,221	)
Loss attributable to Kindred		(12,231	)		(56,950	)
Loss per common share:
Basic:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)
Diluted:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Gentiva Merger for the periods presented. The unaudited pro forma financial data presented excludes transaction, integration, retention and severance costs, a lease termination charge, and financing costs totaling $135.2 million incurred by both the Company and Gentiva in connection with the Gentiva Merger. These costs have been eliminated from the results of operations for 2015 and have been reflected as expenses incurred as of January 1, 2014 for purposes of the pro forma financial presentation. Revenues and earnings before interest, income taxes, transaction, integration, retention, and severance costs associated with Gentiva aggregated $559.7 million and $77.6 million, respectively, in the third quarter of 2016 and $525.0 million and $67.5 million, respectively, in the third quarter of 2015. Revenues and earnings before interest, income taxes, transaction, integration, retention, and severance costs associated with Gentiva aggregated $1.6 billion and $211.8 million, respectively, for the nine months ended September 30, 2016 and $1.4 billion and $168.7 million, respectively, for 2015 since the date of the Gentiva Merger.

NOTE 3 – OTHER ACQUISITIONS

The following is a summary of the Company’s other acquisition activities. The operating results of the acquired businesses have been included in the accompanying unaudited condensed consolidated financial statements of the Company from the respective acquisition dates. The purchase price of acquired businesses resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses. Each of these acquisitions was financed through operating cash flows and borrowings under the Company’s ABL Facility (as defined below in Note 13). Unaudited pro forma financial data related to the acquired businesses have not been presented because the acquisitions are not material individually to the Company’s consolidated financial statements.

During the third quarter of 2016, the Company acquired home health operations from the Arkansas Department of Health, which includes licenses to provide home health, hospice and personal care services throughout the state of Arkansas, for approximately $39 million. In addition, the Company also acquired two certificates of need, one for home health and one for hospice, and an IRF Medicare license for $4.3 million, in aggregate, in the third quarter of 2016.

In June 2016, the Company acquired five LTAC hospitals (233 licensed beds) operated by Select Medical Holdings Corporation (“Select”) and sold three of its LTAC hospitals (255 licensed beds) to Select. In the third quarter of 2016, the Company paid Select $6 million in lieu of selling another LTAC hospital to Select. In connection with the facility swap with Select, the Company recorded a gain of $0.9 million ($0.5 million net of income taxes) during the nine months ended September 30, 2016.

In addition, during the nine months ended September 30, 2016, the Company acquired four home health and hospice businesses for $26.3 million in cash. The Company also acquired a hospice business in exchange for $9.0 million of outstanding accounts receivable owed to the Company.

16

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 3 – OTHER ACQUISITIONS (Continued)

On January 1, 2015, the Company completed the acquisition of Centerre for a purchase price of approximately $195 million in cash (the “Centerre Acquisition”). Centerre operated 11 IRFs with 614 beds through partnerships.

During the third quarter of 2015, the Company acquired a home health business for $2.0 million.

In addition, during the nine months ended September 30, 2015, the Company acquired two home-based primary care practices for $12.1 million.

NOTE 4 – IMPAIRMENT CHARGES

On October 1, 2016, the Company completed the sale of 12 LTAC hospitals (the “Hospitals”) to a group of entities operating under the name “Curahealth”, which are affiliates of a private investment fund sponsored by Nautic Partners, LLC (the “Curahealth Disposal”). In connection with (1) the Curahealth Disposal, (2) the closure of three LTAC hospitals in the third quarter of 2016, (3) a reduction in revenues associated with revenue rate reductions announced by the Center of Medicare and Medicaid Services (“CMS”) on August 2, 2016, (4) continued increases in labor costs during 2016, and (5) a refinement of the impact of LTAC patient criteria that became effective for the majority of the Company’s LTAC hospitals on September 1 (collectively, the “Hospital Division Triggering Event”), the Company was required to assess the recoverability of the hospital division reporting unit goodwill in the third quarter of 2016.

The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. To determine the fair value of the hospital division reporting unit, the Company used a combination of an income approach and a market approach to calculate the fair value of the reporting unit. The discounted cash flow that served as the primary basis for the income approach was based upon the hospital division’s financial forecast of revenue, gross profit margins, operating costs and cash flows. As a result of the Hospital Division Triggering Event, the Company concluded that the carrying value of the hospital division reporting unit exceeded its estimated fair value. The second step of the test was then performed to measure the impairment loss, a process which compares the implied fair value of goodwill to the implied fair value for the reporting unit. The Company determined that a goodwill impairment charge aggregating $261.1 million was necessary for the three months ended September 30, 2016. The Company also assessed the recoverability of the hospital division intangible assets and property and equipment and concluded a property and equipment impairment charge of $3.2 million was necessary. The fair value of the assets was measured using Level 3 inputs such as operating cash flows, market data and replacement cost factoring in depreciation, economic obsolescence and inflation trends. The impairment charges did not impact the Company’s cash flows or liquidity.

During the three months ended September 30, 2016, the Hospitals met assets held for sale criteria and were subsequently sold to Curahealth on October 1, 2016. The Company recorded impairment charges in connection with the sale aggregating $33.0 million, of which $19.7 million was related to property and equipment, and $13.3 million was related to goodwill and other intangible assets. These charges reflect the amounts by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets was measured using a Level 3 input of the pending offer. In addition, in the first quarter of 2016, the Company also recorded a property and equipment impairment charge of $7.8 million under the held and used accounting model related to the planned Curahealth Disposal. The fair value of property and equipment in the first quarter of 2016 was measured using Level 3 inputs, primarily replacement costs.

During 2016, the nursing center division has experienced a decline in financial performance as compared to projected results and in the third quarter of 2016, the Company determined it was more likely than not that it would dispose of its skilled nursing facility business. As a result, the Company tested the recoverability of its nursing center division intangible assets and property and equipment under the held and used accounting model. No goodwill existed on the nursing centers reporting unit’s balance sheet at September 30, 2016. The Company determined that a property and equipment impairment charge aggregating $21.7 million was necessary for the three months ended September 30, 2016. The fair value of the assets was measured using Level 3 inputs, such as operating cash flows and replacement costs.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the planned divestiture and pending offers for a nursing center held for sale and determined its property and equipment was impaired. As a result, the Company recorded an impairment charge of $5.3 million. The fair value of the assets was measured based upon pending offers, a Level 3 input. The impairment charge did not impact the Company’s cash flows or liquidity.

17

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 4 – IMPAIRMENT CHARGES (Continued)

During the nine months ended September 30, 2016, the Company also recorded an impairment charge of $3.5 million related to certificates of need for two hospitals as part of the annual indefinite-lived intangible assets impairment review at May 1. This charge reflects the amount by which the carrying value of the certificates of need exceeded its estimated fair value. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

During the nine months ended September 30, 2016, the Company recorded an asset impairment charge of $2.6 million related to the sale of a hospital division medical office building. This charge reflects the amount by which the carrying value of the property exceeded its estimated fair value. The fair value of the property was measured using the pending offer, a Level 3 input.

During the nine months ended September 30, 2015, the Company recorded an asset impairment charge of $6.7 million related to previously acquired home health and hospice trade names after the decision in the first quarter of 2015 to rebrand to the Kindred at Home trade name. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

In assessing the carrying values of long-lived assets, the Company estimates future cash flows at the lowest level for which there are independent, identifiable cash flows. For this purpose, these cash flows are aggregated based upon the contractual agreements underlying the operation of the facility or group of facilities. Generally, an individual hospital or nursing center is considered the lowest level for which there are independent, identifiable cash flows. However, to the extent that groups of facilities are leased under a master lease agreement in which the operations of a facility and compliance with the lease terms are interdependent upon other facilities in the agreement (including the Company’s ability to renew the lease or divest a particular property), the Company defines the group of facilities under a master lease agreement, or a renewal bundle in a master lease, as the lowest level for which there are independent, identifiable cash flows. Accordingly, the estimated cash flows of all facilities within a master lease agreement, or a renewal bundle in a master lease, are aggregated for purposes of evaluating the carrying values of long-lived assets.

All of the previously mentioned charges are included in the impairment charges line on the statement of operations for all periods.

The Company determined that there were no other goodwill or other intangible asset impairments as of September 30, 2016. However, adverse changes in the operating environment and related key assumptions used to determine the fair value of the hospital reporting unit and indefinite-lived intangible assets may result in future impairment charges for a portion or all of these assets. Specifically, if the hospital division experiences adverse deviation from revenue or mitigation assumptions associated with LTAC patient criteria or if recent increases in labor costs materially exceed the Company’s projections in the hospital division or the Company’s other reporting units or business segments, an impairment charge of a portion or all of these assets may be required. An impairment charge could have a material adverse effect on the Company’s business, financial position and results of operations, but would not be expected to have an impact on the Company’s cash flows or liquidity.

NOTE 5 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures of unprofitable businesses discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the gains or losses associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations based upon the authoritative guidance which was in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. As of September 30, 2016, the Company has sold all facilities held for sale as discontinued operations.

On December 27, 2014, the Company entered into an agreement with Ventas, Inc. (“Ventas”) to transition the operations under the leases for nine non-strategic nursing centers (the “2014 Expiring Facilities”). Each lease terminated when the operation of such nursing center was transferred to a new operator. At September 30, 2016, the Company had transferred the operations for all of the 2014 Expiring Facilities to new operators. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale, and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods. Under the terms of the agreement to transition the operations of the 2014 Expiring Facilities, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.

18

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5 – DISCONTINUED OPERATIONS (Continued)

A summary of discontinued operations follows (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues	$	756		$	12,935		$	5,921		$	36,934
Salaries, wages and benefits		2			5,306			1,781			17,877
Supplies		-			595			133			1,995
Rent		469			1,951			1,690			6,608
Other operating expenses		29			2,001			567			7,008
General and administrative expenses (income)		271			(920	)		(2,496	)		5,699
Depreciation		-			266			237			632
Interest expense		5			2			16			3
Investment income		-			(7	)		(1	)		(12	)
		776			9,194			1,927			39,810
Income (loss) from operations before income taxes		(20	)		3,741			3,994			(2,876	)
Provision (benefit) for income taxes		(8	)		1,472			1,572			(1,132	)
Income (loss) from operations		(12	)		2,269			2,422			(1,744	)
Gain (loss) on divestiture of operations		-			-			179			983
Income (loss) from discontinued operations		(12	)		2,269			2,601			(761	)
(Earnings) loss attributable to noncontrolling interests		(1	)		1			(6	)		32
Income (loss) attributable to Kindred	$	(13	)	$	2,270		$	2,595		$	(729	)

The following table sets forth certain discontinued operating data by business segment (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016		2015
Revenues:
Hospital division	$	511		$	158		$	1,393	$	1,747
Nursing center division		245			12,777			4,528		35,187
	$	756		$	12,935		$	5,921	$	36,934
Segment EBITDAR:
Hospital division	$	580		$	(14	)	$	1,476	$	408
Nursing center division		(126	)		5,967			4,460		3,947
	$	454		$	5,953		$	5,936	$	4,355
Rent:
Hospital division	$	468		$	477		$	1,395	$	1,514
Nursing center division		1			1,474			295		5,094
	$	469		$	1,951		$	1,690	$	6,608
Depreciation:
Hospital division	$	-		$	-		$	-	$	-
Nursing center division		-			266			237		632
	$	-		$	266		$	237	$	632

19

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5 – DISCONTINUED OPERATIONS (Continued)

Assets held for sale at September 30, 2016 relate to 12 hospitals and one nursing center. A summary of the net assets held for sale follows (in thousands):

	September 30,			December 31,
	2016			2015
Current assets	$	34,207		$	-
Long-term assets:
Property and equipment, net		4,499			571
Other		-			42
		4,499			613
Current liabilities		(13,182	)		-
	$	25,524		$	613

NOTE 6 – RESTRUCTURING CHARGES

The Company has initiated various restructuring activities whereby it has incurred costs associated with reorganizing its operations, including the divestiture, swap, closure and consolidation of facilities and branches, reduced headcount and realigned operations in order to improve cost efficiencies in response to changes in the healthcare industry and to partially mitigate reductions in reimbursement rates from third party payors. The costs associated with these activities are reported as restructuring charges in the statement of operations and would have been recorded as general and administrative expense or rent expense if not classified as restructuring charges.

20

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 – RESTRUCTURING CHARGES (Continued)

The following table sets forth the restructuring charges incurred by business segment (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Hospital division	$	78,476	$	332	$	78,743	$	897
Kindred at Home:
Home health		1,240		2,597		1,976		4,853
Hospice		541		420		1,203		2,691
		1,781		3,017		3,179		7,544
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		128		-		128		-
RehabCare		586		-		586		-
		714		-		714		-
Nursing center division		-		-		4,010		352
Support center		492		-		1,577		-
	$	81,463	$	3,349	$	88,223	$	8,793

Restructuring Activities:

LTAC Portfolio Repositioning

During the first quarter of 2016, the Company approved an LTAC portfolio repositioning plan that incorporates the divestiture, swap or closure of certain LTAC hospitals as part of its mitigation strategies to prepare for new patient criteria for LTAC hospitals under the Pathway for SGR Reform Act of 2013 (the “LTAC Legislation”). The activities related to the LTAC portfolio repositioning plan are expected to be substantially complete by the end of 2016.

During the nine months ended September 30, 2016, the Company entered into a facility swap with Select, and signed a definitive agreement regarding the Curahealth Disposal. In addition, the Company closed three LTAC hospitals in the third quarter of 2016. See Notes 3 and 18.

The composition of the restructuring charges that the Company has incurred for these activities is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Lease termination cost	$	56,869	$	207	$	56,869	$	207
Facility closure, loss on disposal and other costs		20,212		-		19,109		167
Severance		1,395		125		2,765		523
Transaction costs		492		-		1,577		-
	$	78,968	$	332	$	80,320	$	897

The following table (in thousands) summarizes the Company’s LTAC portfolio repositioning liability activity (included in other accrued liabilities) during the nine months ended September 30, 2016, which does not include the non-cash charges of $13.8 million related to facility closure, loss on disposal and other costs, and lease termination costs.

	Lease termination costs			Severance and transaction costs			Total
Liability balance at January 1, 2016	$	-		$	-		$	-
Expense		62,190			4,342			66,532
Payments		(3,500	)		(3,600	)		(7,100	)
Liability balance at September 30, 2016	$	58,690		$	742		$	59,432

21

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6 – RESTRUCTURING CHARGES (Continued)

Kindred at Home Branch Consolidations

During the first quarter of 2015, the Company approved and initiated branch consolidations in specific markets to improve operations and cost efficiencies in the Kindred at Home division. The branch consolidations included branches that served both the home health and hospice business segment operations. Gentiva initiated similar branch consolidations prior to the Gentiva Merger and these activities and acquired liabilities are included herein. These activities are expected to be substantially complete by the end of 2016.

The composition of the restructuring costs that the Company has incurred for these consolidations is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Lease termination cost	$	1,781	$	601	$	2,494	$	1,272
Facility closure and other costs		-		2,416		685		6,272
	$	1,781	$	3,017	$	3,179	$	7,544

The following table summarizes the Company’s Kindred at Home branch consolidation restructuring liability activity (included in other accrued liabilities) during the nine months ended September 30, 2016 (in thousands):

	Lease termination costs
Liability balance at January 1, 2016		$	1,863
Expense			2,494
Payments			(1,771	)
Adjustments			(60	)
Liability balance at September 30, 2016		$	2,526

2016 Division Reorganizations

During the nine months ended September 30, 2016, the Company initiated a restructuring plan to improve operations and cost efficiencies in the nursing center division. In addition, during the third quarter of 2016, the Company initiated a similar restructuring plan in the Kindred Rehabilitation Services division. Actions related to these plans were completed by the end of the third quarter of 2016.

The composition of the restructuring costs that the Company has incurred for these division reorganizations is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Severance	$	714	$	-	$	2,284	$	-
Facility closure and other costs		-		-		2,440		-
Lease termination cost		-		-		-		352
	$	714	$	-	$	4,724	$	352

22

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7 – REVENUES

Revenues are recorded based upon estimated amounts due from patients and third party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid, Medicare Advantage, Medicaid Managed, and other third party payors. Revenues under third party agreements are subject to examination and retroactive adjustment. Provisions for estimated third party adjustments are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in the periods the interim or final settlements are determined.

A summary of revenues by payor type follows (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Medicare	$	921,911		$	915,778		$	2,859,760		$	2,673,753
Medicaid		209,640			210,688			610,119			610,911
Medicare Advantage		140,774			127,905			423,117			401,199
Medicaid Managed		66,903			52,736			191,837			147,137
Other		506,385			517,047			1,548,966			1,626,264
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958

NOTE 8 – LOSS PER SHARE AND DIVIDENDS

Loss per common share is based upon the weighted average number of common shares outstanding during the respective periods. Because the Company reported a loss from continuing operations attributable to the Company for both the three months ended September 30, 2016 and 2015, and for both the nine months ended September 30, 2016 and 2015, the diluted calculation of earnings per common share excludes the dilutive impact of stock options and the Units. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.

23

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 8 – LOSS PER SHARE AND DIVIDENDS (Continued)

A computation of loss per common share follows (in thousands, except per share amounts):

	Three months ended September 30,												Nine months ended September 30,
	2016						2015						2016						2015
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Loss:
Amounts attributable to Kindred stockholders:
Loss from continuing operations:
As reported in Statement of Operations	$	(685,600	)	$	(685,600	)	$	(16,869	)	$	(16,869	)	$	(651,418	)	$	(651,418	)	$	(138,329	)	$	(138,329	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(685,600	)	$	(685,600	)	$	(16,869	)	$	(16,869	)	$	(651,418	)	$	(651,418	)	$	(138,329	)	$	(138,329	)
Discontinued operations, net of income taxes:
Income (loss) from operations:
As reported in Statement of Operations	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,416		$	2,416		$	(1,712	)	$	(1,712	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,416		$	2,416		$	(1,712	)	$	(1,712	)
Gain on divestiture of operations:
As reported in Statement of Operations	$	-		$	-		$	-		$	-		$	179		$	179		$	983		$	983
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	-		$	-		$	-		$	-		$	179		$	179		$	983		$	983
Income (loss) from discontinued operations:
As reported in Statement of Operations	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,595		$	2,595		$	(729	)	$	(729	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,595		$	2,595		$	(729	)	$	(729	)
Net loss:
As reported in Statement of Operations	$	(685,613	)	$	(685,613	)	$	(14,599	)	$	(14,599	)	$	(648,823	)	$	(648,823	)	$	(139,058	)	$	(139,058	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(685,613	)	$	(685,613	)	$	(14,599	)	$	(14,599	)	$	(648,823	)	$	(648,823	)	$	(139,058	)	$	(139,058	)
Shares used in the computation:
Weighted average shares outstanding - basic      computation		86,869			86,869			86,184			86,184			86,766			86,766			83,960			83,960
Dilutive effect of employee stock options					-						-						-						-
Dilutive effect of tangible equity units					-						-						-						-
Adjusted weighted average shares outstanding -      diluted computation					86,869						86,184						86,766						83,960
Loss per common share:
Loss from continuing operations	$	(7.89	)	$	(7.89	)	$	(0.20	)	$	(0.20	)	$	(7.51	)	$	(7.51	)	$	(1.65	)	$	(1.65	)
Discontinued operations:
Income (loss) from operations		-			-			0.03			0.03			0.03			0.03			(0.02	)		(0.02	)
Gain on divestiture of operations		-			-			-			-			-			-			0.01			0.01
Income (loss) from discontinued operations		-			-			0.03			0.03			0.03			0.03			(0.01	)		(0.01	)
Net loss	$	(7.89	)	$	(7.89	)	$	(0.17	)	$	(0.17	)	$	(7.48	)	$	(7.48	)	$	(1.66	)	$	(1.66	)
Number of antidilutive stock options and tangible      equity units excluded from shares used in the      diluted loss per common share computation					1,743						1,548						1,744						2,572

24

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 8 – LOSS PER SHARE AND DIVIDENDS (Continued)

During the nine months ended September 30, 2016, the Company paid a cash dividend of $0.12 per common share on September 2, 2016 to shareholders of record as of the close of business on August 18, 2016 and also paid a cash dividend of $0.12 per common share on June 10, 2016 and April 1, 2016 to shareholders.

During the nine months ended September 30, 2015, the Company paid a cash dividend of $0.12 per common share on September 4, 2015 to shareholders of record as of the close of business on August 19, 2015 and also paid a cash dividend of $0.12 per common share on June 10, 2015 and April 1, 2015 to shareholders.

Future declarations of dividends will be subject to the approval of Kindred’s Board of Directors.

The Company made an installment payment on the Company’s Units on September 1, 2016 to holders of record on August 15, 2016, which consisted of a quarterly installment payment of $18.75 per Unit. The Company made an installment payment on the Company’s Units on June 1, 2016, which consisted of a quarterly installment payment of $18.76 per Unit. The Company also made installment payments on the Company’s Units on March 1, 2016, December 1, 2015, September 1, 2015 and June 1, 2015, each of which consisted of a quarterly installment payment of $18.75 per Unit. In addition, the Company also made an installment payment on the Company’s Units on March 2, 2015, which consisted of a quarterly installment payment of $18.75 per Unit, plus a one-time incremental payment of $1.25 per Unit for the period between November 25, 2014 and December 1, 2014, for a total payment of $20.00 per Unit. Each Unit is composed of a prepaid stock purchase contract (a “Purchase Contract”) and one share of 7.25% Mandatory Redeemable Preferred Stock, Series A (the “Mandatory Redeemable Preferred Stock”) having a final preferred stock installment payment date of December 1, 2017 and an initial liquidation preference of $201.58 per share of Mandatory Redeemable Preferred Stock. To the extent that any Unit has been separated into its constituent Purchase Contract and its constituent share of Mandatory Redeemable Preferred Stock, the installment payment is payable only on the constituent share of Mandatory Redeemable Preferred Stock.

NOTE 9 – BUSINESS SEGMENT DATA

The Company is organized into four operating divisions: the hospital division, the Kindred at Home division, the Kindred Rehabilitation Services division and the nursing center division. Based upon the authoritative guidance for business segments, the operating divisions represent six reportable operating segments, including (1) hospitals, (2) home health services, (3) hospice services, (4) Kindred Hospital Rehabilitation Services, (5) RehabCare and (6) nursing centers. These reportable operating segments are consistent with information used by the Company’s President and Chief Executive Officer and its Chief Operating Officer to assess performance and allocate resources. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

For segment purposes, the Company defines segment EBITDAR as earnings before interest, income taxes, depreciation, amortization, and rent. Segment EBITDAR reported for each of the Company’s operating segments excludes litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

25

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

The following table sets forth certain data by business segment (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues:
Hospital division	$	575,323		$	579,497		$	1,852,317		$	1,847,186
Kindred at Home:
Home health		449,958			424,054			1,318,549			1,152,741
Hospice		188,575			181,140			550,642			478,202
		638,533			605,194			1,869,191			1,630,943
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		169,018			149,435			504,607			453,543
RehabCare		192,480			219,518			592,803			708,904
		361,498			368,953			1,097,410			1,162,447
Nursing center division		270,259			270,510			814,881			818,688
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations:
Kindred Hospital Rehabilitation Services		(22,330	)		(22,081	)		(69,515	)		(69,284	)
RehabCare		(28,075	)		(35,943	)		(85,708	)		(111,994	)
Nursing centers		(1,681	)		(1,614	)		(5,008	)		(4,028	)
		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958
Loss from continuing operations:
Segment EBITDAR:
Hospital division	$	82,752		$	96,108		$	344,179		$	361,751
Kindred at Home:
Home health		75,073			67,682			218,044			187,397
Hospice		31,326			34,025			87,521			78,908
		106,399			101,707			305,565			266,305
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		49,470			42,141			147,809			131,236
RehabCare		9,248			14,544			34,504			44,933
		58,718			56,685			182,313			176,169
Nursing center division		29,922			35,923			93,684			112,763
Support center		(61,751	)		(55,439	)		(199,363	)		(192,213	)
Litigation contingency expense		-			(31,462	)		(2,840	)		(130,387	)
Impairment charges		(324,289	)		-			(338,208	)		(6,726	)
Restructuring charges		(22,813	)		(2,541	)		(28,860	)		(6,962	)
Transaction costs		(2,982	)		(3,846	)		(6,513	)		(103,764	)
EBITDAR		(134,044	)		197,135			349,957			476,936
Rent		(98,415	)		(95,436	)		(296,025	)		(282,955	)
Restructuring charges - rent		(58,650	)		(808	)		(59,363	)		(1,831	)
Depreciation and amortization		(40,382	)		(39,329	)		(121,320	)		(116,889	)
Interest, net		(58,052	)		(56,008	)		(172,856	)		(173,925	)
Income (loss) from continuing operations before      income taxes		(389,543	)		5,554			(299,607	)		(98,664	)
Provision for income taxes		281,752			12,523			311,470			9,183
	$	(671,295	)	$	(6,969	)	$	(611,077	)	$	(107,847	)

26

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Rent:
Hospital division	$	52,555	$	51,726	$	158,259	$	154,584
Kindred at Home:
Home health		8,472		8,675		25,730		24,149
Hospice		4,342		4,428		13,047		12,188
		12,814		13,103		38,777		36,337
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		8,852		7,591		26,511		22,473
RehabCare		925		937		2,697		2,946
		9,777		8,528		29,208		25,419
Nursing center division		22,697		21,510		68,151		64,039
Support center		572		569		1,630		2,576
	$	98,415	$	95,436	$	296,025	$	282,955
Depreciation and amortization:
Hospital division	$	12,627	$	12,956	$	38,896	$	40,963
Kindred at Home:
Home health		3,803		4,653		11,916		12,519
Hospice		1,563		1,821		4,688		4,759
		5,366		6,474		16,604		17,278
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		3,573		3,344		10,620		10,076
RehabCare		2,011		1,955		5,983		5,790
		5,584		5,299		16,603		15,866
Nursing center division		7,552		6,695		22,020		21,151
Support center		9,253		7,905		27,197		21,631
	$	40,382	$	39,329	$	121,320	$	116,889

27

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Capital expenditures, excluding acquisitions    (including discontinued operations):
Hospital division:
Routine	$	5,649	$	5,127	$	17,499	$	20,017
Development		-		-		-		-
		5,649		5,127		17,499		20,017
Kindred at Home:
Home health:
Routine		1,300		1,225		5,009		2,336
Development		-		-		-		-
		1,300		1,225		5,009		2,336
Hospice:
Routine		637		352		1,928		834
Development		-		-		-		-
		637		352		1,928		834
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Routine		380		350		1,058		625
Development		4,973		1,281		15,344		1,342
		5,353		1,631		16,402		1,967
RehabCare:
Routine		698		532		1,205		1,248
Development		-		-		-		-
		698		532		1,205		1,248
Nursing center division:
Routine		5,486		4,738		13,247		14,146
Development		585		2,085		5,923		8,330
		6,071		6,823		19,170		22,476
Support center:
Routine:
Information systems		7,031		22,765		24,744		40,335
Other		692		333		4,013		1,150
Development		2,828		2,394		5,845		2,394
		10,551		25,492		34,602		43,879
Totals:
Routine		21,873		35,422		68,703		80,691
Development		8,386		5,760		27,112		12,066
	$	30,259	$	41,182	$	95,815	$	92,757

28

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	September 30,		December 31,
	2016		2015
Assets at end of period:
Hospital division	$	1,335,743	$	1,633,801
Kindred at Home:
Home health		1,527,366		1,435,176
Hospice		949,726		922,710
		2,477,092		2,357,886
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		819,995		802,686
RehabCare		333,564		347,738
		1,153,559		1,150,424
Nursing center division		485,181		494,066
Support center		775,765		832,082
	$	6,227,340	$	6,468,259
Goodwill:
Hospital division	$	361,310	$	628,519
Kindred at Home:
Home health		913,703		905,989
Hospice		647,507		639,006
		1,561,210		1,544,995
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		499,953		496,296
RehabCare		-		-
		499,953		496,296
	$	2,422,473	$	2,669,810

NOTE 10 – INCOME TAXES

At each balance sheet date, management assesses all available positive and negative evidence to determine whether a valuation allowance is needed against its deferred tax assets. The authoritative guidance requires evidence related to events that have actually happened to be weighted more significantly than evidence that is projected or expected to happen. A significant piece of negative evidence according to this weighting standard is that there are cumulative losses in the two most recent years and the current year, which is the case for the Company at September 30, 2016. The Company’s outlook of taxable income for 2016 changed in the third quarter of 2016 after the Company recorded $286.0 million of goodwill and property and equipment impairment charges associated with (1) the Hospital Division Triggering Event and (2) the decline in nursing center division financial performance in 2016 combined with the planned disposal of the Company’s skilled nursing facility business. In addition, the divestiture of the skilled nursing facility business may generate additional taxable losses in the future related to the transaction.

In addition, the Company has deferred tax liabilities related to tax amortization of acquired indefinite lived intangible assets because these assets are not amortized for financial reporting purposes. The tax amortization in current and future years created a deferred tax liability which will reverse at the time of ultimate sale or book impairment. Due to the uncertain timing of this reversal, the temporary difference associated with indefinite lived intangible assets cannot be considered a source of future taxable income for purposes of determining the valuation allowance. As such, this deferred tax liability cannot be used to offset the deferred tax asset related to the net deferred tax assets.  

On the basis of this evaluation, as of September 30, 2016, the Company recorded a valuation allowance of $366.5 million against the Company’s deferred tax assets. As of September 30, 2016, the Company has a net deferred tax liability of $200.3 million representing indefinite lived intangible assets. The amount of deferred tax asset considered realizable, however, could be adjusted if the weighting of the positive and negative evidence changes.

29

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 11 – INSURANCE RISKS

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its wholly owned limited purpose insurance subsidiaries. Provisions for loss for these risks are based upon management’s best available information including actuarially determined estimates. Effective with the Gentiva Merger, the Company cancelled all policies issued by the Gentiva wholly owned limited purpose insurance subsidiary and insures all post-merger risks through its insurance subsidiary.

The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These risks are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of, or less than, the amounts recorded. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):

	Three months ended					Nine months ended
	September 30,					September 30,
	2016		2015			2016			2015
Professional liability:
Continuing operations	$	19,486	$	19,778		$	64,614		$	51,067
Discontinued operations		84		(1,741	)		(2,940	)		(2,408	)
Workers compensation:
Continuing operations	$	16,792	$	11,165		$	45,797		$	40,021
Discontinued operations		163		(2,219	)		(512	)		(2,225	)

A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):

	September 30, 2016						December 31, 2015
	Professional liability		Workers compensation		Total		Professional liability		Workers compensation		Total
Assets:
Current:
Insurance subsidiary investments	$	59,268	$	46,078	$	105,346	$	61,889	$	44,749	$	106,638
Reinsurance and other     recoverables		10,184		1,302		11,486		9,282		1,020		10,302
Other		-		50		50		-		100		100
		69,452		47,430		116,882		71,171		45,869		117,040
Non-current:
Insurance subsidiary investments		94,860		100,657		195,517		82,207		122,291		204,498
Reinsurance and other     recoverables		98,886		95,272		194,158		90,387		86,943		177,330
Deposits		4,225		24,061		28,286		3,980		4,337		8,317
Other		-		-		-		-		38		38
		197,971		219,990		417,961		176,574		213,609		390,183
	$	267,423	$	267,420	$	534,843	$	247,745	$	259,478	$	507,223
Liabilities:
Allowance for insurance risks:
Current	$	61,036	$	50,297	$	111,333	$	64,099	$	48,770	$	112,869
Non-current		283,048		213,639		496,687		263,273		206,079		469,352
	$	344,084	$	263,936	$	608,020	$	327,372	$	254,849	$	582,221

Provisions for loss for professional liability risks retained by the Company’s limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1%. The discount rate is based upon the risk-free interest rate for the respective year. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $346.5 million at September 30, 2016 and $329.9 million at December 31, 2015.

Provisions for loss for workers compensation risks retained by the Company’s limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually.

30

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 12 – INSURANCE SUBSIDIARY INVESTMENTS

The Company maintains investments, consisting principally of cash and cash equivalents, debt securities, equities, and certificates of deposit for the payment of claims and expenses related to professional liability and workers compensation risks. These investments have been categorized as available-for-sale and are reported at fair value.

The cost for equities, amortized cost for debt securities and estimated fair value of the Company’s insurance subsidiary investments follows (in thousands):

	September 30, 2016									December 31, 2015
	Cost		Unrealized gains		Unrealized losses			Fair value		Cost		Unrealized gains		Unrealized losses			Fair value
Cash and cash equivalents (a)	$	177,550	$	-	$	-		$	177,550	$	186,029	$	-	$	-		$	186,029
Debt securities:
Corporate bonds		56,934		108		(10	)		57,032		46,940		5		(122	)		46,823
U.S. Treasury notes		26,447		36		-			26,483		33,386		-		(55	)		33,331
Debt securities issued     by U.S. government     agencies		17,643		27		(1	)		17,669		22,497		-		(43	)		22,454
		101,024		171		(11	)		101,184		102,823		5		(220	)		102,608
Equities by industry:
Technology		1,721		51		(16	)		1,756		1,533		66		(98	)		1,501
Consumer		1,687		11		(73	)		1,625		2,271		182		(36	)		2,417
Healthcare		1,230		16		(56	)		1,190		1,896		116		(37	)		1,975
Financial services		1,262		-		(113	)		1,149		1,854		55		(81	)		1,828
Industrials		998		1		(65	)		934		1,994		86		(157	)		1,923
Energy		-		-		-			-		1,015		-		(15	)		1,000
Other		3,060		1		(42	)		3,019		3,849		26		(268	)		3,607
		9,958		80		(365	)		9,673		14,412		531		(692	)		14,251
Certificates of deposit		12,450		6		-			12,456		8,250		-		(2	)		8,248
	$	300,982	$	257	$	(376	)	$	300,863	$	311,514	$	536	$	(914	)	$	311,136

(a) Includes $19.9 million and $29.6 million of money market funds at September 30, 2016 and December 31, 2015, respectively.

Since the Company’s insurance subsidiary investments are restricted for a limited purpose, they are classified in the accompanying unaudited condensed consolidated balance sheet based upon the expected current and long-term cash requirements of the Company’s limited purpose insurance subsidiaries.

The Company’s investment policy governing insurance subsidiary investments precludes the investment portfolio managers from selling any security at a loss without prior authorization from the Company. The investment managers also limit the exposure to any one issue, issuer or type of investment. The Company intends, and has the ability, to hold insurance subsidiary investments for a long duration without the necessity of selling securities to fund the underwriting needs of its insurance subsidiary. This ability to hold securities allows sufficient time for recovery of temporary declines in the market value of equity securities and the par value of debt securities as of their stated maturity date.

The Company considered the severity and duration of its unrealized losses at September 30, 2016 and recognized pretax other-than-temporary-impairments of $0.2 million during the nine months ended September 30, 2016 for various investments held in its insurance subsidiary investment portfolio. These investments were determined to be impaired after considering the duration of the declines in values and the likelihood of near term price recovery of each investment. Because the Company considered the remaining unrealized losses at September 30, 2016 to be temporary, the Company did not record any additional impairment losses related to these investments. The Company considered the severity and duration of its unrealized losses at September 30, 2015 for various investments held in its insurance subsidiary investment portfolio and determined that these unrealized losses were temporary and did not record any impairment losses related to these investments.

31

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 13 – LONG-TERM DEBT

Term Loan Amendment Agreement

On June 14, 2016, the Company entered into a fifth amendment and restatement agreement (the “Term Loan Amendment Agreement”) among the Company, the other credit parties party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto. The Term Loan Amendment Agreement amends and restates the Fourth Amended and Restated Term Loan Facility to provide for, among other things, (1) additional joint venture flexibility, including an increased ability to enter into and make investments in joint ventures that are non-guarantor restricted subsidiaries and to incur debt and liens of such joint ventures and other non-guarantor restricted subsidiaries, (2) an increase in the size of a basket for asset sales from 15% to 25% of consolidated total assets, (3) maintaining a maximum total leverage ratio of 6.00:1.00 for each quarterly measurement date after the date of such amendment, (4) a prepayment premium of 1.00% in connection with any repricing transaction within six months of the closing date, and (5) an incremental term loan in an aggregate principal amount of $200 million.

The incremental term loan under the Term Loan Amendment Agreement was issued with 95 basis points of original issue discount (“OID”) and has the same terms as, and is fungible with, the $1.18 billion in aggregate principal amount of term loans that were outstanding under the Fourth Amended and Restated Term Loan Facility immediately prior to the effectiveness of the Term Loan Amendment Agreement. The net proceeds from the incremental term loan were used to repay a portion of the Company’s outstanding borrowings under its ABL Facility (as defined below).

ABL Amendment Agreement

Also on June 14, 2016, the Company entered into a fourth amendment and restatement agreement (the “ABL Amendment Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto. The ABL Amendment Agreement amends and restates the ABL Credit Agreement dated as of June 1, 2011 (as amended by that certain Amendment No. 1 to the ABL Credit Agreement dated as of October 4, 2012 and as amended and restated by that certain Amendment and Restatement Agreement dated as of August 21, 2013, that certain Second Amendment and Restatement Agreement dated as of April 9, 2014 and that certain Third Amendment and Restatement Agreement dated as of October 31, 2014, and as further amended by that certain Incremental ABL Joinder dated as of December 12, 2014 and that certain Amendment No. 2 dated as of June 3, 2015), among the Company, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto (the “Prior ABL Facility”).

The ABL Amendment Agreement amends and restates the Prior ABL Facility (as amended and restated, the “ABL Facility”) to provide for, among other things, (1) additional joint venture flexibility, including an increased ability to enter into and make investments in joint ventures that are non-guarantor restricted subsidiaries and to incur debt and liens of such joint ventures and other non-guarantor restricted subsidiaries, and (2) an increase in the size of a basket for asset sales from 15% to 25% of consolidated total assets.

Incremental Term Loan Amendment

On March 10, 2015, the Company entered into an incremental amendment agreement, which provided for an incremental term loan in an aggregate principal amount of $200 million under its Fourth Amended and Restated Term Loan Facility. The Company used the net proceeds of the incremental term loan to repay outstanding borrowings under its Prior ABL Facility. The incremental term loan was issued with 50 basis points of OID and has the same terms as, and is fungible with, all other term loans outstanding under the Company’s Term Loan Facility.

Amendment to Notes due 2022

On April 9, 2014, the Company completed a private placement of $500 million aggregate principal amount of 6.375% senior notes due 2022 (the “Notes due 2022”). The Notes due 2022 were issued pursuant to the indenture dated April 9, 2014 (the “2022 Indenture”) among the Company, the guarantors party thereto (the “2022 Guarantors”), and Wells Fargo Bank, National Association, as trustee.

On January 30, 2015, following the receipt ofsufficient consentsto approve the proposed amendments(the “Amendments”),the Company, the 2022 Guarantors,and WellsFargo Bank, National Association, astrustee, entered into the first supplemental indenture(the “2022 NotesSupplemental Indenture”)to the 2022 Indenture. The 2022 NotesSupplemental Indenture conformscertain covenants, definitions,and other termsinthe 2022 Indenture to the covenants, definitions,and termscontained in the indentures governing the Notes (as defined in Note 15). The Amendmentsbecame operative following the consummation of the Gentiva Merger.

32

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 14 – CONTINGENCIES

Management continually evaluates contingencies based upon the best available information. In addition, allowances for losses are provided currently for disputed items that have continuing significance, such as certain third party reimbursements and deductions that continue to be claimed in current cost reports and tax returns.

Management believes that allowances for losses have been provided to the extent necessary and that its assessment of contingencies is reasonable.

Principal contingencies are described below.

Revenues – Certain third party payments are subject to examination by agencies administering the various reimbursement programs. The Company is contesting certain issues raised in audits of prior year cost reports and the denial of payment by third parties to the Company’s customers.

Professional liability risks – The Company has provided for losses for professional liability risks based upon management’s best available information including actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 11.

Legal and regulatory proceedings – The Company is a party to various legal actions and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including investigations resulting from the Company’s obligation to self-report suspected violations of law). The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental and internal audits and investigations. The U.S. Department of Justice (the “DOJ”), CMS or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity. See Note 17.

Other indemnifications – In the ordinary course of business, the Company enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction, such as a disposal of an operating facility. These indemnifications may cover claims related to employment-related matters, governmental regulations, environmental issues, and tax matters, as well as patient, third party payor, supplier, and contractual relationships. The Company also is subject to indemnity claims under contracts with its Kindred Rehabilitation Services division customers related to the provision of its services. Obligations under these indemnities generally are initiated by a breach of the terms of a contract or by a third party claim or event. These indemnifications could potentially subject the Company to damages and other payments which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, or liquidity.

Income taxes – The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest, and penalties.

33

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company follows the provisions of the authoritative guidance for fair value measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance related to fair value measures establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency asset backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

34

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

The Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and any associated losses are summarized below (in thousands): 

	Fair value measurements
	Level 1		Level 2			Level 3			Assets/liabilities at fair value			Total losses
September 30, 2016
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	57,032		$	-		$	57,032		$	-
U.S. Treasury notes		26,483		-			-			26,483			-
Debt securities issued by U.S. government    agencies		-		17,669			-			17,669			-
		26,483		74,701			-			101,184			-
Available-for-sale equity securities		9,673		-			-			9,673			-
Money market funds		21,549		-			-			21,549			-
Certificates of deposit		-		12,456			-			12,456			-
Total available-for-sale investments		57,705		87,157			-			144,862			-
Deposits held in money market funds		11,901		4,126			-			16,027			-
	$	69,606	$	91,283		$	-		$	160,889		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(4,883	)	$	(4,883	)	$	-
Interest rate swaps		-		(8,234	)		-			(8,234	)		-
	$	-	$	(8,234	)	$	(4,883	)	$	(13,117	)	$	-
Non-recurring:
Assets:
Property and equipment	$	-	$	-		$	645,723		$	645,723		$	(24,902	)
Goodwill		-		-			361,310			361,310			(261,129	)
Intangible assets - certificates of need		-		-			641			641			(3,559	)
Nursing center available for sale		-		-			4,499			4,499			(5,310	)
Hospitals available for sale		-		-			21,025			21,025			(43,308	)
	$	-	$	-		$	1,033,198		$	1,033,198		$	(338,208	)
Liabilities	$	-	$	-		$	-		$	-		$	-
December 31, 2015
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	46,823		$	-		$	46,823		$	-
U.S. Treasury notes		33,331		-			-			33,331			-
Debt securities issued by U.S. government    agencies		-		22,454			-			22,454			-
		33,331		69,277			-			102,608			-
Available-for-sale equity securities		14,251		-			-			14,251			-
Money market funds		31,429		-			-			31,429			-
Certificates of deposit		-		8,248			-			8,248			-
Total available-for-sale investments		79,011		77,525			-			156,536			-
Deposits held in money market funds		100		3,880			-			3,980			-
	$	79,111	$	81,405		$	-		$	160,516		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(6,437	)	$	(6,437	)	$	-
Interest rate swaps		-		(4,472	)		-			(4,472	)		-
	$	-	$	(4,472	)	$	(6,437	)	$	(10,909	)	$	-
Non-recurring:
Assets:
Intangible assets - trade names	$	-	$	-		$	98,774		$	98,774		$	(24,757	)
Liabilities	$	-	$	-		$	-		$	-		$	-

35

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Recurring measurements

The Company’s available-for-sale investments held by its limited purpose insurance subsidiaries consist of debt securities, equities, money market funds, and certificates of deposit. These available-for-sale investments and the insurance subsidiaries’ cash and cash equivalents of $157.7 million as of September 30, 2016 and $156.4 million as of December 31, 2015, classified as insurance subsidiary investments, are maintained for the payment of claims and expenses related to professional liability and workers compensation risks.

The Company also has available-for-sale investments totaling $1.7 million as of September 30, 2016 and $1.8 million as of December 31, 2015 related to a deferred compensation plan that is maintained for certain of the Company’s current and former employees.

The fair value of actively traded debt and equity securities and money market funds is based upon quoted market prices and is generally classified as Level 1. The fair value of inactively traded debt securities and certificates of deposit is based upon either quoted market prices of similar securities or observable inputs such as interest rates using either a market or income valuation approach and is generally classified as Level 2. The Company’s investment advisors obtain and review pricing for each security. The Company is responsible for the determination of fair value and as such the Company reviews the pricing information from its advisors in determining reasonable estimates of fair value. Based upon the Company’s internal review procedures, there were no adjustments to the prices during the three months or nine months ended September 30, 2016 or September 30, 2015.

The Company’s deposits held in money market funds consist primarily of cash and cash equivalents held for the Company’s insurance programs and for general corporate purposes.

The Company acquired a contingent consideration liability in the Gentiva Merger from a prior acquisition by Gentiva with an initial estimated fair value of $7.9 million. The fair value is determined using a discounted cash flow approach utilizing Level 2 and Level 3 inputs which includes observable market discount rates, fixed payment schedules, and assumptions based on achieving certain predefined performance criteria. As of September 30, 2016, the fair value of the Level 2 and 3 contingent consideration liability was $4.9 million. The change in fair value in the third quarter of 2016 consists of $0.1 million in accrued interest included in interest expense in the accompanying unaudited condensed consolidated statement of operations. A one percent change in the discount rate used to calculate the accretion of the present value of the contingent consideration liability would have an impact on the fair value of approximately $0.1 million.

The fair value of the derivative liability associated with the interest rate swaps is estimated using industry-standard valuation models, which are Level 2 measurements. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The carrying value is equal to fair value for financial instruments that are based upon quoted market prices or current market rates. The Company’s long-term debt is based upon Level 2 inputs.

	September 30, 2016				December 31, 2015
(In thousands)	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	139,430	$	139,430	$	98,758	$	98,758
Insurance subsidiary investments		300,863		300,863		311,136		311,136
Long-term debt, including amounts due within one year    (excluding capital lease obligations totaling $0.6 million and    $0.8 million at September 30, 2016 and December 31, 2015,     respectively)		3,343,416		3,389,569		3,110,130		2,978,890

Non-recurring measurements

During the third quarter of 2016, the Company recorded a goodwill impairment charge of $261.1 million and a property and equipment impairment charge of $3.2 million related to the Hospital Division Triggering Event. These charges reflect the amounts by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets were measured using Level 3 inputs such as operating cash flows, market data and replacement cost factoring in depreciation, economic obsolescence and inflation trends.

36

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Non-recurring measurements (Continued)

During the third quarter of 2016, the Company recorded impairment charges aggregating $33.0 million, comprised of $19.7 million related to property and equipment, and $13.3 million related to goodwill and other intangible assets. These charges reflect the amounts by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets was measured using a Level 3 input of the pending offer from Curahealth. In addition, during the first quarter of 2016, the Company recorded asset impairment charges of $7.8 million under the held and used accounting model related to the planned Curahealth Disposal. These charges reflect the amount by which the carrying value of certain property and equipment exceeded its estimated fair value. The fair value of property and equipment was measured using Level 3 inputs, primarily replacement costs.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the decline in financial performance of its nursing center division. After determining it was more likely than not that the Company would dispose of its skilled nursing facility business, the Company determined that its property and equipment was impaired. As a result, the Company recorded an impairment charge of $21.7 million. The fair value of the assets was measured using Level 3 inputs, such as operating cash flows and replacement costs.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the planned divestiture and pending offers for a nursing center held for sale and determined its property and equipment was impaired. As a result, the Company recorded an impairment charge of $5.3 million. The fair value of the assets was measured based upon pending offers, a Level 3 input.

During the nine months ended September 30, 2016, the Company recorded an asset impairment charge of $2.6 million related to the sale of a medical office building. This charge reflects the amount by which the carrying value of the property exceeded its estimated fair value. The fair value of the property was measured using a Level 3 input of the pending offer.

During the nine months ended September 30, 2016, the Company also recorded an impairment charge of $3.5 million related to certificates of need for two hospitals as part of the annual indefinite-lived intangible assets impairment review at May 1. This charge reflects the amount by which the carrying value of the certificates of need exceeded its estimated fair value. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

During the nine months ended September 30, 2015, the Company recorded an asset impairment charge of $6.7 million related to previously acquired home health and hospice trade names after the decision in the first quarter of 2015 to rebrand to the Kindred at Home trade name. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The Company’s $750 million aggregate principal amount of 8.00% Senior Notes due 2020 (the “Notes due 2020”), Notes due 2022 and $600 million aggregate principal amount of 8.75% Senior Notes due 2023 (the “Notes due 2023”) (the Notes due 2020 and the Notes due 2023 are collectively referred to as the “Notes”) are all fully and unconditionally guaranteed by substantially all of the Company’s domestic 100% owned subsidiaries. The equity method has been used with respect to the parent company’s investment in subsidiaries.

The following unaudited condensed consolidating financial data present the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of September 30, 2016 and December 31, 2015, and the respective results of operations and cash flows for the three months and nine months ended September 30, 2016 and September 30, 2015.

37

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

	Three months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	1,559,255		$	259,800		$	(25,528	)	$	1,793,527
Salaries, wages and benefits		-			895,394			62,250			-			957,644
Supplies		-			82,509			12,991			-			95,500
Rent		-			77,529			20,886			-			98,415
Other operating expenses		-			190,299			27,065			-			217,364
General and administrative expenses		-			230,612			105,323			(25,528	)		310,407
Other (income) expense		-			246			(692	)		-			(446	)
Litigation contingency expense		-			-			-			-			-
Impairment charges		-			202,617			121,672			-			324,289
Restructuring charges		-			80,268			1,195			-			81,463
Depreciation and amortization		-			37,883			2,499			-			40,382
Management fees		-			(2,277	)		2,277			-			-
Intercompany interest (income) expense from     affiliates		(56,169	)		44,514			11,655			-			-
Interest expense (income)		59,859			(17	)		20			-			59,862
Investment income		-			(90	)		(1,720	)		-			(1,810	)
Equity in net loss of consolidating affiliates		683,376			-			-			(683,376	)		-
		687,066			1,839,487			365,421			(708,904	)		2,183,070
Loss from continuing operations before income     taxes		(687,066	)		(280,232	)		(105,621	)		683,376			(389,543	)
Provision (benefit) for income taxes		(1,453	)		282,602			603			-			281,752
Loss from continuing operations		(685,613	)		(562,834	)		(106,224	)		683,376			(671,295	)
Discontinued operations, net of income taxes:
Income (loss) from operations		-			(73	)		61			-			(12	)
Loss on divestiture of operations		-			-			-			-			-
Income (loss) from discontinued operations		-			(73	)		61			-			(12	)
Net loss		(685,613	)		(562,907	)		(106,163	)		683,376			(671,307	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(14,305	)		-			(14,305	)
Discontinued operations		-			-			(1	)		-			(1	)
		-			-			(14,306	)		-			(14,306	)
Loss attributable to Kindred	$	(685,613	)	$	(562,907	)	$	(120,469	)	$	683,376		$	(685,613	)
Comprehensive loss	$	(685,055	)	$	(562,907	)	$	(106,849	)	$	684,062		$	(670,749	)
Comprehensive loss attributable to Kindred	$	(685,055	)	$	(562,907	)	$	(121,155	)	$	684,062		$	(685,055	)

38

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Three months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	1,553,814		$	236,783		$	(26,081	)	$	1,764,516
Salaries, wages and benefits		-			869,689			52,451			-			922,140
Supplies		-			83,840			12,711			-			96,551
Rent		-			76,275			19,161			-			95,436
Other operating expenses		-			186,036			21,801			-			207,837
General and administrative expenses		-			226,402			107,179			(26,081	)		307,500
Other (income) expense		-			35			(685	)		-			(650	)
Litigation contingency expense		-			31,462			-			-			31,462
Restructuring charges		-			3,349			-			-			3,349
Depreciation and amortization		-			36,920			2,409			-			39,329
Management fees		-			(5,170	)		5,170			-			-
Intercompany interest (income) expense from     affiliates		(51,099	)		39,769			11,330			-			-
Interest expense		56,350			27			63			-			56,440
Investment income		-			(177	)		(255	)		-			(432	)
Equity in net loss of consolidating affiliates		11,415			-			-			(11,415	)		-
		16,666			1,548,457			231,335			(37,496	)		1,758,962
Income (loss) from continuing operations before     income taxes		(16,666	)		5,357			5,448			11,415			5,554
Provision (benefit) for income taxes		(2,067	)		14,411			179			-			12,523
Income (loss) from continuing operations		(14,599	)		(9,054	)		5,269			11,415			(6,969	)
Income (loss) from discontinued operations, net of     income taxes		-			2,311			(42	)		-			2,269
Net income (loss)		(14,599	)		(6,743	)		5,227			11,415			(4,700	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		-			-			(9,900	)		-			(9,900	)
Discontinued operations		-			-			1			-			1
		-			-			(9,899	)		-			(9,899	)
Loss attributable to Kindred	$	(14,599	)	$	(6,743	)	$	(4,672	)	$	11,415		$	(14,599	)
Comprehensive income (loss)	$	(15,716	)	$	(6,743	)	$	4,591		$	12,051		$	(5,817	)
Comprehensive loss attributable to Kindred	$	(15,716	)	$	(6,743	)	$	(5,308	)	$	12,051		$	(15,716	)

39

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Nine months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	4,769,100		$	781,053		$	(76,585	)	$	5,473,568
Salaries, wages and benefits		-			2,627,827			184,985			-			2,812,812
Supplies		-			254,818			39,508			-			294,326
Rent		-			233,264			62,761			-			296,025
Other operating expenses		-			567,203			82,712			-			649,915
General and administrative expenses		-			762,273			312,871			(76,585	)		998,559
Other (income) expense		-			550			(2,459	)		-			(1,909	)
Litigation contingency expense		-			2,840			-			-			2,840
Impairment charges		-			213,964			124,244			-			338,208
Restructuring charges		-			87,028			1,195			-			88,223
Depreciation and amortization		-			113,542			7,778			-			121,320
Management fees		-			(7,003	)		7,003			-			-
Intercompany interest (income) expense from     affiliates		(166,673	)		131,499			35,174			-			-
Interest expense (income)		175,372			(34	)		79			-			175,417
Investment income		-			(305	)		(2,256	)		-			(2,561	)
Equity in net loss of consolidating affiliates		643,548			-			-			(643,548	)		-
		652,247			4,987,466			853,595			(720,133	)		5,773,175
Loss from continuing operations before income taxes		(652,247	)		(218,366	)		(72,542	)		643,548			(299,607	)
Provision (benefit) for income taxes		(3,424	)		313,569			1,325			-			311,470
Loss from continuing operations		(648,823	)		(531,935	)		(73,867	)		643,548			(611,077	)
Discontinued operations, net of income taxes:
Income from operations		-			2,336			86			-			2,422
Gain on divestiture of operations		-			179			-			-			179
Income from discontinued operations		-			2,515			86			-			2,601
Net loss		(648,823	)		(529,420	)		(73,781	)		643,548			(608,476	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(40,341	)		-			(40,341	)
Discontinued operations		-			-			(6	)		-			(6	)
		-			-			(40,347	)		-			(40,347	)
Loss attributable to Kindred	$	(648,823	)	$	(529,420	)	$	(114,128	)	$	643,548		$	(648,823	)
Comprehensive loss	$	(650,525	)	$	(529,420	)	$	(73,613	)	$	643,380		$	(610,178	)
Comprehensive loss attributable to Kindred	$	(650,525	)	$	(529,420	)	$	(113,960	)	$	643,380		$	(650,525	)

40

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Nine months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	4,626,164		$	724,586		$	(76,792	)	$	5,273,958
Salaries, wages and benefits		-			2,534,133			170,787			-			2,704,920
Supplies		-			249,995			38,064			-			288,059
Rent		-			226,417			56,538			-			282,955
Other operating expenses		-			542,682			74,999			-			617,681
General and administrative expenses		-			815,833			304,945			(76,792	)		1,043,986
Other (income) expense		-			355			(2,054	)		-			(1,699	)
Litigation contingency expense		-			130,387			-			-			130,387
Impairment charges		-			6,726			-			-			6,726
Restructuring charges		-			8,793			-			-			8,793
Depreciation and amortization		-			109,571			7,318			-			116,889
Management fees		-			(14,766	)		14,766			-			-
Intercompany interest (income) expense from     affiliates		(154,140	)		120,173			33,967			-			-
Interest expense		172,534			3,371			223			-			176,128
Investment income		-			(1,525	)		(678	)		-			(2,203	)
Equity in net loss of consolidating affiliates		127,902			-			-			(127,902	)		-
		146,296			4,732,145			698,875			(204,694	)		5,372,622
Income (loss) from continuing operations before     income taxes		(146,296	)		(105,981	)		25,711			127,902			(98,664	)
Provision (benefit) for income taxes		(7,238	)		15,956			465			-			9,183
Income (loss) from continuing operations		(139,058	)		(121,937	)		25,246			127,902			(107,847	)
Discontinued operations, net of income taxes:
Loss from operations		-			(793	)		(951	)		-			(1,744	)
Gain on divestiture of operations		-			983			-			-			983
Income (loss) from discontinued operations		-			190			(951	)		-			(761	)
Net income (loss)		(139,058	)		(121,747	)		24,295			127,902			(108,608	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		-			-			(30,482	)		-			(30,482	)
Discontinued operations		-			-			32			-			32
		-			-			(30,450	)		-			(30,450	)
Loss attributable to Kindred	$	(139,058	)	$	(121,747	)	$	(6,155	)	$	127,902		$	(139,058	)
Comprehensive income (loss)	$	(140,835	)	$	(121,747	)	$	23,748		$	128,449		$	(110,385	)
Comprehensive loss attributable to Kindred	$	(140,835	)	$	(121,747	)	$	(6,702	)	$	128,449		$	(140,835	)

41

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet

	As of September 30, 2016
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	32,623		$	106,807		$	-		$	139,430
Insurance subsidiary investments		-		-			105,346			-			105,346
Accounts receivable, net		-		1,101,665			164,880			-			1,266,545
Inventories		-		20,568			4,694			-			25,262
Income taxes		-		11,432			984			-			12,416
Other		-		85,318			9,558			-			94,876
		-		1,251,606			392,269			-			1,643,875
Property and equipment, net		-		807,137			70,414			-			877,551
Goodwill		-		1,972,402			450,071			-			2,422,473
Intangible assets, net		-		758,045			46,557			-			804,602
Insurance subsidiary investments		-		-			195,517			-			195,517
Intercompany		4,940,207		-			-			(4,940,207	)		-
Deferred tax assets		-		-			8,189			(8,189	)		-
Other		11,123		113,557			158,642			-			283,322
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	104,206		$	99,220		$	-		$	203,426
Salaries, wages and other     compensation		-		331,453			59,290			-			390,743
Due to third party payors		-		57,945			-			-			57,945
Professional liability risks		-		5,086			55,950			-			61,036
Other accrued liabilities		60,217		199,168			20,920			-			280,305
Long-term debt due within one     year		26,186		-			1,703			-			27,889
		86,403		697,858			237,083			-			1,021,344
Long-term debt		3,315,573		-			601			-			3,316,174
Intercompany/deficiency in earnings of     consolidated subsidiaries		720,363		4,344,909			595,298			(5,660,570	)		-
Professional liability risks		-		73,117			209,931			-			283,048
Deferred tax liabilities		-		208,523			-			(8,189	)		200,334
Deferred credits and other liabilities		-		214,438			139,808			-			354,246
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		828,991		(636,098	)		(84,265	)		720,363			828,991
Noncontrolling interests		-		-			223,203			-			223,203
		828,991		(636,098	)		138,938			720,363			1,052,194
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340

42

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet (Continued)

	As of December 31, 2015
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries		Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	18,232		$	80,526	$	-		$	98,758
Insurance subsidiary investments		-		-			106,638		-			106,638
Accounts receivable, net		-		1,039,761			155,107		-			1,194,868
Inventories		-		23,125			4,666		-			27,791
Income taxes		-		10,913			877		-			11,790
Other		-		53,648			7,406		-			61,054
		-		1,145,679			355,220		-			1,500,899
Property and equipment, net		-		911,611			60,385		-			971,996
Goodwill		-		2,098,812			570,998		-			2,669,810
Intangible assets, net		-		707,792			47,863		-			755,655
Insurance subsidiary investments		-		-			204,498		-			204,498
Intercompany		4,749,257		-			-		(4,749,257	)		-
Deferred tax assets		-		95,721			8,409		-			104,130
Acquisition deposit		-		18,489			-		-			18,489
Other		11,312		116,692			114,778		-			242,782
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	106,253		$	80,808	$	-		$	187,061
Salaries, wages and other     compensation		-		348,548			56,377		-			404,925
Due to third party payors		-		36,251			-		-			36,251
Professional liability risks		-		4,813			59,286		-			64,099
Other accrued liabilities		75,134		297,608			21,504		-			394,246
Long-term debt due within one     year		23,524		-			1,106		-			24,630
		98,658		793,473			219,081		-			1,111,212
Long-term debt		3,085,074		-			1,274		-			3,086,348
Intercompany/deficiency in earnings of     consolidated subsidiaries		76,983		4,142,653			606,604		(4,826,240	)		-
Professional liability risks		-		61,472			201,801		-			263,273
Deferred credits and other liabilities		-		175,173			126,206		-			301,379
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		1,499,854		(77,975	)		992		76,983			1,499,854
Noncontrolling interests		-		-			206,193		-			206,193
		1,499,854		(77,975	)		207,185		76,983			1,706,047
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259

43

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows

	Three months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(22,220	)	$	36,799		$	21,503		$	-	$	36,082
Cash flows from investing activities:
Routine capital expenditures		-			(19,562	)		(2,311	)		-		(21,873	)
Development capital expenditures		-			(3,413	)		(4,973	)		-		(8,386	)
Acquisitions, net of cash acquired		-			(49,329	)		-			-		(49,329	)
Sale of assets		-			3,739			-			-		3,739
Purchase of insurance subsidiary investments		-			-			(22,427	)		-		(22,427	)
Sale of insurance subsidiary investments		-			-			31,875			-		31,875
Net change in insurance subsidiary cash and     cash equivalents		-			-			(14,680	)		-		(14,680	)
Net change in other investments		-			(63	)		114			-		51
Other		-			(150	)		-			-		(150	)
Net cash used in investing activities		-			(68,778	)		(12,402	)		-		(81,180	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		489,200			-			-			-		489,200
Repayment of borrowings under revolving credit		(388,100	)		-			-			-		(388,100	)
Proceeds from issuance of term loan, net of discount		-			-			-			-		-
Repayment of term loan		(3,508	)		-			-			-		(3,508	)
Repayment of other long-term debt		-			-			(276	)		-		(276	)
Payment of deferred financing costs		(50	)		-			-			-		(50	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(2,904	)		-			-			-		(2,904	)
Dividends paid		(10,224	)		-			-			-		(10,224	)
Contributions made by noncontrolling interests		-			-			4,993			-		4,993
Distributions to noncontrolling interests		-			-			(4,694	)		-		(4,694	)
Other		-			35			-			-		35
Net change in intercompany accounts		(62,194	)		40,530			21,664			-		-
Net cash provided by financing activities		22,220			40,565			21,687			-		84,472
Change in cash and cash equivalents		-			8,586			30,788			-		39,374
Cash and cash equivalents at beginning of period		-			24,037			76,019			-		100,056
Cash and cash equivalents at end of period	$	-		$	32,623		$	106,807		$	-	$	139,430

44

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Three months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(28,117	)	$	137,155		$	23,252		$	-	$	132,290
Cash flows from investing activities:
Routine capital expenditures		-			(32,663	)		(2,759	)		-		(35,422	)
Development capital expenditures		-			(5,760	)		-			-		(5,760	)
Acquisitions, net of cash acquired		-			(1,577	)		(425	)		-		(2,002	)
Sale of assets		-			3,884			-			-		3,884
Purchase of insurance subsidiary investments		-			-			(16,357	)		-		(16,357	)
Sale of insurance subsidiary investments		-			-			15,987			-		15,987
Net change in insurance subsidiary cash and cash    equivalents		-			-			(2,633	)		-		(2,633	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			176			-			-		176
Other		-			1,383			-			-		1,383
Net cash used in investing activities		-			(9,557	)		(6,187	)		-		(15,744	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		259,700			-			-			-		259,700
Repayment of borrowings under revolving credit		(349,700	)		-			-			-		(349,700	)
Repayment of term loan		(3,003	)										(3,003	)
Repayment of other long-term debt		-			-			(500	)		-		(500	)
Payment of deferred financing costs		(301	)		-			-			-		(301	)
Issuance of common stock in connection with    employee benefit plans		329			-			-			-		329
Payment of dividend for Mandatory Redeemable    Preferred Stock		(2,703	)		-			-			-		(2,703	)
Dividends paid		(10,065	)		-			-			-		(10,065	)
Contributions made by noncontrolling interests		-			-			1,492			-		1,492
Distributions to noncontrolling interests		-			-			(10,685	)		-		(10,685	)
Other		-			245			-			-		245
Net change in intercompany accounts		133,860			(136,275	)		2,415			-		-
Net cash provided by (used in) financing    activities		28,117			(136,030	)		(7,278	)		-		(115,191	)
Change in cash and cash equivalents		-			(8,432	)		9,787			-		1,355
Cash and cash equivalents at beginning of period		-			53,234			66,302			-		119,536
Cash and cash equivalent at end of period	$	-		$	44,802		$	76,089		$	-	$	120,891

45

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Nine months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(20,910	)	$	12,114		$	46,844		$	-	$	38,048
Cash flows from investing activities:
Routine capital expenditures		-			(63,476	)		(5,227	)		-		(68,703	)
Development capital expenditures		-			(11,768	)		(15,344	)		-		(27,112	)
Acquisitions, net of cash acquired		-			(77,040	)		-			-		(77,040	)
Acquisition deposits		-			18,489			-			-		18,489
Sale of assets		-			4,962			-			-		4,962
Purchase of insurance subsidiary investments		-			-			(75,422	)		-		(75,422	)
Sale of insurance subsidiary investments		-			-			78,478			-		78,478
Net change in insurance subsidiary cash and cash    equivalents		-			-			8,479			-		8,479
Net change in other investments		-			(34,546	)		1,199			-		(33,347	)
Other		-			(1,277	)		-			-		(1,277	)
Net cash used in investing activities		-			(164,656	)		(7,837	)		-		(172,493	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,267,200			-			-			-		1,267,200
Repayment of borrowings under revolving credit		(1,215,800	)		-			-			-		(1,215,800	)
Proceeds from issuance of term loan, net of discount		198,100			-			-			-		198,100
Proceeds from other long-term debt		-			-			750			-		750
Repayment of term loan		(10,019	)		-			-			-		(10,019	)
Repayment of other long-term debt		-			-			(826	)		-		(826	)
Payment of deferred financing costs		(342	)		-			-			-		(342	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(8,558	)		-			-			-		(8,558	)
Dividends paid		(30,517	)		-			-			-		(30,517	)
Contributions made by noncontrolling interests		-			-			11,261			-		11,261
Distributions to noncontrolling interests		-			-			(35,240	)		-		(35,240	)
Purchase of noncontrolling interests		-			-			(1,000	)		-		(1,000	)
Other		-			108			-			-		108
Net change in intercompany accounts		(179,154	)		166,825			12,329			-		-
Net cash provided by (used in) financing    activities		20,910			166,933			(12,726	)		-		175,117
Change in cash and cash equivalents		-			14,391			26,281			-		40,672
Cash and cash equivalents at beginning of period		-			18,232			80,526			-		98,758
Cash and cash equivalents at end of period	$	-		$	32,623		$	106,807		$	-	$	139,430

46

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Nine months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by operating activities	$	361		$	29,691		$	63,015		$	-	$	93,067
Cash flows from investing activities:
Routine capital expenditures		-			(75,033	)		(5,658	)		-		(80,691	)
Development capital expenditures		-			(12,066	)		-			-		(12,066	)
Acquisitions, net of cash acquired		-			(501,875	)		(161,882	)		-		(663,757	)
Acquisition deposits		-			195,000			-			-		195,000
Sale of assets		-			7,061			-			-		7,061
Proceeds from senior unsecured notes offering    held in escrow		-			-			1,350,000			-		1,350,000
Interest in escrow for senior unsecured notes		-			-			23,438			-		23,438
Purchase of insurance subsidiary investments		-			-			(59,186	)		-		(59,186	)
Sale of insurance subsidiary investments		-			-			50,780			-		50,780
Net change in insurance subsidiary cash and cash    equivalents		-			-			(8,396	)		-		(8,396	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			375			-			-		375
Other		-			590			-			-		590
Net cash provided by (used in) investing    activities		-			(360,948	)		1,189,096			-		828,148
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,414,850			-			-			-		1,414,850
Repayment of borrowings under revolving credit		(1,319,850	)		-			-			-		(1,319,850	)
Proceeds from issuance of term loan, net of discount		199,000											199,000
Proceeds from issuance of senior unsecured notes    due 2020 and 2023		1,350,000			-			(1,350,000	)		-		-
Repayment of Gentiva debt		-			(1,177,363	)		-			-		(1,177,363	)
Repayment of term loan		(9,008	)		-			-			-		(9,008	)
Repayment of other long-term debt		-			-			(1,400	)		-		(1,400	)
Payment of deferred financing costs		(3,284	)		-			-			-		(3,284	)
Issuance of common stock in connection with    employee benefit plans		534			-			-			-		534
Payment of costs associated with issuance of    common stock and tangible equity units		(915	)		-			-			-		(915	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(8,135	)		-			-			-		(8,135	)
Dividends paid		(30,067	)		-			-			-		(30,067	)
Contributions made by noncontrolling interests		-			-			1,492			-		1,492
Distributions to noncontrolling interests		-			-			(31,823	)		-		(31,823	)
Other		-			1,457			-			-		1,457
Net change in intercompany accounts		(1,593,486	)		1,422,557			170,929			-		-
Net cash provided by (used in) financing    activities		(361	)		246,651			(1,210,802	)		-		(964,512	)
Change in cash and cash equivalents		-			(84,606	)		41,309			-		(43,297	)
Cash and cash equivalents at beginning of period		-			129,408			34,780			-		164,188
Cash and cash equivalents at end of period	$	-		$	44,802		$	76,089		$	-	$	120,891

47

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 17 – LEGAL AND REGULATORY PROCEEDINGS

The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including investigations resulting from the Company’s obligation to self-report suspected violations of law). These matters could (1) require the Company to pay substantial damages, fines, penalties or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under the Company’s insurance policies where coverage applies and is available; (2) cause the Company to incur substantial expenses; (3) require significant time and attention from the Company’s management; (4) subject the Company to sanctions, including possible exclusions from the Medicare and Medicaid programs; and (5) cause the Company to close or sell one or more facilities or otherwise modify the way the Company conducts business. The ultimate resolution of these matters, whether as a result of litigation or settlement, could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

In accordance with authoritative accounting guidance related to loss contingencies, the Company records an accrued liability for litigation and regulatory matters that are both probable and reasonably estimable. Additional losses in excess of amounts accrued may be reasonably possible. The Company reviews loss contingencies that are reasonably possible and determines whether an estimate of the possible loss or range of loss, individually or in aggregate, can be disclosed in the Company’s consolidated financial statements. These estimates are based upon currently available information for those legal and regulatory proceedings in which the Company is involved, taking into account the Company’s best estimate of losses for those matters for which such estimate can be made. The Company’s estimates involve significant judgment and a variety of assumptions, given that (1) these legal and regulatory proceedings may be in early stages; (2) discovery may not be completed; (3) damages sought in these legal and regulatory proceedings can be unsubstantiated or indeterminate; (4) the matters often involve legal uncertainties or evolving areas of law; (5) there are often significant facts in dispute; and/or (6) there is a wide range of possible outcomes. Accordingly, the Company’s estimated loss or range of loss may change from time to time, and actual losses may be more or less than the current estimate. At this time, except as otherwise specifically noted, no estimate of the possible loss or range of loss, individually or in the aggregate, in excess of the amounts accrued, if any, can be made regarding the matters described below.

Set forth below are descriptions of the Company’s significant legal proceedings.

Medicare and Medicaid payment reviews, audits, and investigations—As a result of the Company’s participation in the Medicare and Medicaid programs, the Company faces and is currently subject to various governmental and internal reviews, audits, and investigations to verify the Company’s compliance with these programs and applicable laws and regulations. The Company is routinely subject to audits under various government programs, such as the CMS Recovery Audit Contractor program, in which third-party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments to healthcare providers under the Medicare program. In addition, the Company, like other healthcare providers, is subject to ongoing investigations by the U.S. Department of Health and Human Services Office of Inspector General (the “OIG”), the DOJ and state attorneys general into the billing of services provided to Medicare and Medicaid patients, including whether such services were properly documented and billed, whether services provided were medically necessary, and general compliance with conditions of participation in the Medicare and Medicaid programs. Private pay sources such as third-party insurance and managed care entities also often reserve the right to conduct audits. The Company’s costs to respond to and defend any such reviews, audits, and investigations are significant and are likely to increase in the current enforcement environment. These audits and investigations may require the Company to refund or retroactively adjust amounts that have been paid under the relevant government program or by other payors. Further, an adverse review, audit, or investigation also could result in other adverse consequences, particularly if the underlying conduct is found to be pervasive or systemic. These consequences include (1) state or federal agencies imposing fines, penalties, and other sanctions on the Company; (2) loss of the Company’s right to participate in the Medicare or Medicaid programs or one or more third party payor networks; (3) indemnity claims asserted by customers and others for which the Company provides services; and (4) damage to the Company’s reputation in various markets, which could adversely affect the Company’s ability to attract patients, residents and employees.

48

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 17 – LEGAL AND REGULATORY PROCEEDINGS (Continued)

On January 12, 2016, the Company entered into a settlement agreement (the “Settlement Agreement”) with the United States of America, acting through the DOJ and on behalf of the OIG (the “United States”), to resolve the pending DOJ investigation concerning the operations of RehabCare Group, Inc. and its subsidiaries (“RehabCare”), a therapy services company acquired by the Company on June 1, 2011. Under the Settlement Agreement, the Company paid $125 million, plus accrued interest from August 31, 2015, at the rate of 1.875% per annum (the “Settlement Payment”) to the United States during the first quarter of 2016. In the first quarter of 2015, the Company recorded a $95 million loss reserve for this matter and disclosed an estimated settlement range of $95 million to $125 million. Based on the progress of continuing settlement discussions through October 2015, the Company recorded an additional $30 million loss provision in the third quarter of 2015. The Company recorded an additional loss reserve of approximately $2 million in the fourth quarter of 2015 related to the Settlement Agreement and associated costs and, in connection with establishing the final terms of the Settlement Agreement, also recorded an income tax benefit of $47 million in the fourth quarter of 2015. In connection with the resolution of this matter, and in exchange for the OIG’s agreement not to exclude the Company or its subsidiaries from participating in the federal healthcare programs, on January 11, 2016, the Company entered into a five-year corporate integrity agreement with the OIG.

In connection with the Settlement Agreement, RehabCare has received requests for indemnification from some of its current and former customers related to alleged damages stemming from payments made by these customers to the DOJ and the related legal and other costs. At this time, the Company has recorded an estimated aggregate loss contingency reserve of $4.2 million for these matters. No estimate of the possible loss in excess of the amount accrued can be made regarding these matters at this time. There is no certainty about the timing or likelihood of any definitive resolutions relating to these indemnification claims. The Company disputes the allegations in these indemnification claims and will defend these and any related claims vigorously.

Whistleblower lawsuits—The Company is also subject to qui tam or “whistleblower” lawsuits under the federal False Claims Act and comparable state laws for allegedly submitting fraudulent bills for services to the Medicare and Medicaid programs. These lawsuits can result in monetary damages, fines, attorneys’ fees, and the award of bounties to private qui tam plaintiffs who successfully bring these lawsuits and to the respective government programs. The Company also could be subject to civil penalties (including the loss of the Company’s licenses to operate one or more facilities or healthcare activities), criminal penalties (for violations of certain laws and regulations), and exclusion of one or more facilities or healthcare activities from participation in the Medicare, Medicaid, and other federal and state healthcare programs. The lawsuits are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes.

Employment-related lawsuits—The Company’s operations are subject to a variety of federal and state employment-related laws and regulations, including but not limited to the U.S. Fair Labor Standards Act (“FLSA”), Equal Employment Opportunity laws, and enforcement policies of the Equal Employment Opportunity Commission, the Office of Civil Rights and state attorneys general, federal and state wage and hour laws, and a variety of laws enacted by the federal and state governments that govern these and other employment-related matters. Accordingly, the Company is currently subject to employee-related claims, class action and other lawsuits and proceedings in connection with the Company’s operations, including but not limited to those related to alleged wrongful discharge, illegal discrimination, and violations of equal employment and federal and state wage and hour laws. Because labor represents such a large portion of the Company’s operating costs, noncompliance with these evolving federal and state laws and regulations could subject the Company to significant back pay awards, fines, and additional lawsuits and proceedings. These claims, lawsuits, and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes.

49

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 17 – LEGAL AND REGULATORY PROCEEDINGS (Continued)

As a result of the decertification of a wage and hour class action lawsuit (Rindfleisch v. Gentiva), single-plaintiff lawsuits with identical claims have been filed against the Company. Including Rindfleisch, which has four plaintiffs, there are 143 lawsuits pending in federal district court for the Northern District of Georgia. These lawsuits pertain to a compensation plan that paid Gentiva’s home health employees on both a per visit and an hourly basis, thereby allegedly voiding their FLSA exempt status and entitling them to overtime pay. The plaintiffs in these lawsuits are seeking attorneys’ fees and costs, back wages, and liquidated damages as allowed under the FLSA. The Company recorded an estimated loss contingency reserve of $5.5 million related to these matters. At this time, no estimate of the possible loss or range of loss in excess of the amount accrued can be made regarding these lawsuits. The Company disputes the allegations made in these lawsuits and will defend these and any related claims vigorously.

Minimum staffing lawsuits—Various states in which the Company operates hospitals and nursing centers have established minimum staffing requirements or may establish minimum staffing requirements in the future. While the Company seeks to comply with all applicable staffing requirements, the regulations in this area are complex and the Company may experience compliance issues from time to time. Failure to comply with such minimum staffing requirements may result in one or more facilities failing to meet the conditions of participation under relevant federal and state healthcare programs and the imposition of significant fines, damages, or other sanctions.

Shareholder actions—The Company is also subject to lawsuits and other shareholder actions brought from time to time. A shareholder derivative action (the “Complaint”) is currently pending against certain of the Company’s current and former officers and directors in circuit court for Jefferson County, Kentucky. The Complaint also names the Company as a nominal defendant. The Complaint alleges that the named current and former officers and directors of the Company breached their respective duties of good faith, loyalty, and candor, and other general fiduciary duties owed to the Company and its shareholders by, among other things, failing to exercise reasonable and prudent supervision over the management, polices, and controls of the Company in order to detect practices that existed at RehabCare resulting in the Company having to enter into two separate settlement agreements with the DOJ. The Company disputes the allegations made in the Complaint and will defend this action and any related claims vigorously.

Ordinary course matters—In addition to the matters described above, the Company is subject to investigations, claims, and lawsuits in the ordinary course of business, including investigations resulting from the Company’s obligation to self-report suspected violations of law and professional liability claims, particularly in its hospital and nursing center operations. In many of these claims, plaintiffs’ attorneys are seeking significant fines and compensatory and punitive damages in addition to attorneys’ fees. The Company maintains professional and general liability insurance in amounts and coverage that management believes are sufficient for the Company’s operations. However, the Company’s insurance may not cover all claims against the Company or the full extent of the Company’s liability.

NOTE 18 – SUBSEQUENT EVENTS

Plan to Exit the Skilled Nursing Facility Business

On November 7, 2016, the Company announced plans to exit its skilled nursing facility business as an owner and operator. This strategic decision will reduce annual rent obligations and annual capital expenditures. In addition, the Company will optimize its overhead structure by eliminating divisional and corporate overhead above the facility level, much of which is associated with supporting the Company’s skilled nursing facilities.

Curahealth Disposal

On October 1, 2016, the Company completed the Curahealth Disposal for $27.5 million. The Hospitals have a total of 783 licensed beds in Arizona, Louisiana, Massachusetts, Oklahoma, Pennsylvania, and Tennessee. As of September 30, 2016, the Hospitals were classified as assets held for sale.

In connection with the sale of the Hospitals, the Company entered into amendments to certain of its master lease agreements with Ventas on April 3, 2016 to transition the operations of seven of the Hospitals formerly leased from Ventas (the “Leased Hospitals”). Six of the Leased Hospitals were leased under master lease agreement No. 5 and one was leased under master lease agreement No. 1. The Leased Hospitals were leased under the applicable master lease agreement until the closing of the Curahealth Disposal. The Company paid a fee to Ventas of $3.5 million upon signing of the amendments and paid an additional $3 million upon the closing of the sale of the Leased Hospitals. Ventas paid the Company 50% of the sales proceeds for the real estate (after deduction of Ventas’s closing costs) attributed to the Leased Hospitals in the sale, which was immaterial.

50

KINDRED HEALTHCARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 18 – SUBSEQUENT EVENTS (Continued)

Curahealth Disposal (Continued)

Under separate lease amendments, the annual rent on the Leased Hospitals, which had annual rent of $7.7 million, was reallocated to the remaining facilities the Company leases from Ventas under the various master lease agreements. As required under GAAP, the reallocated rents were recorded as a lease termination fee by the Company upon the cease use date of the Leased Hospitals. The total annual payments on Ventas’s post-acute care portfolio operated by the Company will remain the same as its prior level.

In connection with these transactions, the Company incurred a pretax lease termination fee of $51.8 million comprised of the $6.5 million of fees paid to Ventas in conjunction with execution of the amendments and $45.3 million of aggregate reallocated rents attributable to the Leased Hospitals, which was recorded upon the cease use date of the Leased Hospitals. The lease termination fee was recorded as a long-term liability discounted at the Company’s credit-adjusted risk-free rate through the end of the original lease term of the Leased Hospitals, or through 2025. The Company does not expect any additional lease termination fees related to the transactions.

The Company recognized a non-cash pretax impairment charge related to property and equipment of $27.5 million during the nine months ended September 30, 2016, of which $19.7 million was recorded during the third quarter of 2016. In addition, the Company recognized a pretax loss on disposal of $21.4 million during the third quarter of 2016, which included a non-cash pretax write-off of both goodwill and other intangible assets of $13.3 million allocable to the Hospitals.

51

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Cautionary Statement

This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements include, but are not limited to, statements regarding the Company’s expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management, government investigations, regulatory matters, and statements containing words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “would,” “should,” “will,” “intend,” “may,” “potential,” “upside,” and other similar expressions. Statements in this report concerning the Company’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends, or other financial items, and product or services-line growth, and expected outcome of government investigations and other regulatory matters, together with other statements that are not historical facts, are forward-looking statements that are estimates reflecting the best judgment of the Company based upon currently available information.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from the Company’s expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties, and other factors, many of which the Company is unable to predict or control, that may cause the Company’s actual results, performance, or plans to differ materially from any future results, performance, or plans expressed or implied by such forward-looking statements. These statements involve risks, uncertainties, and other factors discussed below and detailed from time to time in the Company’s filings with the SEC.

In addition to the factors set forth above, other factors that may affect the Company’s plans, results, or stock price include, without limitation:  

• the impact of healthcare reform, which will initiate significant changes to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) or future deficit reduction measures adopted at the federal or state level. Healthcare reform is impacting each of the Company’s businesses in some manner. Potential future efforts in the U.S. Congress to repeal, amend, modify, or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by CMS and others, and the numerous processes required to implement these reforms, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations, and liquidity,

• the Company’s ability to adjust to the new patient criteria for LTAC hospitals under the LTAC Legislation, which reduces the population of patients eligible for reimbursement under the Medicare prospective payment system for LTAC hospitals (“LTAC PPS”) and changes the basis upon which the Company is paid for other patients,

• changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursement for the Company’s TC hospitals, nursing centers, IRFs, and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process,

• the Company’s ability to meet its substantial debt service requirements,

• the Company’s ability to comply with the terms of its corporate integrity agreements with the OIG,

• the impact of the final rules issued by CMS in 2012, which among other things, reduced Medicare reimbursement to the Company’s TC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short-stay outlier rules,

• the impact of the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012) which instituted an automatic 2% reduction on each claim submitted to Medicare beginning April 1, 2013,

• the Company’s ability to exit the skilled nursing facility business, and to realize the anticipated benefits, cost savings and strategic gains from this initiative,

52

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Cautionary Statement (Continued)

• the potential for diversion of management time and use of the Company’s resources in seeking to exit the skilled nursing facility business,

• the costs of defending and insuring against alleged professional liability and other claims and investigations (including those related to pending investigations and whistleblower and wage and hour class action lawsuits against the Company) and the Company’s ability to predict the estimated costs and reserves related to such claims and investigations, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes,

• the effects of additional legislative changes and government regulations, interpretation of regulations, and changes in the nature and enforcement of regulations governing the healthcare industry,

• the ability of the Company’s hospitals, nursing centers, and other healthcare services to adjust to medical necessity reviews,

• the impact of the Company’s significant level of indebtedness on its funding costs, operating flexibility, and ability to fund ongoing operations, development capital expenditures, or other strategic acquisitions with additional borrowings,

• the Company’s ability to pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings, and productivity gains associated with such operations, as and when planned, including the potential impact of unanticipated issues, expenses, and liabilities associated with those activities,

• the Company’s obligations under various laws to self-report suspected violations of law to various government agencies (including any associated obligation to refund overpayments to government payors, fines, and other sanctions),

• the failure of the Company’s facilities and other operations to meet applicable licensure and certification requirements,

• the further consolidation and cost containment efforts of managed care organizations, other third party payors, and conveners,

• the Company’s ability to comply with its rental and debt agreements, including payment of amounts owed thereunder and compliance with the covenants contained therein, including under the Company’s master lease agreements with Ventas,  

• the Company’s ability to control costs, particularly labor and employee benefit costs,

• the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims,

• the condition of the financial markets, including volatility and weakness in the equity, capital, and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio,

• the Company’s ability to pay a dividend as, when, and if declared by the Board of Directors, in compliance with applicable laws and the Company’s debt and other contractual arrangements,

• national, regional, and industry-specific economic, financial, business, and political conditions, including their effect on the availability and cost of labor, credit, materials, and other services,

• increased operating costs due to shortages in qualified nurses, therapists, and other healthcare personnel,

• the Company’s ability to attract and retain key executives and other healthcare personnel,

• the Company’s ability to successfully dispose of unprofitable facilities,

• events or circumstances that could result in the impairment of an asset or other charges,

• changes in GAAP or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and

• the Company’s ability to maintain an effective system of internal control over financial reporting.

Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

53

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

General

The accompanying unaudited condensed consolidated financial statements, including the notes thereto, should be read in conjunction with the following discussion and analysis.

The Company is a healthcare services company that through its subsidiaries operates TC hospitals, a home health, hospice and community care business, IRFs, a contract rehabilitation services business, nursing centers, and assisted living facilities across the United States. At September 30, 2016, the Company’s hospital division operated 94 TC hospitals (6,890 licensed beds) in 22 states. The Company’s Kindred at Home division primarily provided home health, hospice, and community care services from 647 sites of service in 40 states. The Company’s Kindred Rehabilitation Services division operated 19 IRFs (969 licensed beds) and 104 hospital-based ARUs, and provided rehabilitation services primarily in hospitals and long-term care settings in 46 states. The Company’s nursing center division operated 91 nursing centers (11,568 licensed beds) and seven assisted living facilities (380 licensed beds) in 19 states.

Gentiva merger

On October 9, 2014, the Company entered into the Gentiva Merger Agreement, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

At the effective time of the Gentiva Merger, each share of Gentiva Common Stock issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by Kindred, Gentiva and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (1) the Cash Consideration, without interest, and (2) the Stock Consideration.

Operating results in the third quarter of 2016 included transaction and integration costs totaling $1 million and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2016 included transaction and integration costs totaling $4 million, retention and severance costs totaling $1 million, and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results in the third quarter of 2015 included transaction and integration costs totaling $1 million, and retention and severance costs totaling $2 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2015 included transaction and integration costs totaling $35 million, retention and severance costs totaling $59 million, a lease termination charge of $1 million and financing costs totaling $23 million related to the Gentiva Merger. See note 2 of the notes to unaudited condensed consolidated financial statements.

Discontinued operations

The Company has completed several strategic divestitures to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains associated with these transactions were classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Assets held for sale at September 30, 2016 have been measured at the lower of carrying value or estimated fair value less costs of disposal. See note 5 of the notes to unaudited condensed consolidated financial statements.

On December 27, 2014, the Company entered into an agreement with Ventas to transition the operations under the leases for the 2014 Expiring Facilities. Each lease terminated when the operation of such nursing center was transferred to a new operator. At September 30, 2016, the Company had transferred the operations for all of the 2014 Expiring Facilities to new operators. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale, and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods. Under the terms of the agreement to transition the operations of the 2014 Expiring Facilities, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.

54

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of commitments and contingencies. The Company relies on historical experience and on various other assumptions that management believes to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.

The Company believes the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue recognition

The Company has agreements with third party payors that provide for payments to each of its operating divisions. These payment arrangements may be based upon prospective rates, reimbursable costs, established charges, discounted charges or per diem payments. Net patient service revenue is recorded at the estimated net realizable amounts from Medicare, Medicaid, Medicare Advantage, Medicaid Managed, other third party payors, and individual patients for services rendered. Retroactive adjustments that are likely to result from future examinations by third party payors are accrued on an estimated basis in the period the related services are rendered and adjusted as necessary in future periods based upon new information or final settlements.

Collectibility of accounts receivable

Accounts receivable consist primarily of amounts due from the Medicare and Medicaid programs, other government programs, managed care health plans, commercial insurance companies, skilled nursing and hospital customers, individual patients, and other customers. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collected.

In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the composition of patient accounts by payor type, the status of ongoing disputes with third party payors, and general industry conditions. Actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of the change.

The provision for doubtful accounts totaled $10 million and $12 million in the third quarter of 2016 and 2015, respectively, and $31 million and $33 million for the nine months ended September 30, 2016 and 2015, respectively.

Allowances for insurance risks

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its limited purpose insurance subsidiaries. Provisions for loss for these risks are based upon management’s best available information including actuarially determined estimates. Effective with the Gentiva Merger, the Company cancelled all policies issued by the Gentiva limited purpose insurance subsidiary and insures all post-merger risks through its insurance subsidiary.

The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These risks are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of, or less than, the amounts recorded. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

Provisions for loss for professional liability risks retained by the Company’s limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1%. The discount rate is based upon the risk-free interest rate for the respective year. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. The allowance for professional liability risks aggregated $344 million at September 30, 2016 and $327 million at December 31, 2015. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $347 million at September 30, 2016 and $330 million at December 31, 2015.

55

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies (Continued)

Allowances for insurance risks (Continued)

Changes in the number of professional liability claims and the cost to settle these claims significantly impact the allowance for professional liability risks. A relatively small variance between the Company’s estimated and actual number of claims or average cost per claim could have a material impact, either favorable or unfavorable, on the adequacy of the allowance for professional liability risks. For example, a 1% variance in the allowance for professional liability risks at September 30, 2016 would impact the Company’s earnings by approximately $3 million.

The provision for professional liability risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $20 million in the third quarter of both 2016 and 2015, and $65 million and $51 million for the nine months ended September 30, 2016 and 2015, respectively. The increase for the nine months ended September 30, 2016 was primarily attributable to an increase in the frequency and severity of claims in the nursing center division.

Provisions for loss for workers compensation risks retained by the Company’s limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually. The allowance for workers compensation risks aggregated $264 million at September 30, 2016 and $255 million at December 31, 2015. The provision for workers compensation risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial insurance carriers, aggregated $17 million and $11 million in the third quarter of 2016 and 2015, respectively, and $46 million and $40 million for the nine months ended September 30, 2016 and 2015, respectively. Workers compensation costs in the third quarter of 2015 and for the nine months ended September 30, 2015 were lower in comparison to the same periods in 2016 primarily as a result of favorable actuarial adjustments of prior year reserves recorded in the third quarter of 2015.

Accounting for income taxes

The provision (benefit) for income taxes is based upon the Company’s estimate of annual taxable income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating losses and capital loss carryforwards.

At each balance sheet date, management assesses all available positive and negative evidence to determine whether a valuation allowance is needed against its deferred tax assets. The authoritative guidance requires evidence related to events that have actually happened to be weighted more significantly than evidence that is projected or expected to happen. A significant piece of negative evidence according to this weighting standard is that there are cumulative losses in the two most recent years and the current year, which is the case for the Company at September 30, 2016. The Company’s outlook of taxable income for 2016 changed in the third quarter of 2016 after the Company recorded $286 million of goodwill and property and equipment impairment charges associated with (1) the Hospital Division Triggering Event and (2) the decline in nursing center financial performance in 2016 combined with the planned disposal of the Company’s skilled nursing facility business. In addition, the activities necessary to dispose of the skilled nursing facility business may generate additional taxable losses in the future.

In addition, the Company has deferred tax liabilities related to tax amortization of acquired indefinite lived intangible assets because these assets are not amortized for financial reporting purposes. The tax amortization in current and future years created a deferred tax liability which will reverse at the time of ultimate sale or book impairment. Due to the uncertain timing of this reversal, the temporary difference associated with indefinite lived intangible assets cannot be considered a source of future taxable income for purposes of determining the valuation allowance. As such, this deferred tax liability cannot be used to offset the deferred tax asset related to the net deferred tax assets.  

On the basis of this evaluation, as of September 30, 2016, the Company recorded a valuation allowance of $366 million against the Company’s deferred tax assets. The valuation allowance was recorded as an increase to the income tax provision in the third quarter of 2016. As of September 30, 2016, the Company has a net deferred tax liability of $200 million representing indefinite lived intangible assets. The amount of deferred tax asset considered realizable, however, could be adjusted if the weighting of the positive and negative evidence changes.

The Company’s effective income tax rate was 72.3% and 225.5% in the third quarter of 2016 and 2015, respectively, and 104.0% and 9.3% for the nine months ended September 30, 2016 and 2015, respectively. The change in the effective income tax rate in both periods of 2016 was attributable to recording a $366 million deferred tax valuation allowance in the third

56

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies (Continued)

Accounting for income taxes (Continued)

quarter of 2016, an increase in nontaxable noncontrolling interests in 2016 and a decrease in 2016 litigation contingency loss reserve provisions and transaction costs that were not deductible for income tax purposes. See note 17 of the notes to unaudited condensed consolidated financial statements.

The Company has recognized deferred tax assets to the extent it is more likely than not they will be realized and a valuation allowance is provided for deferred tax assets to the extent that it is uncertain that the deferred tax asset will be realized. The Company recognized net deferred tax assets totaling $104 million at December 31, 2015.

The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest and penalties. While the Company believes its tax positions are appropriate, there can be no assurance that the various authorities engaged in the examination of its income tax returns will not challenge the Company’s positions.

Valuation of long-lived assets, goodwill, and intangible assets

Long-lived assets and intangible assets with finite lives

The Company reviews the carrying value of certain long-lived assets and finite lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period is necessary. If circumstances suggest that the recorded amounts cannot be recovered based upon estimated future undiscounted cash flows, the carrying values of such assets are reduced to fair value.

In assessing the carrying values of long-lived assets, the Company estimates future cash flows at the lowest level for which there are independent, identifiable cash flows. For this purpose, these cash flows are aggregated based upon the contractual agreements underlying the operation of the facility or group of facilities. Generally, an individual facility for hospitals, IRFs, or nursing centers, skilled nursing rehabilitation services reporting unit, hospital rehabilitation services reporting unit, or sites of service within the Kindred at Home division are considered the lowest level for which there are independent, identifiable cash flows. However, to the extent that groups of facilities are leased under a master lease agreement in which the operations of a facility and compliance with the lease terms are interdependent upon other facilities in the agreement (including the Company’s ability to renew the lease or divest a particular property), the Company defines the group of facilities under a master lease agreement, or a renewal bundle in a master lease, as the lowest level for which there are independent, identifiable cash flows. Accordingly, the estimated cash flows of all facilities within a master lease agreement, or a renewal bundle in a master lease, are aggregated for purposes of evaluating the carrying values of long-lived assets.

The Company’s intangible assets with finite lives, such as customer relationship assets, trade names, leasehold interests, and non-compete agreements, are amortized in accordance with the authoritative guidance for goodwill and other intangible assets, primarily using the straight-line method over their estimated useful lives ranging from two to 20 years.

During the third quarter of 2016, the Company recorded an asset impairment charge of $20 million related to the property and equipment of the Hospitals sold to Curahealth and an asset impairment charge of $5 million related to the property and equipment of a nursing center held for sale. These charges reflect the amount by which the carrying values of the properties exceeded their estimated fair value. The fair value of the properties was measured using Level 3 inputs of the pending offers.

During the third quarter of 2016, the Company recorded a property and equipment impairment charge of $3 million related to the Hospital Division Triggering Event. This charge reflects the amount by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets was measured using Level 3 inputs such as operating cash flows, market data and replacement cost factoring in depreciation, economic obsolescence and inflation trends.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the decline in financial performance of its nursing center division and also determined it was more likely than not that the Company would dispose of its skilled nursing facility business. The Company determined that its property and equipment was impaired and recorded an impairment charge of $22 million. The fair value of the assets was measured using Level 3 inputs, such as operating cash flows and replacement costs.

57

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies (Continued)

Valuation of long-lived assets, goodwill, and intangible assets (Continued)

During the nine months ended September 30, 2016, the Company recorded an asset impairment charge of $3 million related to the sale of a hospital division medical office building. This charge reflects the amount by which the carrying value of the property exceeded its estimated fair value. The fair value of the property was measured using the pending offer, a Level 3 input.

During the nine months ended September 30, 2016, the Company also recorded an asset impairment charge of $8 million under the held and used accounting model related to the planned Curahealth Disposal. These charges reflect the amount by which the carrying value of certain property and equipment exceeded its estimated fair value. The fair value of property and equipment in the first quarter of 2016 was measured using Level 3 inputs, primarily replacement costs.

Goodwill

In accordance with the authoritative guidance for goodwill and other intangible assets, the Company is required to perform an impairment test for goodwill and indefinite-lived intangible assets at least annually or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. The Company performs its annual goodwill impairment test on October 1 each fiscal year for each of its reporting units.

A reporting unit is either an operating segment or one level below the operating segment, referred to as a component. When the components within the Company’s operating segments have similar economic characteristics, the Company aggregates the components of its operating segments into one reporting unit. Accordingly, the Company has determined that its reporting units are hospitals, home health, hospice, community care, hospital rehabilitation services, inpatient rehabilitation hospitals, RehabCare, and nursing centers. The hospital rehabilitation services and inpatient rehabilitation hospitals reporting units are both included in the Kindred Hospital Rehabilitation Services operating segment of the Kindred Rehabilitation Services division. The community care reporting unit is included in the home health operating segment of the Kindred at Home division. The carrying value of goodwill for each of the Company’s reporting units at September 30, 2016 and December 31, 2015 follows (in thousands):

	September 30,		December 31,
	2016		2015
Hospitals	$	361,310	$	628,519
Kindred at Home:
Home health		744,594		739,677
Hospice		647,507		639,006
Community care		169,109		166,312
		1,561,210		1,544,995
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Service contracts		173,618		173,618
Inpatient rehabilitation hospitals		326,335		322,678
RehabCare		-		-
		499,953		496,296
Nursing centers		-		-
	$	2,422,473	$	2,669,810

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. If the carrying value of the reporting unit is greater than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss, if any. Based upon the results of the step one impairment test for goodwill for each of the Company’s reporting units at October 1, 2015, no goodwill impairment charges were recorded in connection with the Company’s annual impairment test.

Since quoted market prices for the Company’s reporting units are not available, the Company applies judgment in determining the fair value of these reporting units for purposes of performing the goodwill impairment test. The Company relies on widely accepted valuation techniques, including discounted cash flow and market multiple analyses approaches, which capture both the future income potential of the reporting unit and the market behaviors and actions of market participants in the industry that includes the reporting unit. These types of analyses require the Company to make assumptions and estimates regarding future cash flows, industry-specific economic factors and the profitability of future business strategies. The discounted cash flow approach uses a projection of estimated operating results and cash flows that are discounted using a weighted average cost of capital. Under the discounted cash

58

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Critical Accounting Policies (Continued)

Valuation of long-lived assets, goodwill, and intangible assets (Continued)

Goodwill (Continued)

flow approach, the projection uses management’s best estimates of economic and market conditions over the projected period for each reporting unit including growth rates in the number of admissions, patient days, reimbursement rates, operating costs, rent expense, and capital expenditures. Other significant estimates and assumptions include terminal value growth rates, changes in working capital requirements and weighted average cost of capital. The market multiple analysis estimates fair value by applying cash flow multiples to the reporting unit’s operating results. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting units.

During the third quarter of 2016, the Company recorded a goodwill impairment charge of $13 million related to the Curahealth Disposal. This charge reflects the amount by which the carrying values of the properties exceeded their estimated fair value. The fair value of the properties was measured using a Level 3 input of the pending offer.

During the third quarter of 2016, the Company recorded a goodwill impairment charge of $261 million related to the Hospital Division Triggering Event. This charge reflects the amount by which the carrying value of the hospital reporting unit goodwill exceeded the estimated fair value.

The Company determined that the sale of three LTAC hospitals to Select during the second quarter of 2016 was an impairment triggering event in the hospital reporting unit. The Company tested the recoverability of the hospital reporting unit goodwill and determined that goodwill was not impaired.

The Company determined that there were no other goodwill or other intangible asset impairments as of September 30, 2016. However, adverse changes in the operating environment and related key assumptions used to determine the fair value of the Company’s reporting units and indefinite-lived intangible assets may result in future impairment charges for a portion or all of these assets. Specifically, if the hospital division experiences adverse deviation from revenue or mitigation assumptions associated with LTAC patient criteria or if recent increases in labor costs materially exceed the Company’s projections for the hospital division or the Company’s other reporting units or business segments, an impairment charge of a portion or all of these assets may be required. An impairment charge could have a material adverse effect on the Company’s business, financial position and results of operations, but would not be expected to have an impact on the Company’s cash flows or liquidity.

Indefinite-lived intangible assets

The Company’s indefinite-lived intangible assets consist of trade names, Medicare certifications, and certificates of need. The fair values of the Company’s indefinite-lived intangible assets are derived from current market data, including comparable sales or royalty rates, and projections at a facility, geographical location level or reporting unit which include management’s best estimates of economic and market conditions over the projected period. Significant assumptions include growth rates in the number of admissions, patient days, reimbursement rates, operating costs, rent expense, capital expenditures, terminal value growth rates, changes in working capital requirements, weighted average cost of capital, and opportunity costs.

The annual impairment tests for certain of the Company’s indefinite-lived intangible assets are performed as of May 1 and October 1. As part of the impairment review at May 1, an impairment charge of $3 million was recorded during the nine months ended September 30, 2016 related to certificates of need for two hospitals which had declines in operating cash flows. No impairment charges were recorded in connection with the annual impairment tests performed at each of the dates in 2015. The Medicare certifications in the Company’s home health, hospice and IRFs reporting units totaling approximately $118 million were within 1% of their fair value at October 1, 2015 after the annual impairment test. The majority of the $118 million Medicare certification value related to the Gentiva Merger and the Centerre Acquisition, which were each appraised during 2015.

During the nine months ended September 30, 2015, the Company recorded an asset impairment charge of $7 million related to previously acquired home health and hospice trade names after the decision in the first quarter of 2015 to rebrand to the Kindred at Home trade name. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

59

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Recently Issued Accounting Requirements

In October 2016, the FASB issued authoritative guidance which alters how an entity needs to consider indirect interests in a VIE held through an entity under common control. The amendment eliminates the distinction between the full attribution and proportionate approach, leaving the entity to only consider the latter when evaluating a VIE held through common control. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In August 2016, the FASB issued authoritative guidance to eliminate diversity in practice related to the cash flow statement classification of eight specific cash flow issues, which include debt prepayment or extinguishment costs, maturity of a zero coupon bond, settlement of contingent consideration liabilities after a business combination, proceeds from insurance settlements and distribution from certain equity method investees. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on its consolidated statement of cash flows.

In June 2016, the FASB issued authoritative guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for annual periods beginning after December 15, 2019 and early adoption is permitted beginning after December 15, 2018. The Company is still evaluating its transition approach and the impact of adoption on its business, financial position, results of operations, and liquidity.

In May 2016, the FASB finalized its amendments to the guidance in the new revenue standard on contracts with customers and specifically, collectability, non-cash consideration, presentation of sales taxes, and completed contracts. The amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for interim and annual periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that requires the tax effects related to share-based payments to be recorded through the income statement at settlement. Under the new guidance, tax benefits in excess of or less than the tax effect of compensation expenses will no longer be recorded in equity for purpose of simplification, which is expected to reduce administrative complexities but could increase the volatility of income tax expense. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB finalized its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. Under the new amendments, the FASB confirmed that a principal in an arrangement controls a good or service before it is transferred to a customer but revised the structure of indicators when an entity is the principal. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for annual and interim periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Under the new guidance, the equity method of accounting should be applied prospectively from the date significant influence is obtained. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB issued authoritative guidance clarifying that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. Under the new guidance, an entity will still need to evaluate whether it is possible that the counterparty will perform under the contract as part of the assessment for hedge accounting. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

60

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Recently Issued Accounting Requirements (Continued)

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and expects no material impact on liquidity.

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In August 2014, the FASB issued authoritative guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances. The guidance is effective for annual and interim periods ending after December 15, 2016. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB finalized a one-year deferral of the new revenue standard with an updated effective date for interim and annual periods beginning on or after December 15, 2017. Entities are not permitted to adopt the standard earlier than the original effective date, which was on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

61

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations

For segment purposes, the Company defines segment EBITDAR as earnings before interest, income taxes, depreciation, amortization, and rent. Segment EBITDAR reported for each of the Company’s operating segments excludes litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

A summary of the Company’s operating data follows (unaudited):

	Three months ended						Nine months ended
	September 30,						September 30,
(In thousands)	2016			2015			2016			2015
Revenues:
Hospital division	$	575,323		$	579,497		$	1,852,317		$	1,847,186
Kindred at Home:
Home health		449,958			424,054			1,318,549			1,152,741
Hospice		188,575			181,140			550,642			478,202
		638,533			605,194			1,869,191			1,630,943
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		169,018			149,435			504,607			453,543
RehabCare		192,480			219,518			592,803			708,904
		361,498			368,953			1,097,410			1,162,447
Nursing center division		270,259			270,510			814,881			818,688
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations:
Kindred Hospital Rehabilitation Services		(22,330	)		(22,081	)		(69,515	)		(69,284	)
RehabCare		(28,075	)		(35,943	)		(85,708	)		(111,994	)
Nursing centers		(1,681	)		(1,614	)		(5,008	)		(4,028	)
		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958
Loss from continuing operations:
Segment EBITDAR:
Hospital division	$	82,752		$	96,108		$	344,179		$	361,751
Kindred at Home:
Home health		75,073			67,682			218,044			187,397
Hospice		31,326			34,025			87,521			78,908
		106,399			101,707			305,565			266,305
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		49,470			42,141			147,809			131,236
RehabCare		9,248			14,544			34,504			44,933
		58,718			56,685			182,313			176,169
Nursing center division		29,922			35,923			93,684			112,763
Support center		(61,751	)		(55,439	)		(199,363	)		(192,213	)
Litigation contingency expense		-			(31,462	)		(2,840	)		(130,387	)
Impairment charges		(324,289	)		-			(338,208	)		(6,726	)
Restructuring charges		(22,813	)		(2,541	)		(28,860	)		(6,962	)
Transaction costs		(2,982	)		(3,846	)		(6,513	)		(103,764	)
EBITDAR		(134,044	)		197,135			349,957			476,936
Rent		(98,415	)		(95,436	)		(296,025	)		(282,955	)
Restructuring charges - rent		(58,650	)		(808	)		(59,363	)		(1,831	)
Depreciation and amortization		(40,382	)		(39,329	)		(121,320	)		(116,889	)
Interest, net		(58,052	)		(56,008	)		(172,856	)		(173,925	)
Income (loss) from continuing operations before income     taxes		(389,543	)		5,554			(299,607	)		(98,664	)
Provision for income taxes		281,752			12,523			311,470			9,183
	$	(671,295	)	$	(6,969	)	$	(611,077	)	$	(107,847	)

62

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Operating data:

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Hospital division:
End of period data:		94		95
Number of transitional care hospitals		6,890		7,094
Number of licensed beds
Revenue mix %:
Medicare		54.6		57.1		56.0		56.4
Medicaid		4.0		5.3		4.1		5.4
Medicare Advantage		12.1		10.8		11.9		11.4
Medicaid Managed		7.3		6.1		6.4		5.4
Commercial insurance and other		22.0		20.7		21.6		21.4
Admissions:
Medicare		7,861		7,976		25,033		25,018
Medicaid		375		556		1,224		1,776
Medicare Advantage		1,327		1,212		4,162		4,119
Medicaid Managed		861		646		2,362		1,964
Commercial insurance and other		1,727		1,763		5,405		5,446
		12,151		12,153		38,186		38,323
Patient days:
Medicare		202,482		210,870		650,499		657,930
Medicaid		16,781		23,167		57,324		77,043
Medicare Advantage		43,241		39,585		136,698		132,773
Medicaid Managed		28,534		24,412		81,142		71,258
Commercial insurance and other		59,856		58,631		185,634		183,794
		350,894		356,665		1,111,297		1,122,798
Average length of stay:
Medicare		25.8		26.4		26.0		26.3
Medicaid		44.7		41.7		46.8		43.4
Medicare Advantage		32.6		32.7		32.8		32.2
Medicaid Managed		33.1		37.8		34.4		36.3
Commercial insurance and other		34.7		33.3		34.3		33.7
Weighted average		28.9		29.3		29.1		29.3
Revenues per admission:
Medicare	$	39,945	$	41,451	$	41,445	$	41,608
Medicaid		61,338		55,415		62,716		55,950
Medicare Advantage		52,363		51,495		52,826		51,202
Medicaid Managed		48,631		54,976		49,831		51,240
Commercial insurance and other		73,515		68,151		74,099		72,592
Weighted average		47,348		47,683		48,508		48,200
Revenues per patient day:
Medicare	$	1,551	$	1,568	$	1,595	$	1,582
Medicaid		1,371		1,330		1,339		1,290
Medicare Advantage		1,607		1,577		1,608		1,588
Medicaid Managed		1,467		1,455		1,451		1,412
Commercial insurance and other		2,121		2,049		2,158		2,151
Weighted average		1,640		1,625		1,667		1,645
Medicare case mix index (discharged patients only)		1.172		1.150		1.172		1.162
Average daily census		3,814		3,877		4,056		4,113
Occupancy %		61.6		62.2		65.4		65.8
Same-hospital data:
Admissions:
Medicare		7,571		7,659		24,573		24,342
Medicaid		371		508		1,205		1,667
Medicare Advantage		1,292		1,166		4,084		4,011
Medicaid Managed		861		619		2,355		1,899
Commercial insurance and other		1,658		1,680		5,280		5,266
		11,753		11,632		37,497		37,185
Patient days:
Medicare		194,857		202,690		638,490		640,903
Medicaid		16,467		21,203		55,941		72,660
Medicare Advantage		41,955		37,272		134,237		128,411
Medicaid Managed		28,526		23,329		80,662		68,984
Commercial insurance and other		57,168		56,377		180,921		178,651
		338,973		340,871		1,090,251		1,089,609
Total average length of stay		28.8		29.3		29.1		29.3
Total revenues per patient day	$	1,641	$	1,629	$	1,668	$	1,648

63

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Operating data (Continued):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Kindred at Home:
Home health:
Sites of service (at end of period)		395		388
Revenue mix %:
Medicare		78.1		80.0		79.1		80.4
Medicaid		2.5		2.1		2.2		2.0
Commercial and other		8.6		8.2		8.4		8.0
Commercial paid at episodic rates		10.8		9.7		10.3		9.6
Episodic revenues ($ 000s)	$	332,562	$	319,820	$	990,576	$	873,838
Total episodic admissions		69,219		66,753		210,857		183,648
Medicare episodic admissions		59,823		58,479		182,564		161,046
Total episodes		113,256		108,519		340,421		298,013
Episodes per admission		1.64		1.63		1.61		1.62
Revenue per episode	$	2,936	$	2,947	$	2,910	$	2,932
Hospice:
Sites of service (at end of period)		185		181
Admissions		12,916		12,091		39,299		33,528
Average length of stay		98		101		93		96
Patient days		1,277,125		1,211,291		3,699,617		3,187,714
Revenue per patient day	$	148	$	150	$	149	$	150
Average daily census		13,882		13,166		13,502		11,677
Community Care and other revenues (included in    home health business segment) ($ 000s)	$	75,978	$	67,338	$	210,512	$	180,887
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Freestanding IRFs:
End of period data:
Number of IRFs		19		18
Number of licensed beds		969		919
Discharges (a)		4,644		3,941		13,738		11,674
Same-hospital discharges (a)		4,069		3,842		12,174		11,575
Occupancy % (a)		68.8		68.7		70.0		71.1
Average length of stay (a)		12.7		13.2		12.9		13.3
Revenue per discharge (a)	$	19,599	$	18,992	$	19,547	$	19,275
Contract services:
Sites of service (at end of period):
Inpatient rehabilitation units (ARUs)		104		101
LTAC hospitals		120		119
Sub-acute units		7		7
Outpatient units		139		135
		370		362
Revenue per site	$	210,810	$	206,041	$	638,025	$	626,628
RehabCare:
Sites of service (at end of period)		1,754		1,821
Revenue per site	$	109,738	$	120,548	$	336,798	$	391,013

(a)Excludes non-consolidated IRF.

64

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Operating data (Continued):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Nursing center division:
End of period data:
Number of facilities:
Nursing centers:
Owned or leased		87		86
Managed		4		4
Assisted living facilities		7		7
		98		97
Number of licensed beds:
Nursing centers:
Owned or leased		11,083		11,050
Managed		485		485
Assisted living facilities		380		375
		11,948		11,910
Revenue mix %:
Medicare		29.5		30.0		31.0		31.1
Medicaid		38.1		39.6		37.1		38.8
Medicare Advantage		7.3		8.1		7.3		8.6
Medicaid Managed		9.2		5.9		8.8		5.3
Private and other		15.9		16.4		15.8		16.2
Patient days (a):
Medicare		126,800		130,456		401,526		412,843
Medicaid		425,490		449,982		1,266,794		1,342,627
Medicare Advantage		43,162		48,539		129,641		155,862
Medicaid Managed		112,458		82,352		325,409		236,220
Private and other		137,127		140,003		410,926		417,749
		845,037		851,332		2,534,296		2,565,301
Patient day mix % (a):
Medicare		15.0		15.3		15.9		16.1
Medicaid		50.4		52.9		50.0		52.3
Medicare Advantage		5.1		5.7		5.1		6.1
Medicaid Managed		13.3		9.7		12.8		9.2
Private and other		16.2		16.4		16.2		16.3
Revenues per patient day (a):
Medicare Part A	$	573	$	570	$	576	$	570
Total Medicare (including Part B)		629		623		629		617
Medicaid		242		238		239		236
Medicaid (net of provider taxes) (b)		217		214		213		209
Medicare Advantage		459		450		458		450
Medicaid Managed		221		194		220		185
Private and other		313		316		313		318
Weighted average		320		318		322		319
Average daily census (a)		9,185		9,254		9,249		9,397
Admissions (a)		9,698		9,558		28,993		29,765
Occupancy % (a)		77.5		78.6		77.2		79.8
Medicare average length of stay (a)		27.4		28.5		28.0		28.8

(a) Excludes managed facilities.

(b) Provider taxes are recorded in general and administrative expenses for all periods presented.

65

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Hospital division

Revenues declined 1% to $575 million in the third quarter of 2016 compared to $579 million for the same period in 2015, and increased 0.3% to $1.85 billion for the nine months ended September 30, 2016 compared to the same period in 2015. The decline in revenues in the third quarter of 2016 was primarily a result of the hospital division entering into LTAC patient criteria on September 1, 2016 for the majority of its hospitals and a 2% decline in same-hospital average length of stay compared to the same period in 2015. These declines were partially offset by same-hospital admissions, which grew 1% and a 3% growth in same-hospital commercial revenue rates, both in the third quarter of 2016 compared to the same period in 2015. The slight increase in revenues for the nine months ended September 30, 2016 was primarily as a result of a 1% increase in same-hospital revenues per patient day. Same-hospital admissions grew 1% for the nine months ended September 30, 2016 compared to the same period in 2015. Same-hospital average length of stay declined to 29.1 days for the nine months ended September 30, 2016 compared to 29.3 days for the nine months ended September 30, 2015.

Segment EBITDAR margins declined to 14.4% in the third quarter of 2016 compared to 16.6% in the third quarter of 2015 and declined to 18.6% for the nine months ended September 30, 2016 compared to 19.6% for the nine months ended September 30, 2015. The decline in segment EBITDAR margins for both periods was primarily a result of an increase in operating costs per patient day of 3.6% and 2.6% for the third quarter of 2016 and the nine months ended September 30, 2016, respectively. The growth in operating expense per patient day in both periods was primarily attributable to a growth in labor costs and in the third quarter of 2016, operating inefficiencies associated with the closing of three hospitals.

Average hourly wage rates increased 5% and 4% in the third quarter of 2016 and for the nine months ended September 30, 2016, respectively, compared to the same periods in 2015, primarily as a result of an increase in contract labor. Employee benefit costs increased 3% in the third quarter of 2016 compared to the same period in 2015, primarily as a result of an increase in workers compensation expense. Employee benefit costs declined 2% for the nine months ended September 30, 2016 compared to the same period in 2015, primarily as a result of a reduction in compensated absence and health expenses, offset partially by an increase in workers compensation expense.

Professional liability costs were $11 million in the third quarter of both 2016 and 2015, and $35 million and $29 million for the nine months ended September 30, 2016 and 2015, respectively. The increase for the nine months ended September 30, 2016 was primarily attributable to increases in the frequency and severity of claims.

Kindred at Home

Home health

Revenues increased 6% to $450 million in the third quarter of 2016 compared to $424 million in the third quarter of 2015, primarily as a result of a 4% increase in both home health admissions and episodes, a 10% increase in community care revenues, offset by a slight reduction in home health revenue per episode. Revenues increased 14% to $1.3 billion for the nine months ended September 30, 2016 compared to $1.2 billion for the nine months ended September 30, 2015, primarily as a result of the Gentiva Merger, growth in both home health admissions and episodes, and growth in community care revenues, partially offset by a reduction in revenue per episode. The Gentiva Merger, which added 288 sites of service to the Company’s home health operations beginning February 2, 2015, contributed $1.1 billion and $941 million in revenues for the nine months ended September 30, 2016 and for the eight months of operation during the same period in 2015, respectively.

Segment EBITDAR margins increased to 16.7% in the third quarter of 2016 compared to 16.0% in the third quarter of 2015, and increased to 16.5% for the nine months ended September 30, 2016 compared to 16.3% for the nine months ended September 30, 2015. The increase in segment EBITDAR margins for both periods was primarily attributable to volume growth due to acquisitions and organic growth as compared to the prior year period. Labor costs increases for both the third quarter and nine months ended September 30, 2016 as compared to a year ago were offset by lower incentive compensation and health costs in both periods.

Hospice

Revenues increased 4% to $189 million in the third quarter of 2016 compared to $181 million in the third quarter of 2015, primarily as a result of a 5% increase in patient days. Revenues increased 15% to $551 million for the nine months ended September 30, 2016 compared to $478 million for the nine months ended September 30, 2015, primarily as a result of the Gentiva Merger and growth in patient days. The Gentiva Merger, which added 163 sites of service to the Company’s hospice operations beginning February 2, 2015, contributed $513 million and $439 million in revenues for the nine months ended September 30, 2016 and for the eight months of operation during the same period in 2015, respectively.

66

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Kindred at Home (Continued)

Hospice (Continued)

Segment EBITDAR margins declined to 16.6% in the third quarter of 2016 compared to 18.8% in the third quarter of 2015, and declined to 15.9% for the nine months ended September 30, 2016 compared to 16.5% for the nine months ended September 30, 2015. The decline in both periods was primarily attributable to an increase in labor costs in both periods and a 3% decline in average length of stay.

Kindred Rehabilitation Services

Kindred Hospital Rehabilitation Services

Revenues increased 13% to $169 million in the third quarter of 2016 compared to $149 million in the third quarter of 2015, and increased 11% to $505 million for the nine months ended September 30, 2016 compared to $453 million for the nine months ended September 30, 2015. The increase in revenues in both periods was primarily attributable to three freestanding IRFs that opened since the second half of 2015, and 6% and 5% increases in same-hospital discharges for freestanding IRFs in the third quarter of 2016 and for the nine months ended September 30, 2016, respectively, compared to the same prior year periods.

Segment EBITDAR margins increased to 29.3% in the third quarter of 2016 compared to 28.2% in the third quarter of 2015 and increased to 29.3% for the nine months ended September 30, 2016 compared to 28.9% for the nine months ended September 30, 2015. The increase in both periods was primarily a result of cost efficiencies associated with an increase in same-hospital discharges and new hospital development.

Employee benefit costs increased 13% and 6% in the third quarter of 2016 and for the nine months ended September 30, 2016, respectively, compared to the same periods in 2015. The increase in both periods was primarily a result of an increase in employee benefit costs related to the previously mentioned new IRFs.

RehabCare

Revenues declined 12% to $193 million in the third quarter of 2016 compared to $220 million in the third quarter of 2015, and declined 16% to $593 million for the nine months ended September 30, 2016 compared to $709 million for the nine months ended September 30, 2015. The decline in revenues compared to the respective prior year periods was primarily attributable to a net loss of customer contract sites of service that began in the first half of 2015 and reduced customer average daily census. The number of RehabCare sites of service at September 30, 2016 was 1,754 compared to 1,821 at September 30, 2015. The net loss of customer contract sites of service was primarily attributable to skilled nursing center consolidations, competition, and customers moving therapy services in-house throughout 2015 and, more recently, strategic termination of unprofitable contracts during the first nine months of 2016. Revenues derived from non-affiliated customers aggregated $165 million and $184 million in the third quarter of 2016 and 2015, respectively, and $507 million and $597 million for the nine months ended September 30, 2016 and 2015, respectively.

Segment EBITDAR margins declined to 4.8% in the third quarter of 2016 compared to 6.6% in the third quarter of 2015 and declined to 5.8% for the nine months ended September 30, 2016 compared to 6.3% for the nine months ended September 30, 2015. The decline in both periods was primarily attributable to the net loss of customer contract sites of service during 2015 and reduced customer census.

Employee benefit costs decreased 10% and 17% in the third quarter of 2016 and for the nine months ended September 30, 2016, respectively, compared to the same periods in 2015. The decrease in both periods was primarily a result of the net loss of customer contract sites of service during 2015.

Nursing center division

Revenues declined slightly to $270 million in the third quarter of 2016 compared to $271 million in the third quarter of 2015, and declined slightly to $815 million for the nine months ended September 30, 2016 compared to $819 million for the nine months ended September 30, 2015. The decline in revenues was primarily a result of a decline in average daily census of 1% in the third quarter of 2016 and 2% for the nine months ended September 30, 2016 compared to the respective prior year periods and a shift in patient census mix from Medicare, Medicare Advantage, and private and other to Medicaid and Medicaid Managed. Nursing center revenues per patient day increased 1% in both the third quarter of 2016 and for the nine months ended September 30, 2016 compared to the respective prior year periods.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Nursing center division (Continued)

Segment EBITDAR margins declined to 11.1% in the third quarter of 2016 compared to 13.3% in the third quarter of 2015, and declined to 11.5% for the nine months ended September 30, 2016 compared to 13.8% for the nine months ended September 30, 2015. The decline in both periods was primarily a result of a decline in average daily census, a shift in patient census mix, start-up losses at newly opened facilities, higher contract labor costs, and an increase in professional liability costs.

Average hourly wage rates increased 4% in both the third quarter of 2016 and for the nine months ended September 30, 2016 compared to the respective prior year periods, primarily as a result of pay rate increases and higher contract labor costs. Employee benefit costs increased 8% in the third quarter of 2016 and 1% for the nine months ended September 30, 2016 compared to the same periods in 2015, both primarily as a result of an increase in workers compensation expense.

Professional liability costs were $6 million in the third quarter of both 2016 and 2015, and $22 million and $15 million for the nine months ended September 30, 2016 and 2015. The increase for the nine months ended September 30, 2016 was primarily attributable to increases in the frequency and severity of claims.

Support center

Segment EBITDAR for the Company’s operating divisions excludes allocations of support center overhead. These costs aggregated $61 million and $55 million in the third quarter of 2016 and 2015, respectively, and $199 million and $192 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in support center overhead was primarily attributable to research and development costs of $3 million and $7 million in the third quarter of 2016 and for the nine months ended September 30, 2016, respectively, and an increase in incentive compensation costs of $6 million in the third quarter of 2016. As a percentage of consolidated revenues, support center overhead totaled 3.4% and 3.1% in the third quarter of 2016 and 2015, respectively, and 3.6% for both the nine months ended September 30, 2016 and 2015.

Litigation contingency expense

On January 12, 2016, the Company entered into the Settlement Agreement with the United States to resolve the pending DOJ investigation concerning the operations of RehabCare, a therapy services company acquired by the Company on June 1, 2011. Under the Settlement Agreement, the Company paid the Settlement Payment to the United States during the first quarter of 2016. In the first quarter of 2015, the Company recorded a $95 million loss reserve for this matter and disclosed an estimated settlement range of $95 million to $125 million. Based on the progress of continuing settlement discussions through October 2015, the Company recorded an additional $30 million loss provision in the third quarter of 2015. The Company recorded an additional loss reserve of approximately $2 million in the fourth quarter of 2015 related to the Settlement Agreement and associated costs and, in connection with establishing the final terms of the Settlement Agreement, also recorded an income tax benefit of $47 million in the fourth quarter of 2015. In connection with the resolution of this matter, and in exchange for the OIG’s agreement not to exclude the Company or its subsidiaries from participating in the federal healthcare programs, on January 11, 2016, the Company entered into a five-year corporate integrity agreement with the OIG.

In connection with the Settlement Agreement, RehabCare has received requests for indemnification from some of its current and former customers related to alleged damages stemming from payments made by these customers to the DOJ and the related legal and other costs. At this time, the Company has recorded an estimated aggregate loss contingency reserve of $4 million for these matters. No estimate of the possible loss in excess of the amount accrued can be made regarding these matters at this time. There is no certainty about the timing or likelihood of any definitive resolutions relating to these indemnification claims. The Company disputes the allegations in these indemnification claims and will defend these and any related claims vigorously.

Restructuring Costs

The Company has initiated various restructuring activities whereby it has incurred costs associated with reorganizing its operations, including the divestiture, swap, closure and consolidation of facilities and branches, reduced headcount and realigned operations in order to improve cost efficiencies in response to changes in the healthcare industry and to partially mitigate reductions in reimbursement rates from third party payors. The costs associated with these activities are reported as restructuring charges in the statement of operations and would have been recorded as general and administrative expense or rent expense if not classified as restructuring charges.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Restructuring Costs (Continued)

LTAC Portfolio Repositioning

During the first quarter of 2016, the Company approved an LTAC portfolio repositioning plan that incorporates the divestiture, swap or closure of certain LTAC hospitals as part of its mitigation strategies to prepare for new patient criteria for LTAC hospitals under the LTAC Legislation. The activities related to the LTAC portfolio repositioning plan are expected to be substantially complete by the end of 2016. The additional costs cannot be reasonably estimated at this time.

During the nine months ended September 30, 2016, the Company entered into a facility swap with Select, and signed a definitive agreement regarding the Curahealth Disposal. In addition, the Company closed three LTAC hospitals in the third quarter of 2016.

Restructuring charges that the Company incurred related to the LTAC portfolio repositioning strategy consisted of $57 million for lease termination costs, $20 million for facility closure, loss on disposal and other costs, $1 million for severance and $0.5 million for transaction costs for the three months ended September 30, 2016. These charges were $57 million for lease termination costs, $19 million for facility closure, loss on disposal and other costs, $2 million for severance and $2 million for transaction costs for the nine months ended September 30, 2016.

Kindred at Home Branch Consolidations

During the first quarter of 2015, the Company approved and initiated branch consolidations in specific markets to improve operations and cost efficiencies in the Kindred at Home division. The branch consolidations included branches that served both the home health and hospice business segment operations. Gentiva initiated similar branch consolidations prior to the Gentiva Merger and these activities and acquired liabilities are included herein. These activities are expected to be substantially complete by the end of 2016. The additional costs cannot be reasonably estimated at this time.

Restructuring charges related to these consolidations consisted of $2 million for lease termination costs for both the three months and nine months ended September 30, 2016, in addition to $1 million for facility closure and other costs for the nine months ended September 30, 2016. Lease termination costs were $0.6 million and $1 million for the three months and nine months ended September 30, 2015, respectively, and facility closure and other costs were $2 million and $6 million for the three months and nine months ended September 30, 2015, respectively.

2016 Division Reorganizations

During the nine months ended September 30, 2016, the Company initiated a restructuring plan to improve operations and cost efficiencies in the nursing center division. In addition, during the third quarter of 2016, the Company initiated a similar restructuring plan in the Kindred Rehabilitation Services division. Actions related to these plans were completed by the end of the third quarter of 2016.

The Company incurred restructuring costs for these reorganizations of $1 million for severance for the three months ended September 30, 2016. These charges were $3 million for severance and $2 million for facility closure and other costs for the nine months ended September 30, 2016. During the nine months ended September 30, 2015, the Company incurred lease termination costs of $0.4 million.

Transaction costs

Operating results included transaction and integration costs associated with the Gentiva Merger totaling $1 million and $4 million in the third quarter of 2016 and for the nine months ended September 30, 2016, respectively. Operating results included transaction and integration costs associated with the Gentiva Merger totaling $3 million in the third quarter of 2015. Operating results included transaction, integration, and financing costs associated with the Gentiva Merger totaling $100 million for the nine months ended September 30, 2015. Operating results also included transaction costs associated with other acquisition activities of $2 million and $1 million in the third quarter of 2016 and 2015, respectively, and $2 million and $4 million for the nine months ended September 30, 2016 and 2015, respectively. These transaction, integration, and financing costs in all periods were included in general and administrative expenses.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Results of Operations – Continuing Operations (Continued)

Other expenses

Rent expense increased 3% to $98 million in the third quarter of 2016 compared to $95 million in the third quarter of 2015, primarily attributable to new facility leases. Rent expense increased 5% to $296 million for the nine months ended September 30, 2016 compared to $283 million for the nine months ended September 30, 2015, primarily attributable to new facility leases and the Gentiva Merger, which was completed on February 2, 2015.

Depreciation and amortization expense increased 3% to $40 million in the third quarter of 2016 compared to the third quarter of 2015, primarily attributable to integration capital expenditures associated with the Gentiva Merger. Depreciation and amortization expense increased 4% to $121 million for the nine months ended September 30, 2016 compared to $117 million for the nine months ended September 30, 2015, primarily attributable to assets acquired in conjunction with the Gentiva Merger and integration capital expenditures associated with the Gentiva Merger.

Interest expense increased 6% to $60 million in the third quarter of 2016 compared to $56 million in the third quarter of 2015, and declined slightly to $175 million for the nine months ended September 30, 2016 compared to $176 million for the nine months ended September 30, 2015. Interest expense for the nine months ended September 30, 2015 included $17 million in pre-closing costs related to financing the Gentiva Merger. Excluding these financing costs, interest expense increased in both periods for 2016 primarily as a result of increased long-term borrowings. See note 2 of the notes to unaudited condensed consolidated financial statements.

Consolidated results

Loss from continuing operations before income taxes aggregated $390 million in the third quarter of 2016 compared to income from continuing operations before income taxes of $5 million in the third quarter of 2015. Loss from continuing operations before income taxes aggregated $300 million for the nine months ended September 30, 2016 compared to loss from continuing operations before income taxes of $99 million for the nine months ended September 30, 2015. Loss from continuing operations attributable to the Company aggregated $685 million in the third quarter of 2016 compared to $17 million in the third quarter of 2015. Loss from continuing operations attributable to the Company aggregated $651 million for the nine months ended September 30, 2016 compared to $138 million for the nine months ended September 30, 2015. Transaction and integration costs, retirement and severance costs, facility closing costs, research and development, restructuring charges, and impairment charges negatively impacted the consolidated pretax operating results by $413 million ($324 million net of income taxes) in the third quarter of 2016. In addition, the income tax provision includes a $366 million adjustment to the deferred tax valuation allowance for both the third quarter and for the nine months ended September 30, 2016. Transaction and integration costs, litigation contingency expense, retirement and severance costs, restructuring charges, and facility closing costs negatively impacted the consolidated pretax operating results by $40 million ($37 million net of income taxes) in the third quarter of 2015. Transaction and integration costs, litigation contingency expense, retirement and severance costs, business interruption settlements, facility closing costs, research and development, restructuring charges, debt amendment costs, and impairment charges negatively impacted the consolidated pretax operating results by $444 million ($347 million net of income taxes) for the nine months ended September 30, 2016. Transaction and integration costs, pre-closing financing costs, litigation contingency expense, retirement and severance costs, restructuring charges, facility closing costs, and impairment charges negatively impacted the consolidated pretax operating results by $275 million ($221 million net of income taxes) for the nine months ended September 30, 2015.

Results of Operations – Discontinued Operations

Income from discontinued operations was breakeven in the third quarter of 2016 compared to $2 million in the third quarter of 2015. Income from discontinued operations was $2 million for the nine months ended September 30, 2016 compared to a loss from discontinued operations of $2 million for the nine months ended September 30, 2015. The Company recorded a net gain of $0.2 million for the nine months ended September 30, 2016 compared to $1 million for the nine months ended September 30, 2015 related to the divestiture of discontinued operations.

On December 27, 2014, the Company entered into an agreement with Ventas to transition the operations under the leases for the 2014 Expiring Facilities. Each lease terminated when the operation of such nursing center was transferred to a new operator. At September 30, 2016, the Company had transferred the operations for all of the 2014 Expiring Facilities to new operators. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale, and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods. Under the terms of the agreement to transition the operations of the 2014 Expiring Facilities, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Liquidity

Operating cash flows

Cash flows provided by operations (including discontinued operations) aggregated $38 million for the nine months ended September 30, 2016 compared to $93 million for the nine months ended September 30, 2015. Operating cash flows for the nine months ended September 30, 2016 were negatively impacted by growth in accounts receivable in 2016, primarily from billing delays associated with information systems and acquisition integrations. In addition, operating cash flows for the nine months ended September 30, 2016 were negatively impacted by $165 million for the Settlement Agreement, other litigation, debt refinancing, retirement, severance, retention, transaction and lease termination payments, and business interruption settlements. Operating cash flows for the nine months ended September 30, 2015 were negatively impacted by $227 million for severance, retirement, Gentiva Merger transaction and pre-closing financing costs, litigation, other transaction costs, and lease termination payments.

The Company utilizes its ABL Facility to meet working capital needs and finance its acquisition and development activities. As a result, the Company typically carries minimal amounts of cash on its consolidated balance sheet. Based upon the Company’s expected operating cash flows and the availability of borrowings under the ABL Facility ($590 million at September 30, 2016), management believes that the Company has the necessary financial resources to satisfy its expected short-term and long-term liquidity needs.

Dividends and other payments

During the nine months ended September 30, 2016, the Company paid a cash dividend of $0.12 per common share on September 2, 2016 to shareholders of record as of the close of business on August 18, 2016 and also paid a cash dividend of $0.12 per common share on June 10, 2016 and April 1, 2016 to shareholders.

During the nine months ended September 30, 2015, the Company paid a cash dividend of $0.12 per common share on September 4, 2015 to shareholders of record as of the close of business on August 19, 2015 and also paid a cash dividend of $0.12 per common share on June 10, 2015 and April 1, 2015 to shareholders.

The Company made an installment payment on the Company’s Units on September 1, 2016 to holders of record on August 15, 2016, which consisted of a quarterly installment payment of $18.75 per Unit. The Company made an installment payment on the Company’s Units on June 1, 2016, which consisted of a quarterly installment payment of $18.76 per Unit. The Company also made installment payments on the Company’s Units on March 1, 2016, December 1, 2015, September 1, 2015 and June 1, 2015, each of which consisted of a quarterly installment payment of $18.75 per Unit. In addition, the Company made an installment payment on the Company’s Units on March 2, 2015, which consisted of a quarterly installment payment of $18.75 per Unit, plus a one-time incremental payment of $1.25 per Unit for the period between November 25, 2014 and December 1, 2014, for a total payment of $20.00 per Unit. Each Unit is composed of a Purchase Contract and one share of Mandatory Redeemable Preferred Stock having a final preferred stock installment payment date of December 1, 2017 and an initial liquidation preference of $201.58 per share of Mandatory Redeemable Preferred Stock. To the extent that any Unit has been separated into its constituent Purchase Contract and its constituent share of Mandatory Redeemable Preferred Stock, the installment payment is payable only on the constituent share of Mandatory Redeemable Preferred Stock.

Future declarations of dividends will be subject to the approval of Kindred’s Board of Directors. The current cash dividend funding on the Company’s common stock will require the use of approximately $41 million on an annual basis. The current cash funding of installment payments on the Units will require the use of approximately $13 million on an annual basis through 2017.

Gentiva Merger – Financing Transactions

The following Financing Transactions occurred in connection with the Gentiva Merger:

• the Company issued $1.35 billion aggregate principal amount of Notes;

• the Company issued approximately 15 million shares of its common stock through two common stock offerings and issued 9.7 million shares of its common stock as the Stock Consideration (see note 2 of the notes to unaudited condensed consolidated financial statements);

• the Company issued 172,500 Units; and

• the Company amended its credit facilities.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Liquidity (Continued)

Term Loan Amendment Agreement

On June 14, 2016, the Company entered into the Term Loan Amendment Agreement. The Term Loan Amendment Agreement amends and restates the Fourth Amended and Restated Term Loan Facility to provide for, among other things, (1) additional joint venture flexibility, including an increased ability to enter into and make investments in joint ventures that are non-guarantor restricted subsidiaries and to incur debt and liens of such joint ventures and other non-guarantor restricted subsidiaries, (2) an increase in the size of a basket for asset sales from 15% to 25% of consolidated total assets, (3) maintaining a maximum total leverage ratio of 6.00:1.00 for each quarterly measurement date after the date of such amendment, (4) a prepayment premium of 1.00% in connection with any repricing transaction within six months of the closing date, and (5) an incremental term loan in an aggregate principal amount of $200 million.

The incremental term loan under the Term Loan Amendment Agreement was issued with 95 basis points of OID and has the same terms as, and is fungible with, the $1.18 billion in aggregate principal amount of term loans that were outstanding under the Fourth Amended and Restated Term Loan Facility immediately prior to the effectiveness of the Term Loan Amendment Agreement. The net proceeds from the incremental term loan were used to repay a portion of the Company’s outstanding borrowings under its ABL Facility.

ABL Amendment Agreement

Also on June 14, 2016, the Company entered into the ABL Amendment Agreement. The ABL Amendment Agreement amends and restates the Prior ABL Facility to provide for, among other things, (1) additional joint venture flexibility, including an increased ability to enter into and make investments in joint ventures that are non-guarantor restricted subsidiaries and to incur debt and liens of such joint ventures and other non-guarantor restricted subsidiaries, and (2) an increase in the size of a basket for asset sales from 15% to 25% of consolidated total assets.

Incremental Term Loan Amendment

On March 10, 2015, the Company entered into an incremental amendment agreement, which provided for an incremental term loan in an aggregate principal amount of $200 million under its Fourth Amended and Restated Term Loan Facility. The Company used the net proceeds of the incremental term loan to repay outstanding borrowings under its Prior ABL Facility. The incremental term loan was issued with 50 basis points of OID and has the same terms as, and is fungible with, all other term loans outstanding under the Company’s Term Loan Facility.

Amendment to Notes due 2022

On April 9, 2014, the Company completed a private placement of $500 million aggregate principal amount of the Notes due 2022. The Notes due 2022 were issued pursuant to the 2022 Indenture among the Company, the 2022 Guarantors, and Wells Fargo Bank, National Association, as trustee.

On January 30, 2015, following the receipt ofsufficient consentsto approve the Amendments,the Company, the 2022 Guarantors,and WellsFargo Bank, National Association, astrustee, entered into the 2022 NotesSupplemental Indenture. The 2022 NotesSupplemental Indenture conformscertain covenants, definitions,and other termsinthe 2022 Indenture to the covenants, definitions,and termscontained in the indentures governing the Notes. The Amendmentsbecame operative following the consummation of the Gentiva Merger.

Interest rate swaps

In March 2014, the Company entered into an interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under its Third Amended and Restated Term Loan Facility. On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated or otherwise modified. The interest rate swap had an effective date of April 9, 2014, will expire on April 9, 2018 and continues to apply to the Term Loan Facility. The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month LIBOR, subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Liquidity (Continued)

Interest rate swaps (Continued)

In January 2016, the Company entered into three interest rate swap agreements to hedge its floating interest rate on an aggregate of $325 million of debt outstanding under its Fourth Amended and Restated Term Loan Facility. The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. The Company is required to make payments based upon a fixed interest rate of 1.862% and 1.855% calculated on the notional amount of $175 million and $150 million, respectively. In exchange, the Company will receive interest on $325 million at a variable interest rate that is based upon the three-month LIBOR rate, subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders’ equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months and nine months ended September 30, 2016 and 2015, the ineffectiveness related to the interest rate swaps was immaterial.

The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $8 million and $4 million at September 30, 2016 and December 31, 2015, respectively.

Divestitures

On October 1, 2016, the Company completed the Curahealth Disposal for $27.5 million. The Hospitals have a total of 783 licensed beds in Arizona, Louisiana, Massachusetts, Oklahoma, Pennsylvania, and Tennessee. As of September 30, 2016, the Hospitals were classified as assets held for sale.

In connection with the sale of the Hospitals, the Company entered into amendments to certain of its master lease agreements with Ventas on April 3, 2016 to transition the operations of the Leased Hospitals. Six of the Leased Hospitals were leased under master lease agreement No. 5 and one was leased under master lease agreement No. 1. The Leased Hospitals were leased under the applicable master lease agreement until the closing of the sale to Curahealth. The Company paid a fee to Ventas of $3.5 million upon signing of the amendments and paid an additional $3 million upon the closing of the sale of the Leased Hospitals. Ventas paid the Company 50% of the sales proceeds for the real estate (after deduction of Ventas’s closing costs) attributed to the Leased Hospitals in the sale, which was immaterial.

Under separate lease amendments, the annual rent on the Leased Hospitals, which had annual rent of $7.7 million, was reallocated to the remaining facilities the Company leases from Ventas under the various master lease agreements. As required under GAAP, the reallocated rents were recorded as a lease termination fee by the Company upon the cease use date of the Leased Hospitals. The total annual payments on Ventas’s post-acute care portfolio operated by the Company will remain the same as its prior level.

In connection with these transactions, the Company incurred a one-time pretax lease termination fee of $52 million comprised of the $6.5 million of fees paid to Ventas in conjunction with execution of the amendments and $45 million of aggregate reallocated rents attributable to the Leased Hospitals, which was recorded upon the cease use date of the Leased Hospitals. The lease termination fee was recorded as a long-term liability discounted at the Company’s credit-adjusted risk-free rate through the end of the original lease term of the Leased Hospitals, or through 2025. The Company does not expect any additional lease termination fees related to the transactions.

The Company recognized a non-cash pretax impairment charge related to property and equipment of $28 million during the nine months ended September 30, 2016, of which $20 million was recorded during the third quarter of 2016. In addition, the Company recognized a pretax loss on disposal of $21 million during the third quarter of 2016, which included a non-cash pretax write-off of both goodwill and other intangible assets of $13 million allocable to the Hospitals.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Capital Resources

Capital expenditures and acquisitions

Excluding acquisitions, routine capital expenditures (expenditures necessary to maintain existing facilities that generally do not increase capacity or add services) totaled $69 million and $81 million for the nine months ended September 30, 2016 and 2015, respectively. Kindred Hospital Rehabilitation Services development capital expenditures (primarily new IRF development) totaled $15 million for the nine months ended September 30, 2016 and $1 million for the nine months ended September 30, 2015. Nursing center development capital expenditures (primarily the addition of transitional care services for higher acuity patients) totaled $6 million for the nine months ended September 30, 2016 and $8 million for the nine months ended September 30, 2015. Support center development capital expenditures totaled $6 million for the nine months ended September 30, 2016 and $3 million for the nine months ended September 30, 2015. Excluding acquisitions, the Company anticipates that routine capital spending for 2016 should approximate $90 million to $100 million and development capital spending should approximate $30 million to $40 million. Management expects that substantially all of these expenditures will be financed through internal sources or borrowings under the ABL Facility. Management believes that its capital expenditure program is adequate to improve and equip existing facilities. At September 30, 2016, the estimated cost to complete and equip construction in progress approximated $45 million.

Acquisition expenditures totaled $77 million for the nine months ended September 30, 2016, which were financed with operating cash flows, an acquisition deposit of $18 million and the Company’s ABL Facility. Acquisition expenditures totaled $664 million for the nine months ended September 30, 2015, primarily related to the Gentiva Merger and the Centerre Acquisition. See notes 2 and 3 of the notes to unaudited condensed consolidated financial statements.

Other Information

Effects of inflation and changing prices

The Company derives a substantial portion of its revenues from the Medicare and Medicaid programs. The Company has been, and could be in the future, materially adversely affected by the continuing efforts of governmental and private third party payors to contain healthcare costs.

The Company cannot provide assurance that reimbursement payments under governmental and private third party payor programs, including Medicare supplemental insurance policies, will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Medicare reimbursement in LTAC hospitals, IRFs, nursing centers, home health, and hospice is subject to fixed payments under the Medicare prospective payment systems. In accordance with Medicare laws, CMS makes annual adjustments to Medicare payment rates in many prospective payment systems under what is commonly known as a “market basket update.” Each year, the Medicare Payment Advisory Commission (“MedPAC”), a commission chartered by Congress to advise it on Medicare payment issues, makes payment policy recommendations to Congress for a variety of Medicare payment systems. Congress is not obligated to adopt MedPAC recommendations, and, based upon outcomes in previous years, there can be no assurance that Congress will adopt MedPAC’s recommendations in a given year. Medicaid reimbursement rates in many states in which the Company operates nursing centers also are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. However, these adjustments do not reflect the actual increase in the costs of providing healthcare services. In addition, Medicaid reimbursement can be impacted negatively by state budgetary pressures, which may lead to reduced reimbursement or delays in receiving payments. There can be no assurance that the facilities operated by the Company, or the provision of goods and services offered by the Company, will meet the requirements for participation in such programs.

Various healthcare reform provisions became law upon enactment of the ACA. The reforms contained in the ACA have affected each of the Company’s businesses in some manner and are directed in large part at increased quality and cost reductions. Several of the reforms are very significant and could ultimately change the nature of the Company’s services, the methods of payment for the Company’s services, and the underlying regulatory environment. These reforms include the possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care, and the imposition of enrollment limitations on new providers.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Other Information (Continued)

Effects of inflation and changing prices (Continued)

The ACA also provides for: (1) reductions to the annual market basket payment updates for LTAC hospitals, IRFs, home health agencies, and hospice providers that could result in lower reimbursement than in the preceding year; (2) additional annual “productivity adjustment” reductions to the annual market basket payment update as determined by CMS for LTAC hospitals, IRFs, and nursing centers (beginning in federal fiscal year 2012), home health agencies (beginning in federal fiscal year 2015) and hospice providers (beginning in federal fiscal year 2013); (3) new transparency, reporting, and certification requirements for skilled nursing facilities, including disclosures regarding organizational structure, officers, directors, trustees, managing employees, and financial, clinical, and other related data; (4) a quality reporting system for hospitals (including LTAC hospitals and IRFs) beginning in federal fiscal year 2014; and (5) reductions in Medicare payments to hospitals (including LTAC hospitals and IRFs) beginning in federal fiscal year 2014 for failure to meet certain quality reporting standards or to comply with standards in new value-based purchasing demonstration project programs.

Further, the ACA mandates changes to home health and hospice benefits under Medicare. For home health, the ACA mandates creation of a value-based purchasing program, development of quality measures, a decrease in home health reimbursement beginning with federal fiscal year 2014 that will be phased-in over a four-year period, and a reduction in the outlier cap. In addition, the ACA requires the Secretary of the United States Department of Health and Human Services (“HHS”) to test different models for delivery of care, some of which would involve home health services. It also requires the Secretary of HHS to establish a national pilot program for integrated care for patients with certain conditions, bundling payment for acute hospital care, physician services, outpatient hospital services (including emergency department services), and post-acute care services, which would include home health. The ACA further directed the Secretary of HHS to rebase payments for home health that resulted in a decrease in home health reimbursement, which began in 2014 and will be phased-in over a four-year period. The Secretary of HHS is also required to conduct a study to evaluate costs and quality of care among efficient home health agencies regarding access to care and treating Medicare beneficiaries with varying severity levels of illness and provide a report to Congress.

The healthcare reforms and changes resulting from the ACA, as well as other similar healthcare reforms, could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

Congress, MedPAC, and CMS will continue to address reimbursement rates for a variety of healthcare settings. The Company cannot predict the adjustments to Medicare payment rates that Congress or CMS may make in the future. Any downward adjustment to rates for the types of services the Company provides could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

Congress continues to discuss additional deficit reduction measures, leading to a high degree of uncertainty regarding potential reforms to governmental healthcare programs, including Medicare and Medicaid. These discussions, along with other continuing efforts to reform governmental healthcare programs, could result in major changes in healthcare delivery and reimbursement systems on a national and state level, including changes directly impacting the government and private reimbursement systems for each of the Company’s businesses. Healthcare reform, future healthcare legislation, or other changes in the administration or interpretation of governmental healthcare programs, whether resulting from deficit reduction measures or otherwise, could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

The Company believes that its operating margins also will continue to be under pressure as the growth in operating expenses, particularly professional liability, labor, and employee benefits costs, exceeds payment increases from third party payors. In addition, as a result of competitive pressures, the Company’s ability to maintain operating margins through price increases to private patients is limited.

LTAC Legislation

The LTAC Legislation creates new Medicare criteria and payment rules for LTAC hospitals. Medicare payments to LTAC hospitals are now based upon one of two formulas: (1) LTAC PPS, or (2) a site-neutral formula based upon what a short-term acute care hospital would be paid. CMS classifies LTAC hospitals as a distinct provider type, separate from short-term acute care hospitals. Only providers certified as LTAC hospitals may be paid under the LTAC PPS system. CMS regulations classify LTAC hospital patients into diagnostic categories called Medicare Severity Diagnosis Related Groups (“MS-LTC-DRGs”). LTAC PPS is based upon discharged-based MS-LTC-DRGs similar to the prospective payment system used to pay general short-term acute care hospitals (“IPPS”).

75

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Other Information (Continued)

Effects of inflation and changing prices (Continued)

LTAC Legislation (Continued)

Under the new criteria set forth in the LTAC Legislation, LTAC hospitals treating patients with at least a three-day prior stay in an acute care hospital intensive care unit and patients on prolonged mechanical ventilation admitted from an acute care hospital will continue to receive payment under LTAC PPS. Other patients will continue to have access to LTAC care, whether they are admitted to LTAC hospitals from acute care hospitals or directly from other settings or the community, and in such cases, LTAC hospitals will be paid at a “site-neutral” rate for these patients, based on the lesser of per diem Medicare rates paid for patients with the same diagnoses under IPPS or an estimate of cost. The Company expects that the majority of these site-neutral payments will be materially less than the payments currently provided under LTAC PPS.

The effective date of the new patient criteria was October 1, 2015, tied to each individual LTAC hospital’s cost reporting period, followed by a two-year phase-in period. During the phase-in period, payment for patients receiving the site-neutral rate is based 50% on the current LTAC PPS and 50% on the new site-neutral rate. CMS estimates an overall net reduction in Medicare revenue of 4.6% for those hospitals receiving this 50/50 blended reimbursement. The majority of the Company’s TC hospitals (which are certified as LTAC hospitals under the Medicare program) have a cost reporting period starting on September 1 of each year, and thus the phase-in of new patient criteria did not begin for a majority of the Company’s TC hospitals until September 1, 2016, and full implementation of the new criteria will not begin until September 1, 2018.

The Company continues to analyze Medicare and internal data to estimate the number of its Medicare cases that would, on a static retrospective basis, be paid a full MS-LTC-DRG payment under LTAC PPS upon the implementation of new patient criteria versus receiving a site neutral rate. At present, prior to the full implementation of new patient criteria, the Company estimates approximately 70% of the Company’s Medicare LTAC cases are expected to be paid a full MS-LTC-DRG payment under LTAC PPS, with the remaining approximately 30% paid under the short-stay or very short-stay outlier payment process. At this time, and based primarily on 2013 data provided in the proposed regulations issued by CMS on April 17, 2015, the Company estimates a 30 percentage point shift in payment category for Medicare LTAC cases once the new patient criteria is fully phased in, resulting in, on a static prospective basis, an estimated 40% of the Company’s Medicare LTAC cases qualifying for the full MS-LTC-DRG payment under LTAC PPS, and the remaining estimated 60% of the Company’s Medicare LTAC cases instead qualifying for either the site-neutral rate or payment under the short-stay outlier payment process. These percentages do not reflect the significant efforts and actions the Company is and will be undertaking to expand its LTAC patient population and adapt its facility operations, business plans, programs, and other initiatives to reduce and otherwise mitigate the financial and other impacts of the LTAC Legislation and new patient criteria.

The additional patient criteria imposed by the LTAC Legislation reduces the population of patients eligible for reimbursement under LTAC PPS and changes the basis upon which the Company is paid for other patients. In addition, the LTAC Legislation is subject to additional governmental regulations and the interpretation and enforcement of those regulations. The LTAC Legislation, the implementation of new patient criteria, changes in referral patterns, and other associated elements could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

In addition, certain third parties, known as conveners, offer patient placement and care transition services to managed care companies, Medicare Advantage plans, bundled payment participants, accountable care organizations, and other healthcare providers as part of an effort to manage post-acute care provider (“PAC”) utilization and associated costs. Thus, conveners influence patient decision on which PAC setting to choose, as well as how long to remain in a particular PAC facility. Given their focus on perceived financial savings, conveners customarily suggest that patients avoid higher cost PAC settings altogether or move as soon as practicable to lower cost PAC settings. However, conveners are not healthcare providers and may suggest a PAC setting or duration of care that may not be appropriate from a clinical perspective. Conveners may suggest that patients select alternate care settings to the Company’s TC hospitals, IRFs, nursing centers or home health and hospice locations or otherwise suggest shorter lengths of stay in such settings. Because LTAC hospitals are the highest cost PAC setting due to the intensity of services provided to patients in these facilities, the Company believes that its TC hospitals are the most likely to be adversely affected by the activities of these third party conveners.

For additional information regarding Medicare and Medicaid reimbursement and other government regulations impacting the Company, see the Company’s Annual Report on Form 10-K for 2015 as filed with the SEC.

76

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Hospital division

Medicare payments to LTAC hospitals are now based upon one of two formulas: (1) LTAC PPS, or (2) a site-neutral formula based upon what a short-term acute care hospital would be paid. CMS classifies LTAC hospitals as a distinct provider type, separate from short-term acute care hospitals. Only providers certified as LTAC hospitals may be paid under the LTAC PPS system. As of September 30, 2016, all of the Company’s TC hospitals were certified as LTAC hospitals.

On August 2, 2016, CMS issued final regulations regarding Medicare reimbursement for LTAC hospitals for federal fiscal year beginning October 1, 2016. Included in the final regulations are: (1) a market basket increase to the standard federal payment rate of 2.8%; (2) offsets to the standard federal payment rate by the ACA of: (a) 0.3% to account for the effect of a productivity adjustment, and (b) 0.75% as required by the statute; (3) a wage level budget neutrality factor of 0.999593 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) an increase in the high cost outlier threshold per discharge to $21,943. The final rule also implements a new regulation to consolidate existing 25% rule requirements.

On July 31, 2015, CMS issued final regulations regarding Medicare reimbursement for LTAC hospitals for the federal fiscal year beginning October 1, 2015. Included in the final regulations are: (1) a market basket increase to the standard federal payment rate of 2.4%; (2) offsets to the standard federal payment rate mandated by the ACA of: (a) 0.5% to account for the effect of a productivity adjustment, and (b) 0.2% as required by statute; (3) a wage level budget neutrality factor of 1.000513 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) an increase in the high cost outlier threshold per discharge to $16,423.

On August 4, 2014, CMS issued final regulations regarding Medicare reimbursement for LTAC hospitals for the federal fiscal year beginning October 1, 2014. Included in the final regulations are: (1) a market basket increase to the standard federal payment rate of 2.9%; (2) offsets to the standard federal payment rate mandated by the ACA of: (a) 0.5% to account for the effect of a productivity adjustment, and (b) 0.2% as required by statute; (3) a wage level budget neutrality factor of 1.0016703 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) an increase in the high cost outlier threshold per discharge to $14,972. In addition, the final regulations also implemented the third year of a three-year phase-in of a 3.75% budget neutrality adjustment which reduced LTAC hospital rates by 1.3% in 2015.

The Company cannot predict the ultimate long-term impact of LTAC PPS. This payment system is subject to significant change. Slight variations in patient acuity or length of stay could significantly change Medicare revenues generated under LTAC PPS. In addition, the Company’s TC hospitals may not be able to appropriately adjust their operating costs to changes in patient acuity and length of stay or to changes in reimbursement rates. In addition, there can be no assurance that LTAC PPS will not have a material adverse effect on revenues from commercial third party payors. Various factors, including a reduction in average length of stay, have negatively impacted revenues from commercial third party payors in recent years.

Kindred at Home

Home health.  On October 31, 2016, CMS issued final regulations regarding Medicare payment rates for home health agencies effective January 1, 2017. These final regulations implement a net 0.7% reduction, consisting of a market basket update of 2.8%, less (1) a 0.3% productivity reduction, (2) a 2.3% rebasing adjustment mandated under the ACA, and (3) an additional 0.9% reduction adjustment to account for industry wide case mix growth.

OnOctober 29, 2015, CMS issued final regulations regarding Medicare payment rates for home health agencies effective January 1, 2016. These final regulations implement a net 1.4% reduction consisting of a 2.3% market basket inflation increase, less (1) a 0.4% productivity reduction, (2) a 2.4% rebasing adjustment mandated under the ACA, and (3) a 0.9% reduction to account for industry wide case mix growth. The regulations also implement a value-based purchasing demonstration model to be tested in nine states (Massachusetts, Maryland, North Carolina, Florida, Washington, Arizona, Iowa, Nebraska and Tennessee) through payment year 2022.

On October 30, 2014, CMS issued final regulations regarding Medicare payment rates for home health agencies effective January 1, 2015. These final regulations implement a net 0.3% reduction consisting of a 2.6% market basket inflation increase, less (1) a 0.5% productivity adjustment, and (2) a 2.4% rebasing adjustment mandated under the ACA.

77

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Other Information (Continued)

Effects of inflation and changing prices (Continued)

Kindred at Home (Continued)

Hospice.  On July 29, 2016, CMS issued final regulations for Medicare reimbursement for hospice providers effective October 1, 2016. Included in these final regulations are: (1) a market basket increase of 2.7%; (2) a multifactor productivity reduction of 0.3%; and (3) an additional 0.3% reduction as mandated in the ACA.

On July 31, 2015, CMS issued final regulations for Medicare reimbursement for hospice providers for the federal fiscal year beginning October 1, 2015. These final regulations implement a net market basket increase of 1.6% consisting of: (1) a market basket inflation increase of 2.4%, less (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) a 0.5% adjustment to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute. In addition, there is a 0.2% increase resulting from the blend of wage index values under the updated core based statistical areas and a 0.7% reduction for the final year of the phase-out of the wage index budget neutrality adjustment. The regulation also implements, effective January 1, 2016: (1) the creation of two different payment rates for routine home care, a higher base payment for the first 60 days and a reduced payment for days 61 and beyond; and (2) a new service intensity add-on which would pay an additional amount during the last seven days of life when a patient has direct care provided by a registered nurse or social worker.

On August 4, 2014, CMS issued final regulations regarding Medicare payment rates for hospice providers effective October 1, 2014. These final regulations implement a net market basket increase of 2.1% consisting of: (1) a 2.9% market basket inflation increase, less (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) a 0.5% adjustment to account for the effect of a productivity adjustment, and (b) 0.3% as required by statute. In addition, CMS continued the phase-out of the wage index budget neutrality adjustment.

Kindred Rehabilitation Services

Inpatient rehabilitation hospitals.   On July 29, 2016, CMS issued final regulations regarding Medicare reimbursement for IRFs for the federal fiscal year beginning October 1, 2016. Included in these final regulations are: (1) a market basket increase of 2.7%; (2) a productivity reduction of 0.3%; (3) an additional reduction of 0.75% as required by the ACA; and (4) a decrease in the high cost outlier threshold per discharge to $7,984.

On July 31, 2015, CMS issued final regulations regarding Medicare reimbursement for IRFs for the federal fiscal year beginning October 1, 2015. Included in these final regulations are: (1) a market basket increase of 2.4%; (2) a productivity reduction of 0.5%; (3) an additional reduction of 0.2% as required by the ACA; and (4) a decrease in the high cost outlier threshold per discharge to $8,658.

On July 31, 2014, CMS issued final regulations regarding Medicare reimbursement for IRFs for the federal fiscal year beginning October 1, 2014. Included in these final regulations are: (1) a market basket increase to the standard payment conversion factor of 2.9%; (2) offsets to the standard payment conversion factor mandated by the ACA of: (a) 0.5% to account for the effect of a productivity adjustment, and (b) 0.2% as required by statute; (3) adjustments to area wage indexes; and (4) a decrease in the high cost outlier threshold per discharge to $8,848.

Nursing center division

On July 29, 2016, CMS issued final regulations updating Medicare payment rates for nursing centers effective October 1, 2016. These final regulations implement a net market basket increase of 2.4% consisting of: (1) a 2.7% market basket increase, less (2) a 0.3% productivity adjustment.

On July 30, 2015, CMS issued final regulations updating Medicare payment rates for nursing centers effective October 1, 2015. These final regulations implement a net market basket increase of 1.2% consisting of: (1) a 2.3% market basket increase, less (2) a 0.6% market basket forecast error adjustment, and (3) a 0.5% productivity adjustment.

On July 31, 2014, CMS issued final regulations updating Medicare payment rates for nursing centers effective October 1, 2014. These final regulations implement a net market basket increase of 2.0% consisting of: (1) a 2.5% market basket inflation increase, less (2) a 0.5% adjustment to account for the effect of a productivity adjustment.

78

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Condensed Consolidated Statement of Operations

(Unaudited)

(In thousands, except per share amounts)

	2015 Quarters												2016 Quarters
	First			Second			Third			Fourth			First			Second			Third
Revenues	$	1,675,967		$	1,833,475		$	1,764,516		$	1,780,949		$	1,837,971		$	1,842,070		$	1,793,527
Salaries, wages and benefits		847,093			935,687			922,140			909,171			926,214			928,954			957,644
Supplies		93,271			98,237			96,551			96,295			99,416			99,410			95,500
Rent		91,788			95,731			95,436			96,934			97,517			100,093			98,415
Other operating expenses		197,727			212,117			207,837			208,315			214,701			217,850			217,364
General and administrative expenses		404,483			332,003			307,500			341,052			353,826			334,326			310,407
Other income		(480	)		(569	)		(650	)		(1,317	)		(952	)		(511	)		(446	)
Litigation contingency expense		95,000			3,925			31,462			8,261			1,910			930			-
Impairment charges		6,726			-			-			18,031			7,788			6,131			324,289
Restructuring charges		1,971			3,473			3,349			4,177			1,952			4,808			81,463
Depreciation and amortization		38,935			38,625			39,329			40,362			40,681			40,257			40,382
Interest expense		62,518			57,170			56,440			56,267			57,499			58,056			59,862
Investment income		(741	)		(1,030	)		(432	)		(603	)		(254	)		(497	)		(1,810	)
		1,838,291			1,775,369			1,758,962			1,776,945			1,800,298			1,789,807			2,183,070
Income (loss) from continuing operations before     income taxes		(162,324	)		58,106			5,554			4,004			37,673			52,263			(389,543	)
Provision (benefit) for income taxes		(27,736	)		24,396			12,523			(51,980	)		11,836			17,882			281,752
Income (loss) from continuing operations		(134,588	)		33,710			(6,969	)		55,984			25,837			34,381			(671,295	)
Discontinued operations, net of income taxes:
Income (loss) from operations		(3,424	)		(589	)		2,269			1,509			(582	)		3,016			(12	)
Gain (loss) on divestiture of operations		-			983			-			261			262			(83	)		-
Income (loss) from discontinued operations		(3,424	)		394			2,269			1,770			(320	)		2,933			(12	)
Net income (loss)		(138,012	)		34,104			(4,700	)		57,754			25,517			37,314			(671,307	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		(8,847	)		(11,735	)		(9,900	)		(12,082	)		(12,514	)		(13,522	)		(14,305	)
Discontinued operations		29			2			1			2			(2	)		(3	)		(1	)
		(8,818	)		(11,733	)		(9,899	)		(12,080	)		(12,516	)		(13,525	)		(14,306	)
Income (loss) attributable to    Kindred	$	(146,830	)	$	22,371		$	(14,599	)	$	45,674		$	13,001		$	23,789		$	(685,613	)
Amounts attributable to Kindred stockholders:
Income (loss) from continuing operations	$	(143,435	)	$	21,975		$	(16,869	)	$	43,902		$	13,323		$	20,859		$	(685,600	)
Income (loss) from discontinued    operations		(3,395	)		396			2,270			1,772			(322	)		2,930			(13	)
Net income (loss)	$	(146,830	)	$	22,371		$	(14,599	)	$	45,674		$	13,001		$	23,789		$	(685,613	)
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations	$	(1.80	)	$	0.25		$	(0.20	)	$	0.50		$	0.15		$	0.24		$	(7.89	)
Discontinued operations:
Income (loss) from operations		(0.04	)		(0.01	)		0.03			0.02			-			0.03			-
Gain (loss) on divestiture of operations		-			0.01			-			-			-			-			-
Income (loss) from discontinued    operations		(0.04	)		-			0.03			0.02			-			0.03			-
Net income (loss)	$	(1.84	)	$	0.25		$	(0.17	)	$	0.52		$	0.15		$	0.27		$	(7.89	)
Diluted:
Income (loss) from continuing operations	$	(1.80	)	$	0.25		$	(0.20	)	$	0.50		$	0.15		$	0.23		$	(7.89	)
Discontinued operations:
Income (loss) from operations		(0.04	)		(0.01	)		0.03			0.02			-			0.03			-
Gain (loss) on divestiture of operations		-			0.01			-			-			-			-			-
Income (loss) from discontinued    operations		(0.04	)		-			0.03			0.02			-			0.03			-
Net income (loss)	$	(1.84	)	$	0.25		$	(0.17	)	$	0.52		$	0.15		$	0.26		$	(7.89	)
Shares used in computing earnings (loss) per    common share:
Basic		79,575			86,045			86,184			86,336			86,590			86,836			86,869
Diluted		79,575			86,402			86,184			87,232			87,249			87,500			86,869

79

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Operating Data

(Unaudited)

(In thousands)

	2015 Quarters												2016 Quarters
	First			Second			Third			Fourth			First			Second			Third
Revenues:
Hospital division	$	640,483		$	627,206		$	579,497		$	593,593		$	643,299		$	633,695		$	575,323
Kindred at Home:
Home health		300,867			427,820			424,054			425,759			430,035			438,556			449,958
Hospice		119,057			178,005			181,140			178,325			176,426			185,641			188,575
		419,924			605,825			605,194			604,084			606,461			624,197			638,533
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation    Services		151,564			152,544			149,435			155,579			165,774			169,815			169,018
RehabCare		252,595			236,791			219,518			206,582			204,248			196,075			192,480
		404,159			389,335			368,953			362,161			370,022			365,890			361,498
Nursing center division		274,308			273,870			270,510			273,387			272,227			272,395			270,259
		1,738,874			1,896,236			1,824,154			1,833,225			1,892,009			1,896,177			1,845,613
Eliminations:
Kindred Hospital Rehabilitation    Services		(24,002	)		(23,201	)		(22,081	)		(22,017	)		(23,713	)		(23,472	)		(22,330	)
RehabCare		(37,789	)		(38,262	)		(35,943	)		(28,546	)		(28,822	)		(28,811	)		(28,075	)
Nursing centers		(1,116	)		(1,298	)		(1,614	)		(1,713	)		(1,503	)		(1,824	)		(1,681	)
		(62,907	)		(62,761	)		(59,638	)		(52,276	)		(54,038	)		(54,107	)		(52,086	)
	$	1,675,967		$	1,833,475		$	1,764,516		$	1,780,949		$	1,837,971		$	1,842,070		$	1,793,527
Income (loss) from continuing operations:
Segment EBITDAR:
Hospital division	$	134,111		$	131,532		$	96,108		$	116,454		$	135,495		$	125,932		$	82,752
Kindred at Home:
Home health		46,798			72,917			67,682			68,776			66,941			76,030			75,073
Hospice		16,996			27,887			34,025			30,212			24,866			31,329			31,326
		63,794			100,804			101,707			98,988			91,807			107,359			106,399
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation    Services		44,564			44,531			42,141			44,891			47,870			50,469			49,470
RehabCare		15,708			14,681			14,544			(1,118	)		11,987			13,269			9,248
		60,272			59,212			56,685			43,773			59,857			63,738			58,718
Nursing center division		36,963			39,877			35,923			36,601			30,100			33,662			29,922
Support center		(66,565	)		(70,209	)		(55,439	)		(63,016	)		(70,808	)		(66,804	)		(61,751	)
Litigation contingency expense		(95,000	)		(3,925	)		(31,462	)		(8,261	)		(1,910	)		(930	)		-
Impairment charges		(6,726	)		-			-			(18,031	)		(7,788	)		(6,131	)		(324,289	)
Restructuring charges		(1,619	)		(2,802	)		(2,541	)		(3,288	)		(1,701	)		(4,346	)		(22,813	)
Transaction costs		(94,702	)		(5,216	)		(3,846	)		(5,367	)		(1,685	)		(1,846	)		(2,982	)
EBITDAR		30,528			249,273			197,135			197,853			233,367			250,634			(134,044	)
Rent		(91,788	)		(95,731	)		(95,436	)		(96,934	)		(97,517	)		(100,093	)		(98,415	)
Restructuring charges - rent		(352	)		(671	)		(808	)		(889	)		(251	)		(462	)		(58,650	)
Depreciation and amortization		(38,935	)		(38,625	)		(39,329	)		(40,362	)		(40,681	)		(40,257	)		(40,382	)
Interest, net		(61,777	)		(56,140	)		(56,008	)		(55,664	)		(57,245	)		(57,559	)		(58,052	)
Income (loss) from continuing operations     before income taxes		(162,324	)		58,106			5,554			4,004			37,673			52,263			(389,543	)
Provision (benefit) for income taxes		(27,736	)		24,396			12,523			(51,980	)		11,836			17,882			281,752
	$	(134,588	)	$	33,710		$	(6,969	)	$	55,984		$	25,837		$	34,381		$	(671,295	)

80

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Operating Data (Continued)

(Unaudited)

(In thousands)

	2015 Quarters								2016 Quarters
	First		Second		Third		Fourth		First		Second		Third
Rent:
Hospital division	$	51,454	$	51,404	$	51,726	$	51,901	$	51,945	$	53,759	$	52,555
Kindred at Home:
Home health		6,493		8,981		8,675		8,773		8,524		8,734		8,472
Hospice		3,139		4,621		4,428		4,451		4,359		4,346		4,342
		9,632		13,602		13,103		13,224		12,883		13,080		12,814
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		7,373		7,509		7,591		8,307		8,763		8,896		8,852
RehabCare		999		1,010		937		879		879		893		925
		8,372		8,519		8,528		9,186		9,642		9,789		9,777
Nursing center division		21,146		21,383		21,510		21,846		22,472		22,982		22,697
Support center		1,184		823		569		777		575		483		572
	$	91,788	$	95,731	$	95,436	$	96,934	$	97,517	$	100,093	$	98,415
Depreciation and amortization:
Hospital division:	$	14,476	$	13,531	$	12,956	$	13,012	$	13,199	$	13,070	$	12,627
Kindred at Home:
Home health		3,593		4,273		4,653		4,760		4,236		3,877		3,803
Hospice		1,456		1,482		1,821		1,822		1,600		1,525		1,563
		5,049		5,755		6,474		6,582		5,836		5,402		5,366
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		3,418		3,314		3,344		3,435		3,521		3,526		3,573
RehabCare		1,911		1,924		1,955		1,990		1,989		1,983		2,011
		5,329		5,238		5,299		5,425		5,510		5,509		5,584
Nursing center division		7,494		6,962		6,695		6,940		7,253		7,215		7,552
Support center		6,587		7,139		7,905		8,403		8,883		9,061		9,253
	$	38,935	$	38,625	$	39,329	$	40,362	$	40,681	$	40,257	$	40,382

81

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Operating Data (Continued)

(Unaudited)

(In thousands)

	2015 Quarters								2016 Quarters
	First		Second		Third		Fourth		First		Second		Third
Capital expenditures, excluding acquisitions (including discontinued operations):
Hospital division:
Routine	$	8,810	$	6,080	$	5,127	$	8,918	$	5,440	$	6,410	$	5,649
Development		-		-		-		-		-		-		-
		8,810		6,080		5,127		8,918		5,440		6,410		5,649
Kindred at Home:
Home health:
Routine		252		859		1,225		1,865		2,391		1,318		1,300
Development		-		-		-		-		-		-		-
		252		859		1,225		1,865		2,391		1,318		1,300
Hospice:
Routine		37		445		352		381		671		620		637
Development		-		-		-		-		-		-		-
		37		445		352		381		671		620		637
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Routine		247		28		350		323		301		377		380
Development		21		40		1,281		3,359		4,246		6,125		4,973
		268		68		1,631		3,682		4,547		6,502		5,353
RehabCare:
Routine		470		246		532		201		175		332		698
Development		-		-		-		-		-		-		-
		470		246		532		201		175		332		698
Nursing center division:
Routine		5,066		4,342		4,738		4,635		3,166		4,595		5,486
Development		5,767		478		2,085		3,416		4,072		1,266		585
		10,833		4,820		6,823		8,051		7,238		5,861		6,071
Support center:
Routine:
Information systems		5,548		12,022		22,765		24,478		5,815		11,898		7,031
Other		339		478		333		439		147		3,174		692
Development		-		-		2,394		1,090		1,701		1,316		2,828
		5,887		12,500		25,492		26,007		7,663		16,388		10,551
Totals:
Routine		20,769		24,500		35,422		41,240		18,106		28,724		21,873
Development		5,788		518		5,760		7,865		10,019		8,707		8,386
	$	26,557	$	25,018	$	41,182	$	49,105	$	28,125	$	37,431	$	30,259

82

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Operating Data (Continued)

(Unaudited)

	2015 Quarters								2016 Quarters
	First		Second		Third		Fourth		First		Second		Third
Hospital division:
End of period data:
Number of transitional care hospitals		97		96		95		95		95		97		94
Number of licensed beds		7,147		7,124		7,094		7,094		7,089		7,067		6,890
Revenue mix %:
Medicare		56.8		55.2		57.1		57.3		57.8		55.5		54.6
Medicaid		5.5		5.3		5.3		5.1		4.2		4.2		4.0
Medicare Advantage		11.9		11.6		10.8		11.1		11.5		12.0		12.1
Medicaid Managed		4.7		5.6		6.1		6.2		5.6		6.3		7.3
Commercial insurance and other		21.1		22.3		20.7		20.3		20.9		22.0		22.0
Admissions:
Medicare		8,775		8,267		7,976		8,169		8,919		8,253		7,861
Medicaid		610		610		556		520		463		386		375
Medicare Advantage		1,555		1,352		1,212		1,304		1,453		1,382		1,327
Medicaid Managed		643		675		646		612		733		768		861
Commercial insurance and other		1,868		1,815		1,763		1,701		1,871		1,807		1,727
		13,451		12,719		12,153		12,306		13,439		12,596		12,151
Patient days:
Medicare		228,483		218,577		210,870		210,409		229,004		219,013		202,482
Medicaid		28,663		25,213		23,167		21,795		21,134		19,409		16,781
Medicare Advantage		48,448		44,740		39,585		41,079		45,760		47,697		43,241
Medicaid Managed		22,013		24,833		24,412		24,802		25,341		27,267		28,534
Commercial insurance and other		62,241		62,922		58,631		57,321		62,769		63,009		59,856
		389,848		376,285		356,665		355,406		384,008		376,395		350,894
Average length of stay:
Medicare		26.0		26.4		26.4		25.8		25.7		26.5		25.8
Medicaid		47.0		41.3		41.7		41.9		45.6		50.3		44.7
Medicare Advantage		31.2		33.1		32.7		31.5		31.5		34.5		32.6
Medicaid Managed		34.2		36.8		37.8		40.5		34.6		35.5		33.1
Commercial insurance and other		33.3		34.7		33.3		33.7		33.5		34.9		34.7
Weighted average		29.0		29.6		29.3		28.9		28.6		29.9		28.9
Revenues per admission:
Medicare	$	41,483	$	41,892	$	41,451	$	41,656	$	41,717	$	42,579	$	39,945
Medicaid		57,594		54,795		55,415		57,724		57,928		69,797		61,338
Medicare Advantage		48,908		53,578		51,495		50,680		51,080		55,105		52,363
Medicaid Managed		46,740		51,950		54,976		60,263		49,287		51,696		48,631
Commercial insurance and other		72,395		77,110		68,151		70,735		71,651		77,193		73,515
Weighted average		47,616		49,312		47,683		48,236		47,868		50,309		47,348
Revenues per patient day:
Medicare	$	1,593	$	1,584	$	1,568	$	1,617	$	1,625	$	1,605	$	1,551
Medicaid		1,226		1,326		1,330		1,377		1,269		1,388		1,371
Medicare Advantage		1,570		1,619		1,577		1,609		1,622		1,597		1,607
Medicaid Managed		1,365		1,412		1,455		1,487		1,426		1,456		1,467
Commercial insurance and other		2,173		2,224		2,049		2,099		2,136		2,214		2,121
Weighted average		1,643		1,667		1,625		1,670		1,675		1,684		1,640
Medicare case mix index (discharged patients    only)		1.166		1.163		1.150		1.164		1.163		1.179		1.172
Average daily census		4,332		4,135		3,877		3,863		4,220		4,136		3,814
Occupancy %		69.2		66.1		62.2		62.2		68.0		67.5		61.6
Same-hospital data:
Admissions:
Medicare		8,652		8,031		7,659		7,933		8,919		8,083		7,571
Medicaid		602		557		508		454		463		371		371
Medicare Advantage		1,546		1,299		1,166		1,238		1,453		1,339		1,292
Medicaid Managed		640		640		619		590		733		761		861
Commercial insurance and other		1,840		1,746		1,680		1,624		1,871		1,751		1,658
		13,280		12,273		11,632		11,839		13,439		12,305		11,753
Patient days:
Medicare		225,992		212,221		202,690		204,128		229,004		214,629		194,857
Medicaid		28,458		22,999		21,203		19,481		21,134		18,340		16,467
Medicare Advantage		48,276		42,863		37,272		39,122		45,760		46,522		41,955
Medicaid Managed		21,933		23,722		23,329		24,136		25,341		26,795		28,526
Commercial insurance and other		61,715		60,559		56,377		54,899		62,769		60,984		57,168
		386,374		362,364		340,871		341,766		384,008		367,270		338,973
Total average length of stay		29.1		29.5		29.3		28.9		28.6		29.8		28.8
Total revenues per patient day	$	1,643	$	1,671	$	1,629	$	1,673	$	1,676	$	1,687	$	1,641

83

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Operating Data (Continued)

(Unaudited)

	2015 Quarters								2016 Quarters
	First		Second		Third		Fourth		First		Second		Third
Kindred at Home:
Home health:
Sites of service (at end of period)		415		411		388		373		384		384		395
Revenue mix %:
Medicare		80.8		80.4		80.0		80.0		79.8		79.3		78.1
Medicaid		2.0		2.1		2.1		2.1		2.1		2.1		2.5
Commercial and other		7.7		7.9		8.2		8.5		8.4		8.2		8.6
Commercial paid at episodic rates		9.5		9.6		9.7		9.4		9.7		10.4		10.8
Episodic revenues ($ 000s)	$	229,991	$	324,027	$	319,820	$	320,698	$	325,821	$	332,193	$	332,562
Total episodic admissions		49,087		67,808		66,753		66,157		71,426		70,212		69,219
Medicare episodic admissions		43,173		59,394		58,479		57,804		62,011		60,730		59,823
Total episodes		79,895		109,599		108,519		108,300		113,887		113,278		113,256
Episodes per admission		1.63		1.62		1.63		1.64		1.59		1.61		1.64
Revenue per episode	$	2,879	$	2,956	$	2,947	$	2,961	$	2,861	$	2,933	$	2,936
Hospice:
Sites of service (at end of period)		190		185		181		175		177		177		185
Admissions		8,863		12,574		12,091		12,129		13,234		13,149		12,916
Average length of stay		93		93		101		100		92		91		98
Patient days		785,819		1,190,604		1,211,291		1,185,330		1,183,908		1,238,584		1,277,125
Revenue per patient day	$	152	$	150	$	150	$	150	$	149	$	150	$	148
Average daily census		12,830		13,084		13,166		12,884		13,010		13,611		13,882
Community Care and other revenues    (included in home health business segment)    ($ 000s)	$	45,902	$	67,647	$	67,338	$	67,684	$	66,305	$	68,229	$	75,978
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Freestanding IRFs:
End of period data:
Number of IRFs		16		16		18		18		19		19		19
Number of licensed beds		829		829		919		919		969		969		969
Discharges (a)		3,806		3,927		3,941		4,317		4,448		4,646		4,644
Same-hospital discharges (a)		3,806		3,927		3,842		4,040		4,016		4,089		4,069
Occupancy % (a)		73.2		71.5		68.7		68.0		70.6		70.6		68.8
Average length of stay (a)		13.7		13.1		13.2		12.7		13.2		12.9		12.7
Revenue per discharge (a)	$	19,517	$	19,325	$	18,992	$	18,640	$	19,731	$	19,318	$	19,599
Contract services:
Sites of service (at end of period):
Inpatient rehabilitation units    (ARUs)		100		99		101		100		104		105		104
LTAC hospitals		120		120		119		119		119		121		120
Sub-acute units		8		8		7		7		7		7		7
Outpatient units		138		139		135		130		139		138		139
		366		366		362		356		369		371		370
Revenue per site	$	211,151	$	209,436	$	206,041	$	210,978	$	211,417	$	215,798	$	210,810
Revenue mix %:
Company-operated		31		30		30		29		30		29		29
Non-affiliated		69		70		70		71		70		71		71
RehabCare:
Sites of service (at end of period)		1,829		1,789		1,821		1,798		1,767		1,759		1,754
Revenue per site	$	138,106	$	132,359	$	120,548	$	114,896	$	115,590	$	111,470	$	109,738
Revenue mix %:
Company-operated		15		16		16		14		14		15		15
Non-affiliated		85		84		84		86		86		85		85

(a) Excludes non-consolidating IRF.

84

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (Continued)

Operating Data (Continued)

(Unaudited)

	2015 Quarters								2016 Quarters
	First		Second		Third		Fourth		First		Second		Third
Nursing center division:
End of period data:
Number of facilities:
Nursing centers:
Owned or leased		86		86		86		86		88		88		87
Managed		4		4		4		4		4		4		4
Assisted living facilities		7		7		7		7		7		7		7
		97		97		97		97		99		99		98
Number of licensed beds:
Nursing centers:
Owned or leased		11,050		11,050		11,050		11,050		11,330		11,330		11,083
Managed		485		485		485		485		485		485		485
Assisted living facilities		375		375		375		375		375		380		380
		11,910		11,910		11,910		11,910		12,190		12,195		11,948
Revenue mix %:
Medicare		32.8		30.5		30.0		30.1		32.2		31.1		29.5
Medicaid		37.8		38.9		39.6		38.2		36.4		36.9		38.1
Medicare Advantage		9.0		8.6		8.1		7.4		7.2		7.3		7.3
Medicaid Managed		4.7		5.4		5.9		8.4		8.6		8.7		9.2
Private and other		15.7		16.6		16.4		15.9		15.6		16.0		15.9
Patient days (a):
Medicare		148,396		133,991		130,456		129,068		140,027		134,699		126,800
Medicaid		447,888		444,757		449,982		431,415		418,336		422,968		425,490
Medicare Advantage		55,376		51,947		48,539		45,136		43,410		43,069		43,162
Medicaid Managed		71,588		82,280		82,352		99,058		105,663		107,288		112,458
Private and other		138,030		139,716		140,003		141,247		139,142		134,657		137,127
		861,278		852,691		851,332		845,924		846,578		842,681		845,037
Patient day mix % (a):
Medicare		17.3		15.7		15.3		15.3		16.6		16.0		15.0
Medicaid		52.0		52.2		52.9		51.0		49.4		50.2		50.4
Medicare Advantage		6.4		6.1		5.7		5.3		5.1		5.1		5.1
Medicaid Managed		8.3		9.6		9.7		11.7		12.5		12.7		13.3
Private and other		16.0		16.4		16.4		16.7		16.4		16.0		16.2
Revenues per patient day (a):
Medicare Part A	$	567	$	573	$	570	$	585	$	577	$	577	$	573
Total Medicare (including Part B)		606		623		623		638		627		630		629
Medicaid		232		239		238		242		237		238		242
Medicaid (net of provider taxes) (b)		199		215		214		217		211		212		217
Medicare Advantage		446		453		450		450		452		464		459
Medicaid Managed		179		181		194		231		220		220		221
Private and other		312		326		316		308		305		323		313
Weighted average		319		321		318		323		322		323		320
Average daily census (a)		9,570		9,370		9,254		9,195		9,303		9,260		9,185
Admissions (a)		10,376		9,831		9,558		9,237		9,815		9,480		9,698
Occupancy % (a)		81.3		79.6		78.6		78.1		77.3		76.7		77.5
Medicare average length of stay (a)		28.9		28.9		28.5		28.4		28.2		28.4		27.4

(a) Excludes managed facilities.

(b) Provider taxes are recorded in general and administrative expenses for all periods presented.

85

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of the Company’s exposure to market risk contains “forward-looking statements” that involve risks and uncertainties. Given the unpredictability of interest rates as well as other factors, actual results could differ materially from those projected in such forward-looking information.

The Company’s exposure to market risk relates to changes in the prime rate, federal funds rate and LIBOR, which affect the interest paid on certain borrowings.

The following table provides information as of September 30, 2016 about the Company’s financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity date.

Interest Rate Sensitivity

Principal (Notional) Amount by Expected Maturity

Average Interest Rate

(Dollars in thousands)

	Expected maturities
	2016			2017			2018			2019		2020			Thereafter			Total		Fair value September 30, 2016
Liabilities:
Long-term debt, including     amounts due within one     year:
Fixed rate:
Notes due 2020 (a)	$	-		$	-		$	-		$	-	$	750,000		$	-		$	750,000	$	767,700
Notes due 2022 (a)		-			-			-			-		-			500,000			500,000		474,700
Notes due 2023 (a)		-			-			-			-		-			600,000			600,000		605,820
Mandatory Redeemable     Preferred Stock (a)		2,957			12,372			-			-		-			-			15,329		8,438
Other		211			553			143			-		-			-			907		907	(b)
	$	3,168		$	12,925		$	143		$	-	$	750,000		$	1,100,000		$	1,866,236	$	1,857,565
Average interest     rate		6.9	%		7.1	%		2.7	%				8.0	%		7.7	%
Variable rate:
ABL Facility (c)	$	-		$	-		$	-		$	160,000	$	-		$	-		$	160,000	$	160,000
Term Loan    Facility (a,d,e)		3,508			14,034			14,034			14,034		14,034			1,313,326			1,372,970		1,371,254
Other (f)		750			-			-			-		-			-			750		750
	$	4,258		$	14,034		$	14,034		$	174,034	$	14,034		$	1,313,326		$	1,533,720	$	1,532,004

(a) The expected maturities exclude total debt issuance costs, net of accumulated amortization, of approximately $49 million, comprised of $8 million for the Notes due 2020, $6 million for the Notes due 2022, $8 million for the Notes due 2023, $0.5 million for the Mandatory Redeemable Preferred Stock, and $26 million for the Term Loan Facility.

(b) Calculated based upon the net present value of future principal and interest payments using an average interest rate of 2.6%.

(c) Interest on borrowings under the Company’s ABL Facility is payable at a rate per annum equal to the applicable margin plus, at the Company’s option, either: (1) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, or (2) a base rate determined by reference to the highest of: (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR as described in subclause (1) plus 1.00%. At September 30, 2016, the applicable margin for borrowings under the ABL Facility was 2.00% with respect to LIBOR borrowings and 1.00% with respect to base rate borrowings. The applicable margin is subject to adjustment each fiscal quarter, based upon average historical excess availability during the preceding quarter.

(d) Interest on borrowings under the Term Loan Facility is payable at a rate per annum equal to an applicable margin plus, at the Company’s option, either: (1) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, or (2) a base rate determined by reference to the highest of: (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR described in subclause (1) plus 1.00%. LIBOR is subject to an interest rate floor of 1.00%. The applicable margin for borrowings under the Term Loan Facility is 3.25% with respect to LIBOR borrowings and 2.25% with respect to base rate borrowings. The expected maturities for the Term Loan Facility exclude the OID of approximately $7 million.

(e) In March 2014, the Company entered into an interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under the Third Amended and Restated Term Loan Facility. On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated or otherwise modified. The interest rate swap had an effective date of April 9, 2014, will expire on April 9, 2018 and continues to apply to the Term Loan Facility. The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month LIBOR, subject to a minimum rate of 1.0%. In January 2016, the Company entered into three interest rate swap agreements to hedge its floating interest rate on an aggregate of $325 million of debt outstanding under its Fourth Amended and Restated Term Loan Facility. The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. The Company is required to make payments based upon a fixed interest rate of 1.862% and 1.855% calculated on the notional amount of $175 million and $150 million, respectively. In exchange, the Company will receive interest on $325 million at a variable interest rate that is based upon the three-month LIBOR rate, subject to a minimum rate of 1.0%.

(f) Interest based upon prime less 0.5%.

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ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures and Changes in Internal Control Over Financial Reporting

The Company has carried out an evaluation under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2016, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, are effective.

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

The Company provides services in a highly regulated industry and is a party to various legal actions and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including investigations resulting from the Company’s obligation to self-report suspected violations of law). The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental and internal audits and investigations. The DOJ, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity. See note 17 of the notes to unaudited condensed consolidated financial statements for a description of pending legal proceedings, governmental reviews, audits, and investigations to which the Company is subject.

Shareholder derivative action

On March 16, 2016, a shareholder derivative action (previously defined as the “Complaint”) was filed against certain of the Company’s current and former officers and directors in circuit court for Jefferson County, Kentucky. The Complaint also names the Company as a nominal defendant. The Complaint alleges that the named current and former officers and directors of the Company breached their respective duties of good faith, loyalty, and candor, and other general fiduciary duties owed to the Company and its shareholders by, among other things, failing to exercise reasonable and prudent supervision over the management, polices, and controls of the Company in order to detect practices that existed at RehabCare resulting in the Company having to enter into two separate settlement agreements with the DOJ. No estimate of the possible loss or range of loss resulting from this lawsuit can be made at this time. The Company disputes the allegations made in the Complaint and will defend this action and any related claims vigorously.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total number of shares (or units) purchased (a)		Average price paid per share (or unit) (b)		Total number of shares (or units) purchased as part of publicly announced plans or programs		Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
Month #1 (July 1 – July 31)		–	$	–		–	$	–
Month #2 (August 1 – August 31)		19,309		12.15		–		–
Month #3 (September 1 – September 30)		–		–		–		–
Total		19,309	$	12.15		–	$	–

(a) These amounts represent shares of the Company’s common stock, par value $0.25 per share, withheld to offset tax withholding obligations that are triggered upon the vesting and release of service-based restricted share awards previously granted under the Company’s stock-based compensation plans for its employees (the “Withheld Shares”). The total tax withholding obligation is calculated by dividing the closing price of the Company’s common stock on the New York Stock Exchange on the applicable vesting date to determine the total number of Withheld Shares required to satisfy such withholding obligation.

(b) The average price per share for each period was calculated by dividing the sum of the aggregate value of the Withheld Shares by the total number of Withheld Shares.

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PART II.  OTHER INFORMATION (Continued)

Item 6. Exhibits

Exhibit number	Description of document
10.1*	Employment Agreement dated as of August 15, 2016 by and between Kindred Healthcare Operating, Inc. and Jason P. Zachariah.
10.2*	Change-in-Control Severance Agreement dated as of August 15, 2016 by and between Kindred Healthcare Operating, Inc. and Jason P. Zachariah.
31*	Rule 13a-14(a)/15d-14(a) Certifications.
32*	Section 1350 Certifications.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KINDRED HEALTHCARE, INC.
Date: November 9, 2016	/S/    Benjamin A. Breier
	Benjamin A. Breier
	President and Chief Executive Officer
Date: November 9, 2016	/S/    Stephen D. Farber
	Stephen D. Farber
	Executive Vice President, Chief Financial Officer

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EX-10.1

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the “Agreement”) is made as of the 15^th day of August, 2016 (the “Effective Date”), by and between Kindred Healthcare Operating, Inc., a Delaware corporation (the “Company”), and Jason P. Zachariah (the "Executive").

W I T N E S S E T H:

WHEREAS, the Executive is employed by the Company, a wholly-owned subsidiary of Kindred Healthcare, Inc. (“Parent”), and the parties hereto desire to provide for the terms of Executive’s employment by the Company; and

WHEREAS, the Executive Compensation Committee of the Board of Directors of the Parent has determined that it is in the best interests of the Company and Parent to enter into this Agreement.

NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements contained herein, and intending to be legally bound hereby, the Company and Executive agree as follows:

1.Employment. The Company hereby agrees to employ Executive and Executive hereby agrees to be employed by the Company on the terms and conditions herein set forth. The term of this Agreement (the “Term”) shall initially be for a one-year period commencing on the Effective Date.  The Term shall be automatically extended by one additional day for each day beyond the Effective Date that the Executive remains employed by the Company until such time as the Company elects to cease such extension by giving written notice of such election to the Executive, stating the date upon which such election will be effective.  In such event, this Agreement shall terminate on the first anniversary of such effective date of such election notice.

2.Duties.  Executive is engaged by the Company as President, Kindred Rehabilitation Services.The Executive, in carrying out his duties under this Agreement, shall report to the Chief Operating Officer of the Company during the Term.

3.Extent of Services.  Executive, subject to the direction and control of the Board of Directors (the “Board”), shall have the power and authority commensurate with his executive status and necessary to perform his duties hereunder.  During the Term, Executive shall devote his entire working time, attention, labor, skill and energies to the business of the Company, and shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage.

4.Compensation. As compensation for services hereunder rendered, Executive shall receive during the Term:

(a)A base salary (“Base Salary”) of $380,000 per year payable in equal installments in accordance with the Company’s normal payroll procedures. Executive may receive increases in his Base Salary from time to time, as approved by the Board.

(b)In addition to Base Salary, Executive will be eligible to receive bonuses and other incentive compensation as the Board may approve from time to time, including participation in the Company’s annual short-term incentive compensation plan and its long-term incentive compensation plan, in accordance with the terms and conditions of such plans as may be in effect from time to time.

5.Benefits.  

(a)Executive shall be entitled to participate in any and all pension benefit, welfare benefit (including, without limitation, medical, dental, disability and group life insurance coverages) and fringe benefit plans from time to time in effect for officers of the Company and its affiliates.

(b)Executive shall be entitled to participate in such bonus, stock option, or other incentive compensation plans of the Company and its affiliates that are in effect from time to time for officers of the Company.  On the Effective Date, the Executive will be granted 20,000 shares of restricted stock that will vest in equal installments over three years and will be subject to the terms and conditions of the Kindred Healthcare, Inc. 2011 Stock Incentive Plan and the applicable award agreement related thereto.

(c)Executive shall be entitled to paid time off each year, subject to the Company’s policies, as in effect from time to time for the Company’s executive officers.  The Executive shall schedule the timing of such paid time off in a reasonable manner.  The Executive may also be entitled to such other leave, with or without compensation, as shall be mutually agreed by the Company and Executive.

(d)Executive may incur reasonable expenses for promoting the Company’s business, including expenses for entertainment, travel and similar items.  The Company shall reimburse Executive for all such reasonable expenses in accordance with the Company’s reimbursement policies and procedures, as may be in effect from time to time.

(e)While this Agreement is in effect, the Company shall provide the Executive with (i) director’s and officer’s liability insurance coverage; (ii) life insurance for which the Executive may designate the beneficiary or beneficiaries; and (iii) long-term disability insurance; in each such case, consistent with the benefits provided from time to time to the Company’s other executive officers.

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6.Termination of Employment.

(a)Death or Disability.  Executive’s employment shall terminate automatically upon Executive’s death during the Term.  If the Company determines in good faith that the Disability of Executive has occurred during the Term (pursuant to the definition of Disability set forth below) it may give to Executive a written Notice of Termination in accordance with Section 6(d) below.  In such event, Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such Notice of Termination by Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive’s duties. For purposes of this Agreement, "Disability" shall mean Executive’s absence from his full-time duties hereunder for a period of 90 days due to disability as defined in the long-term disability plan provided to Executive by the Company.

(b)Cause.  The Company may terminate Executive’s employment during the Term for Cause.  For purposes of this Agreement, "Cause" shall mean the Executive’s (i) conviction of or plea of nolo contendere to a crime involving moral turpitude; or (ii) conduct that constitutes a willful and material breach by Executive of his duties and responsibilities, which is committed in bad faith or without reasonable belief that such breaching conduct is in the best interests of the Company and its affiliates, but with respect to (ii) only if (a) the Company has given Executive a Notice of Termination in accordance with Section 6(d) below, (b) Executive has been given a reasonable opportunity of not less than 30 days after Executive’s receipt of the Notice of Termination to remedy or correct the purported breaching conduct, and (c) within not less than 45 days after Executive’s receipt of the Notice of Termination the Board has adopted a resolution by a vote of at least 75% of its members, after giving the Executive and his attorney an opportunity to be heard at a meeting of the Board, finding that such conduct constituted such a willful and material breach, was committed in bad faith or without reasonable belief that it was in the best interests of the Company and its affiliates, and has not been remedied or corrected by Executive.  For purposes of the adoption by the Board of any such resolution in respect of the Executive’s termination for Cause, any act, or failure to act, of Executive, based upon authority given to Executive pursuant to a resolution duly adopted by the Board or based upon advice of counsel for the Company to Executive shall be conclusively presumed by the Board to have been done, or omitted to be done, by Executive in good faith and with reasonable belief that such conduct was in the best interests of the Company.

(c)Good Reason. Executive’s employment may be terminated during the Term by Executive for Good Reason.  "Good Reason" shall exist upon the occurrence, without Executive’s express written consent, of any of the following events:

(i)a material adverse change in Executive’s authority, duties or responsibilities (including, without limitation the Company assigning to Executive duties of a substantially nonexecutive or nonmanagerial nature) (other than any such change directly attributable to the fact that the Company is no longer publicly owned);

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(ii)the Company shall materially reduce the Base Salary or annual bonus opportunity of Executive;

(iii)the Company shall require Executive to relocate Executive’s principal business office more than 30 miles from its location on the Effective Date, which shall be 680 South Fourth Street, Louisville, KY; or

(iv)a material breach by the Company of any of Section 5(a), 5(b), 5(e) or 9(c) of this Agreement.

For purposes of this Agreement, "Good Reason" shall not exist until after Executive has given the Company a Notice of Termination in accordance with Section 6(d) below, and the specified event is not remedied within 30 days after the Company’s receipt of such Notice of Termination; from Executive specifically delineating such claimed event and setting forth Executive's intention to terminate employment if not remedied; provided, that if the specified event cannot reasonably be remedied within such 30-day period and the Company commences reasonable steps within such 30-day period to remedy such event and diligently continues such steps thereafter until a remedy is effected, such event shall not constitute "Good Reason" provided that such event is remedied within 60 days after the Company’s receipt of such Notice of Termination.

(d)Notice of Termination.  Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination given in accordance with this Agreement.  For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated and (iii) specifies the intended termination date (which date, in the case of a termination for Good Reason, shall be not more than 30 days after the giving of such notice, and in the case of a termination for Cause, shall not be more than 45 days after the giving of such notice).  The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder.

(e)Date of Termination.  "Date of Termination" means (i) if Executive’s employment is terminated by the Company for Cause, or by Executive for Good Reason, the later of the date specified in the Notice of Termination or the date that is one day after the last day of any applicable cure period, (ii) if Executive’s employment is terminated by the Company other than for Cause or Disability, or Executive resigns without Good Reason, the Date of Termination shall be the date on which the Company or Executive notified Executive or the Company, respectively, of such termination and (iii) if Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the Disability Effective Date, as the case may be.

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7.Obligations of the Company Upon Termination.  Following any termination of Executive’s employment hereunder, the Company shall pay Executive his Base Salary through the Date of Termination and any amounts owed to Executive pursuant to the terms and conditions of the benefit plans and programs of the Company at the time such payments are due.  In addition, subject to Sections 7(e) and 12 hereof and the conditions set forth below, Executive shall be entitled to the following additional payments:

(a)Death or Disability.  If, during the Term, Executive’s employment shall terminate by reason of Executive’s death or Disability, the Company shall pay to Executive (or his designated beneficiary or estate, as the case may be) the prorated portion of any Target Bonus (as defined below) Executive would have received for the year of termination of employment.  Such amount shall be paid on the date when such amounts would otherwise have been payable to the Executive if Executive’s employment with the Company had not terminated as determined in accordance with the terms and conditions of the applicable short-term incentive plan of the Company.

For purposes of this Agreement: “Target Bonus” shall mean the full amount of the targeted annual short-term incentive bonus that would be payable to the Executive, assuming the targeted performance criteria on which such annual short-term incentive bonus is based were deemed to be satisfied, in respect of services for the calendar year in which the date in question occurs.

(b)Good Reason; Other than for Cause.  If, during the Term, the Company shall terminate Executive’s employment other than for Cause (but not for Disability), or the Executive shall terminate his employment for Good Reason:

(1)in satisfaction of the annual bonus Executive would otherwise be eligible to receive under the short-term incentive plan in respect of the calendar year in which the Date of Termination occurs, the Company shall pay to Executive an amount equal to the product of (i) the annual bonus, if any, to which the Executive would have been entitled for the year in which the Date of Termination occurs had Executive’s employment with the Company not been terminated, as determined in accordance with the terms and conditions of the applicable short-term incentive plan of the Company as provided in Section 4(b) hereof, and (ii) a fraction, the numerator of which is the number of days in the period beginning on the first day of the calendar year in which the Date of Termination occurs and ending on the Date of Termination and the denominator of which is 365.  Such amount shall be paid on the date when such amounts would otherwise have been payable to the Executive if Executive’s employment with the Company had not terminated as determined in accordance with the terms and conditions of the applicable short-term incentive plan of the Company.

(2)Within 14 days following Executive’s Date of Termination, the Company shall pay to Executive a cash severance payment in an amount equal to 1.5 times the sum of the Executive’s Base Salary and Target Bonus as of the Date of Termination.

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(3)For a period of 18 months following the Date of Termination (the “Benefit Continuation Period”), the Executive shall be treated as if he had continued to be an Executive for all purposes under the Company’s health insurance plan and dental insurance plan; or if the Executive is prohibited from participating in such plans, the Company shall otherwise provide such benefits.  Executive shall be responsible for any employee contributions for such insurance coverage.  Following the Benefit Continuation Period, the Executive shall be entitled to receive continuation coverage under Part 6 of Title I or ERISA (“COBRA Benefits”) by treating the end of this period as the applicable qualifying event (i.e., as a termination of employment) for purposes of ERISA Section 603(2)) and with the concurrent loss of coverage occurring on the same date, to the extent allowed by applicable law.

(4)For the Benefit Continuation Period, Company shall maintain in force, at its expense, the Executive’s life insurance in effect under the Company’s voluntary life insurance benefit plan as of the Date of Termination. Executive shall be responsible for any employee contributions for such insurance coverage.  For purposes of clarification, the portion of the premiums in respect of such voluntary life insurance for which Executive and Company are responsible, respectively, shall be the same as the portion for which Company and Executive are responsible, respectively, immediately prior to the Date of Termination.

(5)For the Benefit Continuation Period, the Company shall provide short-term and long-term disability insurance benefits to Executive equivalent to the coverage that the Executive would have had if he had remained employed under the disability insurance plans applicable to Executive on the Date of Termination.  Executive shall be responsible for any employee contributions for such insurance coverage. Should Executive become disabled during such period, Executive shall be entitled to receive such benefits, and for such duration, as the applicable plan provides.  For purposes of clarification, the portion of the premiums in respect of such short-term and long-term disability benefits for which Executive and Company are responsible, respectively, shall be the same as the portion for which Executive and Company are responsible, respectively, immediately prior to the Date of Termination.

(6)Within fifteen (15) days after the Date of Termination, the Company shall pay to Executive a cash payment in an amount, if any, necessary to compensate Executive for the Executive's unvested interests under the Company's retirement savings plan which are forfeited by Executive in connection with the termination of Executive's employment.

(7)Company may adopt such amendments to its executive benefit plans, if any, as are necessary to effectuate the provisions of this Agreement.

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(8)Any outstanding unvested stock options, stock performance units or similar equity awards (other than restricted stock awards) held by Executive on the Date of Termination shall continue to vest in accordance with their original terms (including any related performance measures) for the duration of the Benefit Continuation Period as if Executive had remained an employee of the Company through the end of such period and any such stock option, stock performance unit or other equity award (other than restricted stock awards) that has not vested as of the conclusion of such period shall be immediately cancelled and forfeited as of such date.  In addition, Executive shall have the right to continue to exercise any outstanding vested stock options held by Executive during the Benefit Continuation Period; provided that in no event shall Executive be entitled to exercise any such option beyond the original expiration date of such option.  Any outstanding restricted stock award held by Executive as of the Date of Termination that would have vested during the Benefit Continuation Period had Executive remained an employee of the Company through the end of such period shall be immediately vested as of the Date of Termination and any restricted stock award that would not have vested as of the conclusion of such period shall be immediately cancelled and forfeited as of such date.

(9)Following the Executive’s Date of Termination, the Executive shall receive the computer which Executive is utilizing as of the Date of Termination.

(10)Notwithstanding anything in this Agreement to the contrary, in no event shall the provision of in-kind benefits pursuant to this Section 7 during any taxable year of Executive affect the provision of in-kind benefits pursuant to this Section 7 in any other taxable year of Executive.

(c)Cause; Other than for Good Reason.  If Executive’s employment shall be terminated for Cause or Executive terminates employment without Good Reason (and other than due to such Executive’s death) during the Term, this Agreement shall terminate without further additional obligations to Executive under this Agreement.

(d)Death after Termination.  In the event of the death of Executive during the period Executive is entitled to receive payments pursuant to this Agreement, Executive’s designated beneficiary shall be entitled to receive the balance of the payments; or in the event of no designated beneficiary, the remaining payments shall be made to Executive’s estate.

(e)General Release of Claims.  Notwithstanding anything herein to the contrary, the amounts payable pursuant to this Section 7 are subject to the condition that Executive has delivered to the Company an executed copy of an irrevocable general release of claims in a form reasonably satisfactory to the Company within the 60 day period immediately following the Executive’s separation from service (the “Release Period”).  Any payment that otherwise would be made prior to Executive’s delivery of such executed release pursuant to this Section 7 shall be paid on the first business day following the conclusion of the Release Period; provided that in-kind benefits provided

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pursuant to subsections (b)(3), (4) and (5) of this Section 7 shall continue in effect after separation from service pending the execution and delivery of such release for a period not to exceed 60 days; provided further that if such release is not executed and delivered within such 60-day period, Executive shall reimburse the Company for the full cost of coverage during such period.

(f)Six Month Delay for Specified Employees.  Notwithstanding anything herein to the contrary, if at the time of Executive’s separation from service Executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder (the “Code”) and the deferral of the payment payable pursuant to Section 7(b)(2) is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the payment to which Executive would otherwise be entitled during the first six months following his separation from service shall be deferred and accumulated (without any reduction in such payment ultimately paid to Executive) for a period of six months from the date of separation from service and paid in a lump sum on the first day of the seventh month following such separation from service (or, if earlier, the date of Executive’s death), together with interest during such period at a rate computed by adding 2.00% to the Prime Rate as published in the Money Rates section of the Wall Street Journal, or other equivalent publication if the Wall Street Journal no longer publishes such information, on the first publication date of the Wall Street Journal or equivalent publication after the date of Executive’s separation from service (provided that if more than one such Prime Rate is published on any given day, the highest of such published rates shall be used).

8.Disputes.  Any dispute or controversy arising under, out of, or in connection with this Agreement shall, at the election and upon written demand of either party, be finally determined and settled by binding arbitration in the City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and procedures of the American Arbitration Association, and judgment upon the award may be entered in any court having jurisdiction thereof.  The Company shall pay all costs of the arbitration and all reasonable attorneys’ and accountants’ fees of the Executive in connection therewith, including any litigation to enforce any arbitration award.

9.Successors.

(a)This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution.  This Agreement shall inure to the benefit of and be enforceable by Executive’s legal representatives.

(b)This Agreement shall inure to the benefit of and be binding upon the Company, Parent and their successors and assigns.

(c)The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, or any business of the Company for which Executive’s services are principally performed, to assume expressly and agree to perform this

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Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.  As used this Section 9(c), "Company" shall mean the Company as hereinbefore defined, Parent, and any successor to its or their business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

10.Other Severance Benefits.  Executive hereby agrees that in consideration for the payments to be received under Section 7(b) of this Agreement, Executive waives any and all rights to any payments or benefits under any severance plans or arrangements of the Company or their respective affiliates that specifically provide for severance payments, other than the Change in Control Severance Agreement between the Company and Executive (the “Change in Control Severance Agreement”); provided that any payments payable to Executive under Section 7(b) hereof shall be offset by any payments received by Executive from the Company or any successor to the Company under the Change in Control Severance Agreement.

11.Withholding.  All payments to be made to Executive hereunder will be subject to all applicable required withholding of taxes.

12.Non-Competition.  The provisions of this Section 12 and any related provisions shall survive termination of this Agreement and/or Executive’s employment with the Company and do not supersede, but are in addition to and not in lieu of, any other agreements signed by Executive concerning non-competition, confidentiality, solicitation of employees, or trade secrets, and are included in consideration for the Company entering into this Agreement.  Executive’s right to receive and retain the benefits specified in this Agreement is conditioned upon Executive’s compliance with the terms of this Section 12:

(a)Non-Compete.  

(i)During Executive’s employment with the Company and during the period beginning on the Date of Termination and ending one (1) year thereafter (the “Non-Compete Period”), Executive shall not, without prior written approval of the Board, become an officer, employee, agent, partner, or director of, or provide any services or advice to or for or on behalf of, any business enterprise in substantial direct competition (as defined in Section 12(a)(ii)) with the Company.  The above constraint shall not prevent Executive from making passive investments, not to exceed five percent (5%) of the total equity value, in any enterprise where Executive’s services or advice is not required or provided.

(ii)For purposes of this Section 12(a), a business enterprise with which Executive becomes an officer, employee, agent, partner, or director of, or provide any services or advice to or for or on behalf of, shall be considered in substantial direct competition with the Company if such entity owns, operates or manages long-term acute care hospitals, nursing facilities, inpatient rehabilitation hospitals, or provides contract rehabilitation therapy services, home health services or hospice services within any state or country where the Company or any of its direct or indirect subsidiaries or affiliates has any such hospital or facility or provides any such services as of the Date of Termination.

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(iii)During Executive’s employment with the Company and during the Non‑Compete Period, Executive shall not, without prior written approval of the Board, directly or indirectly, solicit, provide to, take away, or attempt to take away or provide to any customer or solicited prospect of the Company or any of its direct or indirect subsidiaries any business of a type which the Company or such subsidiary provides or markets or which is in substantial direct competition with any business then engaged in (or product or services marketed or planned to be marketed) by the Company or any of its direct or indirect subsidiaries; or induce or attempt to induce any such customer to reduce such customer’s business with that business entity, or divert any such customer’s business from the Company and its direct or indirect subsidiaries; or discuss that subject with any such customer.

(b)Non-Solicit.  During Executive’s employment with the Company and during the Non-Compete Period, Executive shall not directly or indirectly, individually or on behalf of any person other than the Company, aid or endeavor to solicit or induce any of the Company’s or its affiliates’ employees to leave their employment with the Company or such affiliates in order to accept employment with Executive or any other person, corporation, limited liability company, partnership, sole proprietorship or other entity; provided, however, that the foregoing shall not restrict Executive or any other person from conducting general solicitations or advertisements not directed specifically at employees of the Company or its affiliates, or from employing any employee who responds to any such general solicitation or advertisement or who otherwise initiates a request for employment.

13.Confidential Information.  At no time shall Executive divulge, furnish or make accessible to anyone any confidential or proprietary knowledge or information about the Parent, the Company or any of their affiliates, including without limitation any confidential or proprietary information concerning the operations, plans or methods of the Company (except as required by law or order of court or other governmental agency) or any of the employees, clients, patients, customers or suppliers of the Parent or Company or any of their affiliates. For purposes of this Section 13, “confidential or proprietary information” shall mean any information, whether in writing or disclosed orally to Executive, which is not generally available to the public.

14.Provisions Relating To Non-Competition, Non-Solicitation and Confidentiality.  The provisions of Sections 12 and 13 shall survive the termination of Executive’s employment and this Agreement and shall not be affected by any subsequent changes in employment terms, positions, duties, responsibilities, authority, or employment termination, permitted or contemplated by this Agreement.  To the extent that any restrictive covenant set forth in Sections 12 and 13 of this Agreement shall be determined to be invalid or unenforceable, such restrictive covenant shall be modified so that the scope of the restrictive covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable and as will grant the Company the maximum protection and restrictions on Executive’s activities permitted by applicable law in such circumstances.  The Company shall have the right to advise any prospective or then current employer of Executive of the provisions of Sections 12 and 13 of this Agreement without liability.  The Company’s right to enforce the provisions of Sections 12

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and 13 of this Agreement shall not be affected by the existence, or non-existence, of any other similar agreement for any other executive, or by the Company’s failure to exercise any of its rights under Sections 12 and 13 of this Agreement or any other similar agreement or to have in effect a similar agreement for any other employee.  Given the potential irreparable harm to the Parent, Company or their affiliates, Executive expressly acknowledges and agrees that Parent and Company shall have the right to seek injunctive relief, a restraining order or such other equitable relief, including, but not limited to, specific performance (without the requirement to post bond) to restrain any breach or threatened breach of any provisions in Sections 12 and 13 in addition to pursuing all appropriate legal relief, including but not limited to attorneys’ fees, costs, damages and recoupment of amounts paid hereunder for any and all violations of such provisions.  If the Company shall institute any action or proceeding to enforce the provisions in Sections 12 and 13, Executive hereby waives the claim or defense that the Company has an adequate remedy at law and agrees not to assert in any such action or proceeding the claim or defense that the Company has an adequate remedy at law.  The parties hereby agree that the Non-Compete Period shall be extended by any period during which Executive is found to be in violation of, or to have violated, any provisions in Sections 12 and 13.

15.No Mitigation.  Executive shall have no duty to mitigate his damages by seeking other employment and, should Executive actually receive compensation from any such other employment, the payments required hereunder (including, without limitation, the provision of in-kind benefits provided under Section 7(b) hereof) shall not be reduced or offset by any such compensation.  Further, the Company’s and Parent’s obligations to make any payments hereunder shall not be subject to or affected by any setoff, counterclaims or defenses which the Company or Parent may have against Executive or others.

16.Notices.  Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered or sent by telephone facsimile transmission, personal or overnight couriers, or registered mail with confirmation or receipt, addressed as follows:

If to Executive:

Jason P. Zachariah

680 South Fourth Street

Louisville, KY 40202

If to Company:

Kindred Healthcare Operating, Inc.

680 South Fourth Street

Louisville, KY  40202

Attn:  General Counsel

17.Waiver of Breach and Severability.  The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party.  In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement and the remaining provisions of the Agreement shall continue to be binding and effective.

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18.Entire Agreement; Amendment.  This instrument contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter hereof.  No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and such officer of the Company specifically designated by the Board.

19.Governing Law.  This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware.

20.Headings.  The headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions.

21.Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

22.Section 409A.  If any provision of this Agreement (or any award of compensation or benefits provided under this Agreement) would cause Executive to incur any additional tax or interest under Section 409A of the Code, the Company shall reform such provision to comply with 409A and agrees to maintain, to the maximum extent practicable without violating 409A of the Code, the original intent and economic benefit to Executive of the applicable provision; provided that nothing herein shall require the Company to provide Executive with any gross-up for any tax, interest or penalty incurred by Executive under Section 409A of the Code.  

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

KINDRED HEALTHCARE OPERATING, INC.
By:	/s/ Benjamin A. Breier
	Benjamin A. Breier
	President and Chief Executive Officer

Solely for the purpose of Section 7:
KINDRED HEALTHCARE, INC.
By:	/s/ Benjamin A. Breier
	Benjamin A. Breier
	President and Chief Executive Officer

/s/ Jason P. Zachariah

JASON P. ZACHARIAH

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EX-10.2

EXHIBIT 10.2

Change-in-Control Severance Agreement

This Change-in-Control Severance Agreement (the “Agreement”) is made as of the 15th day of August, 2016 (the “Effective Date”), by and between Kindred Healthcare Operating, Inc., a Delaware corporation (the “Company”) and JASON P. ZACHARIAH (the “Employee”).

Recitals:

A. The Employee is employed by the Company, a wholly owned subsidiary of Kindred Healthcare, Inc. (the “Parent”).

B. The Company recognizes that the Employee’s contribution to the Company’s growth and success will be significant.

C. The Company wishes to encourage the Employee to remain with and devote full time and attention to the business affairs of the Company and wishes to provide income protection to the Employee for a period of time in the event of a Change in Control.

Now, therefore,in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Agreement

1.Definitions.

a.“Base Salary” shall mean the Employee’s regular annual rate of base pay in gross as of the date elected by Employee under Paragraph 3(a)(i) or 3(a)(ii).

b.“Cause” shall mean the Employee’s (i) conviction of or plea of nolo contendere to a crime involving moral turpitude; or (ii) conduct that constitutes a willful and material breach by Executive of his duties and responsibilities, which is committed in bad faith or without reasonable belief that such breaching conduct is in the best interests of the Company and its affiliates, but with respect to (ii) only if (a) the Company has given Employee a written notice stating that Cause exists, (b) Employee has been given a reasonable opportunity of not less than 30 days after Employee’s receipt of such notice to remedy or correct the purported breaching conduct, and (c) within not less than 45 days after Employee’s receipt of such notice the Board of Directors of Company’s parent has adopted a resolution by a vote of at least 75% of its members, after giving Employee and his attorney an opportunity to be heard at a meeting of the Board, finding that such conduct constituted such a willful and material breach, was committed in bad faith or without reasonable belief that it was in the best interests of the Company and its affiliates, and has not been remedied or corrected by Employee.  For purposes

of the adoption by the Board of any such resolution in respect of the Employee’s conduct, any act, or failure to act, of Employee, based upon authority given to Employee pursuant to a resolution duly adopted by the Board or based upon advice of counsel for the Company to Employee shall be conclusively presumed by the Board to have been done, or omitted to be done, by Employee in good faith and with reasonable belief that such conduct was in the best interests of the Company..

c.“Change in Control” shall mean any one of the following events occurring after the date of this Agreement:

(i)An acquisition (other than directly from Parent) of any voting securities of Parent (the “Voting Securities”) by any “Person” (as defined in Paragraph 1(f) hereof) immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the “1934 Act”) of 20% or more of the combined voting power of Parent’s then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in an acquisition by (i) Parent or any of its subsidiaries, (ii) an employee benefit plan (or a trust forming a part thereof) maintained by Parent or any of its subsidiaries or (iii) any Person in connection with an acquisition referred to in the immediately preceding clauses (i) and (ii) shall not constitute an acquisition which would cause a Change in Control.

(ii)The individuals who, as of the Effective Date, constituted the Board of Directors of Parent (the “Incumbent Board”) cease for any reason to constitute over 50% of the Board; provided, however, that if the election, or nomination for election by Parent’s stockholders, of any new director was approved by a vote of over 50% of the Incumbent Board, such new director shall, for purposes of this Section 1(c)(ii), be considered as though such person were a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened “Election Contest” (as described in Rule 14a‑11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of Parent (a “Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest.

(iii)Consummation of a merger, consolidation or reorganization involving Parent, unless each of the following events occurs in connection with such merger, consolidation or reorganization:

(A)the stockholders of Parent, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, over 50% of the combined voting power of all voting securities of the corporation resulting from such merger or consolidation or reorganization (the “Surviving Company”) over which any Person has Beneficial Ownership in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization;

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(B)the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute over 50% of the members of the board of directors of the Surviving Company; and

(C)no Person (other than Parent, any of its subsidiaries, any employee benefit plan (or any trust forming a part thereof) maintained by Parent, the Surviving Company or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of 20% or more of the then outstanding Voting Securities) has Beneficial Ownership of 20% or more of the combined voting power of the Surviving Company’s then outstanding voting securities.

(iv)Approval by Parent’s stockholders of a complete liquidation or dissolution of Parent.

(v)Approval by Parent’s stockholders of an agreement for the sale or other disposition of all or substantially all of the assets of Parent to any Person (other than a transfer to a subsidiary of Parent).

(vi)Any other event that the Board shall determine constitutes an effective Change in Control of Parent.

(vii)Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by Parent which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by Parent, and after such share acquisition by Parent, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.

d.“Change-in-Control Date” shall mean the date immediately prior to the effectiveness of the Change in Control.

e.“Good Reason” The Employee shall have good reason to terminate employment with the Company if (i) the Employee’s title, duties, responsibilities or authority is reduced or diminished from those in effect on the Change-in-Control Date without the Employee’s written consent; (ii) the Employee’s compensation is reduced; (iii) the Employee’s benefits are reduced, other than pursuant to a uniform reduction applicable to all managers of the Company; or (iv) the Employee is asked to relocate his office to a place more than 30 miles from his business office on the Change-in-Control Date.

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f.“Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the 1934 Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).

g.“Target Bonus” shall mean the Employee’s target annual short-term incentive bonus for the calendar year in which the date in question occurs.

h.“Termination of Employment” shall mean (i) the termination of the Employee’s employment by the Company other than such a termination in connection with an offer of immediate reemployment by a successor or assign of the Company or a purchaser of the Company or its assets under terms and conditions which would not permit the Employee to terminate his employment for Good Reason; or (ii) the Employee’s resignation for Good Reason.

2.Term.  The initial term of this Agreement shall be for a three-year period commencing on the Effective Date (the “Term”).  The Term shall be automatically extended by one additional day for each day beyond the Effective Date that the Employee remains employed by the Company until such time as the Company elects to cease such extension by giving written notice of such election to the Employee, stating the effective date of such notice.  In such event, the Agreement shall terminate on the third anniversary of the effective date of such election notice.  Notwithstanding the foregoing, this Agreement shall automatically terminate if and when the Employee terminates his employment with the Company other than in connection with a Change-in-Control or two years after the Change-in-Control Date, whichever first occurs.

3.Severance Benefits.  If at any time following a Change in Control and continuing for two years thereafter, the Company terminates the Employee without Cause, or the Employee terminates employment with the Company for Good Reason, then as compensation for services previously rendered the Employee shall be entitled to the following benefits:

a.Cash Payment.  The Employee shall be paid a cash severance payment equal to 2.9 times the greater of:

(i)the sum of the Employee’s Base Salary and Target Bonus as of the Termination of Employment, or

(ii)the sum of the Employee’s Base Salary and Target Bonus as of the Change-in-Control Date.

Payment shall be made in a single lump sum upon the effective date of Employee’s Termination of Employment. For purposes of clarification, the Employee shall not be entitled to payment of an annual bonus (or pro-rated portion thereof) pursuant to the applicable short-term incentive plan of the Company for the year in which the Employee’s Termination of Employment occurs.   Notwithstanding anything herein to the contrary, if at the time of Employee’s separation from service Employee is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder (the “Code”) and the deferral of the payment payable pursuant to this Section 3(a) is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then the payment to which

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Employee would otherwise be entitled during the first six months following his separation from service shall be deferred and accumulated (without any reduction in such payment ultimately paid to Employee) for a period of six months from the date of separation from service and paid in a lump sum on the first day of the seventh month following such separation from service (or, if earlier, the date of Employee’s death), together with interest during such period at a rate computed by adding 2.00% to the Prime Rate as published in the Money Rates section of the Wall Street Journal, or other equivalent publication if the Wall Street Journal no longer publishes such information, on the first publication date of the Wall Street Journal or equivalent publication after the date of Employee’s separation from service (provided that if more than one such Prime Rate is published on any given day, the highest of such published rates shall be used).

b.Continuation of Benefits.

(i)For a period of three years following the Termination of Employment (the “Benefit Continuation Period”), the Employee shall be treated as if Employee had continued to be an executive for all purposes under the Company’s health insurance plan and dental insurance plan; or if the Employee is prohibited from participating in such plans, the Company shall otherwise provide such benefits.  Employee shall be responsible for any employee contributions for such insurance coverage.  Following the Benefit Continuation Period, Employee shall be entitled to receive continuation coverage under Part 6 of Title I of ERISA (“COBRA Benefits”) by treating the end of this period as the applicable qualifying event (i.e., as a Termination of Employment) for purposes of ERISA Section 603(2) and with the concurrent loss of coverage occurring on the same date, to the extent allowed by applicable law.

(ii)For the Benefit Continuation Period, the Company shall maintain in force, at its expense, the Employee’s life insurance in effect under the Company’s voluntary life insurance benefit plan as of the Change-in-Control Date or as of the date of Termination of Employment, whichever coverage limits are greater. For purposes of clarification, the portion of the premiums in respect of such voluntary life insurance for which Employee and the Company are responsible, respectively, shall be the same as the portion for which the Company and Employee are responsible, respectively, immediately prior to the date of Termination of Employment or the Change-in-Control Date, as applicable.

(iii)For the Benefit Continuation Period, the Company shall provide short-term and long-term disability insurance benefits to Employee equivalent to the coverage that the Employee would have had had Employee remained employed under the disability insurance plans applicable to Employee on the date of Termination of Employment, or, at the Employee’s election, the plans applicable to Employee as of the Change-in-Control Date.  Should Employee become disabled during such period, Employee shall be entitled to receive such benefits, and for such duration, as the applicable plan provides. For purposes of clarification, the portion of the premiums in respect of such short-term and long-term disability benefits for which Employee and the Company are responsible, respectively, shall be the same as the portion for which Employee and the Company are responsible, respectively, immediately prior to the date of Termination of Employment or the Change-in-Control Date, as applicable.

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(iv)Notwithstanding anything in this Agreement to the contrary, in no event shall the provision of in-kind benefits pursuant to this Section 3 during any taxable year of Employee affect the provision of in-kind benefits pursuant to this Section 3 in any other taxable year of Employee.

c.Retirement Savings Plan.  Within fifteen (15) days after the date of Termination of Employment, the Company shall pay to Employee a cash payment in an amount, if any, necessary to compensate Employee for the Employee's unvested interests under the Company's retirement savings plan which are forfeited by Employee in connection with the Termination of Employment.

d.Plan Amendments.  The Company will use reasonable efforts to adopt such amendments to its employee benefit plans, if any, as are necessary to effectuate the provisions of this Agreement.

e.Maximum Award Limitation.  Notwithstanding anything herein to the contrary, the benefits payable under this Agreement will be reduced in order to comply with any executive severance policy the Company has adopted from time to time.  

f.General Release of Claims.  Notwithstanding anything herein to the contrary, the amounts payable pursuant to this Section 3 are subject to the condition that Employee has delivered to the Company an executed copy of an irrevocable general release of claims in a form satisfactory to the Company within the 60 day period immediately following the Employee’s separation from service (the “Release Period”).  Any payment that otherwise would be made prior to Employee’s delivery of such executed release pursuant to this Section 3 shall be paid on the first business day following the conclusion of the Release Period; provided that in-kind benefits provided pursuant to subsections (b)(i), (ii) and (iii) of this Section 3 shall continue in effect after separation from service pending the execution and delivery of such release for a period not to exceed 60 days; provided further that if such release is not executed and delivered within such 60-day period, Employee shall reimburse the Company for the full cost of coverage during such period.

4.No Mitigation Required or Setoff Permitted.  In no event shall Employee be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Employee under the terms of this Agreement, and all such amounts shall not be reduced whether or not Employee obtains other employment.  Further, the Company’s and Parent’s obligations to make any payments hereunder shall not be subject to or affected by any setoff, counterclaims or defenses which the Company or Parent may have against Employee or others.

5.Waiver of Other Severance Benefits.  The benefits payable pursuant to this Agreement are in lieu of any other severance benefits which may otherwise be payable by the Company or its affiliates to the Employee upon Termination of Employment pursuant to a severance program of the Company or its affiliates (including, without limitation, any benefits to which Employee might otherwise be entitled under any employment agreement or other

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severance or change in control or similar agreement between Employee and the Company or any of its affiliates).

6.Employment at Will.  Notwithstanding anything to the contrary contained herein, the Employee’s employment with the Company is not for any specified term and may be terminated by the Employee or by the Company at any time, for any reason, with or without cause, without any liability, except with respect to the payments provided hereunder or as required by law or any other contract or employee benefit plan.

7.Disputes.  Any dispute or controversy arising under, out of, or in connection with this Agreement shall, at the election and upon written demand of either party, be finally determined and settled by binding arbitration in the City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and procedures of the American Arbitration Association, and judgment upon the award may be entered in any court having jurisdiction thereof.  The Company shall pay all costs of the arbitration and all attorneys’ and accountants’ fees of the Employee in connection therewith, including any litigation to enforce any arbitration award.

8.Non-solicitation.  During the Term and for a period of one year thereafter (collectively, the “Non-solicitation Period”), Employee shall not directly or indirectly, individually or on behalf of any person other than the Company, aid or endeavor to solicit or induce any of the Company’s or its affiliates' employees to leave their employment with the Company or such affiliates in order to accept employment with Employee or any other person, corporation, limited liability company, partnership, sole proprietorship or other entity; provided, however, that the foregoing shall not restrict Employee or any other person from conducting general solicitations or advertisements not directed specifically at employees of the Company or its affiliates, or from employing any employee who responds to any such general solicitation or advertisement or who otherwise initiates a request for employment.  If the restrictions set forth in this section would otherwise be determined to be invalid or unenforceable by a court of competent jurisdiction, the parties intend and agree that such court shall exercise its discretion in reforming the provisions of this Agreement to the end that the Employee will be subject to a non-solicitation covenant which is reasonable under the circumstances and enforceable by the Company.  It is agreed that no adequate remedy at law exists for the parties for violation of this section and that this section may be enforced by any equitable remedy, including specific performance and injunction, without limiting the right of the Company to proceed at law to obtain such relief as may be available to it.  The running of the Non-solicitation Period shall be tolled for any period of time during which Employee is in violation of any covenant contained herein, for any reason whatsoever.

9.Successors; Binding Agreement.  This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving corporation, or upon any transfer of all or substantially all of the Company’s stock or assets.  In the event of such merger, consolidation or transfer, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or corporation to which such stock or assets of the Company shall be transferred.

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10.Notices.  Any notice or other communication hereunder shall be in writing and shall be effective upon receipt (or refusal of receipt) if delivered personally, or sent by overnight courier if signature for the receiving party is obtained, or sent by certified or registered mail, postage prepaid, to the other party at the address set forth below:

If to the Company:	Kindred Healthcare Operating, Inc. 680 South Fourth Street Louisville, Kentucky 40202 Attention:  General Counsel
If to Employee:	Jason P. Zachariah at the address on file with the Company

Either party may change its specified address by giving notice in writing to the other.

11.Indemnification.  The Company shall indemnify, defend and hold the Employee harmless from and against any liability, damages, costs and expenses (including attorneys’ fees) in connection with any claim, cause of action, investigation, litigation or proceeding involving him by reason of his having been an officer, director, employee or agent of the Company, except to the extent it is judicially determined that the Employee was guilty of gross negligence or willful misconduct in connection with the matter giving rise to the claim for indemnification.  This indemnification shall be in addition to and shall not be substituted for any other indemnification or similar agreement or arrangement which may be in effect between the Employee and the Company or may otherwise exist.  The Company also agrees to maintain adequate directors and officers liability insurance, if applicable, for the benefit of Employee for the term of this Agreement and for five years thereafter.

12.ERISA.  Many or all of the employee benefits addressed in Paragraph 3(b) and (c) exist under plans which constitute employee welfare benefit plans (“Welfare Plans”) within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  Any payments pursuant to this Agreement which could cause any of such Plans not to constitute a Welfare Plan shall be deemed instead to be made pursuant to a separate “employee pension benefit plan” within the meaning of Section 3(2) of ERISA or a “top hat” plan under Section 201(2) of ERISA as to which the applicable portions of the document constituting the Welfare Plan shall be deemed to be incorporated by reference.  None of the benefits hereunder may be assigned in any way.

13.Severability.  The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, which other provision shall remain in full force and effect.

14.Interpretation.  The headings used herein are for convenience only and do not limit or expand the contents of this Agreement.  Use of any male gender pronoun shall be deemed to include the female gender also.

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15.No Waiver.  No waiver of a breach of any provision of this Agreement shall be construed to be a waiver of any other breach of this Agreement.  No waiver of any provision of this Agreement shall be enforceable unless it is in writing and signed by the party against whom it is sought to be enforced.

16.Survival.  Any provisions of this Agreement creating obligations extending beyond the term of this Agreement shall survive the expiration or termination of this Agreement, regardless of the reason for such termination.

17.Amendments.  Any amendments to this Agreement shall be effective only if in writing and signed by the parties hereto.

18.Entire Agreement.  This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof.

19.Governing Law.  This Agreement shall be interpreted in accordance with and governed by the law of the State of Delaware.

20.Section 409A.

a.The intent of the parties is that payments and benefits under this Agreement comply with or otherwise be exempt from Section 409A of the Code and the regulations and guidance promulgated thereunder and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted either to be exempt from or in compliance therewith.

b.For purposes of Section 409A of the Code, (i) the Employee may not, directly or indirectly, designate the calendar year of any payment; (ii) no acceleration of the time and form of payment of any nonqualified deferred compensation to the Employee or any portion thereof, shall be permitted; and (iii) each payment in a series of payments hereunder shall be deemed to be a separate payment for purposes of Section 409A.

c.For purposes of Section 409A of the Code, your right to receive any installment payment pursuant to this Agreement will be treated as a right to receive a series of separate and distinct payments.

d.To the extent that any right to reimbursement of expenses or payment of any benefit in-kind under this Agreement may constitute nonqualified deferred compensation (within the meaning of Section 409A of the Code), (i) any such expense reimbursement shall be made by the Company no later than the last day of the taxable year following the taxable year in which such expense was incurred by the Employee, (ii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, and (iii) the amount of expenses eligible for reimbursement or in-kind benefits provided during any taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits to be provided in any other taxable year; provided, that the foregoing clause shall not be violated with regard to expenses

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reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect.

e.A Termination of Employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of “deferred compensation” (as such term is defined in Section 409A of the Code) upon or following Termination of Employment unless such Termination of Employment is also a “separation from service” from the Company within the meaning of Section 409A and Treasury Regulation 1.409A-1(h) and, for purposes of any such provision of this Agreement, references to a “Termination of Employment” or any similar term or phrase shall mean “separation from service.”

f.If any provision of this Agreement (or any award of compensation or benefits provided under this Agreement) would cause the Employee to incur any additional tax or interest under Section 409A of the Code, the Company shall reform such provision to comply with 409A and agrees to maintain, to the maximum extent practicable without violating 409A of the Code, the original intent and economic benefit to the Employee of the applicable provision; provided that nothing herein shall require the Company to provide the Employee with any gross-up for any tax, interest or penalty incurred by the Employee under Section 409A of the Code.  Furthermore, notwithstanding anything herein to the contrary, no payment or benefit payable under this Agreement shall be required to be paid or provided in any calendar year if the payment of such payment or benefit would constitute an impermissible acceleration under Section 409A of the Code and the transition guidance thereunder and such payment shall instead be paid as soon as practicable in the next calendar year, without interest.

g.Any reduction in payments and benefits made pursuant to the provisions of this Agreement will be determined by the Company in its sole discretion according with the following: (i) first, reductions will be made to amounts that do not constitute nonqualified deferred compensation (within the meaning of Section 409A of the Code); and (ii) second, reductions will be made to amounts that do constitute nonqualified deferred compensation based on the date that such amounts become payable, with the amount payable latest in time being reduced first.

21.Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument.

[Remainder of page is intentionally blank. Signatures follow.]

-10-

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

KINDRED HEALTHCARE OPERATING, INC.
By:	/s/ Benjamin A. Breier
	Benjamin A. Breier
	President and Chief Executive Officer

Solely for the purposes of

Sections 3, 4 and 11:

KINDRED HEALTHCARE, INC.
By:	/s/ Benjamin A. Breier
	Benjamin A. Breier
	President and Chief Executive Officer

/s/ Jason P. Zachariah

Jason P. Zachariah

-11-

EX-31

EXHIBIT 31

Certification Required By Rules 13a-14(a) and 15d-14(a)

under the Securities Exchange Act of 1934

I, Benjamin A. Breier, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kindred Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

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

Date: November 9, 2016	/s/ Benjamin A. Breier
	Benjamin A. Breier President and Chief Executive Officer

Certification Required By Rules 13a-14(a) and 15d-14(a)

under the Securities Exchange Act of 1934

I, Stephen D. Farber, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kindred Healthcare, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

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

Date: November 9, 2016	/s/ Stephen D. Farber
	Stephen D. Farber Executive Vice President, ChiefFinancial Officer

EX-32

EXHIBIT 32

Section 1350 Certifications

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Kindred Healthcare, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 9, 2016	/s/ Benjamin A. Breier
	Benjamin A. Breier
	President and Chief Executive Officer
Date: November 9, 2016	/s/ Stephen D. Farber
	Stephen D. Farber
	Executive Vice President, Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Oct. 31, 2016
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Trading Symbol	KND
Entity Registrant Name	KINDRED HEALTHCARE, INC
Entity Central Index Key	0001060009
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		85,160,436

XML

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement [Abstract]
Revenues	$ 1,793,527	$ 1,764,516	$ 5,473,568	$ 5,273,958
Salaries, wages and benefits	957,644	922,140	2,812,812	2,704,920
Supplies	95,500	96,551	294,326	288,059
Rent	98,415	95,436	296,025	282,955
Other operating expenses	217,364	207,837	649,915	617,681
General and administrative expenses (exclusive of depreciation and amortization expense included below)	310,407	307,500	998,559	1,043,986
Other income	(446)	(650)	(1,909)	(1,699)
Litigation contingency expense		31,462	2,840	130,387
Impairment charges	324,289		338,208	6,726
Restructuring charges	81,463	3,349	88,223	8,793
Depreciation and amortization	40,382	39,329	121,320	116,889
Interest expense	59,862	56,440	175,417	176,128
Investment income	(1,810)	(432)	(2,561)	(2,203)
Operating expenses	2,183,070	1,758,962	5,773,175	5,372,622
Income (loss) from continuing operations before income taxes	(389,543)	5,554	(299,607)	(98,664)
Provision for income taxes	281,752	12,523	311,470	9,183
Loss from continuing operations	(671,295)	(6,969)	(611,077)	(107,847)
Discontinued operations, net of income taxes:
Income (loss) from operations	(12)	2,269	2,422	(1,744)
Gain on divestiture of operations			179	983
Income (loss) from discontinued operations	(12)	2,269	2,601	(761)
Net loss	(671,307)	(4,700)	(608,476)	(108,608)
(Earnings) loss attributable to noncontrolling interests:
Continuing operations	(14,305)	(9,900)	(40,341)	(30,482)
Discontinued operations	(1)	1	(6)	32
(Earnings) loss attributable to noncontrolling interests	(14,306)	(9,899)	(40,347)	(30,450)
Income (loss) attributable to Kindred	(685,613)	(14,599)	(648,823)	(139,058)
Amounts attributable to Kindred stockholders:
Loss from continuing operations	(685,600)	(16,869)	(651,418)	(138,329)
Income (loss) from discontinued operations	(13)	2,270	2,595	(729)
Income (loss) attributable to Kindred	$ (685,613)	$ (14,599)	$ (648,823)	$ (139,058)
Basic:
Loss from continuing operations	$ (7.89)	$ (0.20)	$ (7.51)	$ (1.65)
Discontinued operations:
Income (loss) from operations		0.03	0.03	(0.02)
Gain on divestiture of operations				0.01
Income (loss) from discontinued operations		0.03	0.03	(0.01)
Net loss	(7.89)	(0.17)	(7.48)	(1.66)
Diluted:
Loss from continuing operations	(7.89)	(0.20)	(7.51)	(1.65)
Discontinued operations:
Income (loss) from operations		0.03	0.03	(0.02)
Gain on divestiture of operations				0.01
Income (loss) from discontinued operations		0.03	0.03	(0.01)
Net loss	$ (7.89)	$ (0.17)	$ (7.48)	$ (1.66)
Shares used in computing loss per common share:
Basic	86,869	86,184	86,766	83,960
Diluted	86,869	86,184	86,766	83,960
Cash dividends declared and paid per common share	$ 0.12	$ 0.12	$ 0.36	$ 0.36

XML

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
Net loss	$ (671,307)	$ (4,700)	$ (608,476)	$ (108,608)
Available-for-sale securities (Note 12):
Change in unrealized investment gains (losses)	278	(978)	1,461	(841)
Reclassification of gains realized in net loss	(1,333)		(1,202)
Net change	(1,055)	(978)	259	(841)
Interest rate swaps (Note 1):
Change in unrealized gain (losses)	2,022	(909)	(3,761)	(2,173)
Reclassification of ineffectiveness realized in net loss		59		88
Reclassification of losses realized in net loss, net of payments	18	12	411
Net change	2,040	(838)	(3,350)	(2,085)
Income tax expense (benefit) related to items of other comprehensive income (loss)	(427)	699	1,389	1,149
Other comprehensive income (loss)	558	(1,117)	(1,702)	(1,777)
Comprehensive loss	(670,749)	(5,817)	(610,178)	(110,385)
Earnings attributable to noncontrolling interests	(14,306)	(9,899)	(40,347)	(30,450)
Comprehensive loss attributable to Kindred	$ (685,055)	$ (15,716)	$ (650,525)	$ (140,835)

XML

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) - USD ($) $ in Thousands		Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents		$ 139,430	$ 98,758
Insurance subsidiary investments		105,346	106,638
Accounts receivable less allowance for loss of $67,761 ─ September 30, 2016 and $62,896 ─ December 31, 2015		1,266,545	1,194,868
Inventories		25,262	27,791
Income taxes		12,416	11,790
Other		94,876	61,054
Current assets		1,643,875	1,500,899
Property and equipment		2,070,421	2,162,398
Accumulated depreciation		(1,192,870)	(1,190,402)
Property and equipment, net		877,551	971,996
Goodwill		2,422,473	2,669,810
Intangible assets less accumulated amortization of $96,854 ─ September 30, 2016 and $94,221 ─ December 31, 2015		804,602	755,655
Insurance subsidiary investments		195,517	204,498
Deferred tax assets			104,130
Acquisition deposit			18,489
Other		283,322	242,782
Total assets	[1]	6,227,340	6,468,259
Current liabilities:
Accounts payable		203,426	187,061
Salaries, wages and other compensation		390,743	404,925
Due to third party payors		57,945	36,251
Professional liability risks		61,036	64,099
Other accrued liabilities		280,305	394,246
Long-term debt due within one year		27,889	24,630
Current liabilities		1,021,344	1,111,212
Long-term debt		3,316,174	3,086,348
Professional liability risks		283,048	263,273
Deferred tax liabilities		200,334
Deferred credits and other liabilities		354,246	301,379
Commitments and contingencies (Note 14)
Stockholder's equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 85,187 shares ─ September 30, 2016 and 83,792 shares ─ December 31, 2015		21,297	20,948
Capital in excess of par value		1,717,165	1,737,747
Accumulated other comprehensive loss		(4,334)	(2,632)
Accumulated deficit		(905,137)	(256,209)
Stockholders' equity		828,991	1,499,854
Noncontrolling interests		223,203	206,193
Total equity		1,052,194	1,706,047
Total liabilities and equity	[1]	$ 6,227,340	$ 6,468,259

[1] The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements

XML

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Statement Of Financial Position [Abstract]
Allowance for loss	$ 67,761	$ 62,896
Accumulated amortization	$ 96,854	$ 94,221
Common stock, par value	$ 0.25	$ 0.25
Common stock, shares authorized	175,000,000	175,000,000
Common stock, shares issued	85,187,000	83,792,000
Total assets of variable interest entities	$ 405,600	$ 389,000
Total liabilities of variable interest entities	$ 48,900	$ 39,700

XML

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Cash flows from operating activities:
Net loss	$ (671,307)	$ (4,700)	$ (608,476)	$ (108,608)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense	34,914	31,867	103,306	95,325
Amortization of intangible assets	5,468	7,728	18,251	22,196
Amortization of stock-based compensation costs	3,015	3,194	13,058	15,764
Amortization of deferred financing costs	3,987	3,554	11,262	10,155
Payment of capitalized lender fees related to debt issuance	(42)		(7,375)	(28,012)
Provision for doubtful accounts	10,009	11,014	30,955	29,817
Deferred income taxes	(84,173)	3,556	(54,875)	(894)
Impairment charges	324,289		338,208	6,726
Gain on divestiture of discontinued operations			(179)	(983)
Other	6,303	3,485	7,262	10,457
Change in operating assets and liabilities:
Accounts receivable	(42,832)	25,990	(143,953)	(13,399)
Inventories and other assets	11,871	8,767	(3,522)	44,181
Accounts payable	11,995	(353)	24,451	(12,788)
Income taxes	364,925	37,491	365,705	33,646
Due to third party payors	24,809	15,008	20,317	(3,965)
Other accrued liabilities	32,851	(14,311)	(76,347)	(6,551)
Net cash provided by operating activities	36,082	132,290	38,048	93,067
Cash flows from investing activities:
Routine capital expenditures	(21,873)	(35,422)	(68,703)	(80,691)
Development capital expenditures	(8,386)	(5,760)	(27,112)	(12,066)
Acquisitions, net of cash acquired	(49,329)	(2,002)	(77,040)	(663,757)
Acquisition deposits			18,489	195,000
Sale of assets	3,739	3,884	4,962	7,061
Proceeds from senior unsecured notes offering held in escrow				1,350,000
Interest in escrow for senior unsecured notes				23,438
Purchase of insurance subsidiary investments	(22,427)	(16,357)	(75,422)	(59,186)
Sale of insurance subsidiary investments	31,875	15,987	78,478	50,780
Net change in insurance subsidiary cash and cash equivalents	(14,680)	(2,633)	8,479	(8,396)
Proceeds from note receivable		25,000		25,000
Net change in other investments	51	176	(33,347)	375
Other	(150)	1,383	(1,277)	590
Net cash provided by (used in) investing activities	(81,180)	(15,744)	(172,493)	828,148
Cash flows from financing activities:
Proceeds from borrowings under revolving credit	489,200	259,700	1,267,200	1,414,850
Repayment of borrowings under revolving credit	(388,100)	(349,700)	(1,215,800)	(1,319,850)
Proceeds from issuance of term loan, net of discount			198,100	199,000
Proceeds from other long-term debt			750
Repayment of Gentiva debt				(1,177,363)
Repayment of term loan	(3,508)	(3,003)	(10,019)	(9,008)
Repayment of other long-term debt	(276)	(500)	(826)	(1,400)
Payment of deferred financing costs	(50)	(301)	(342)	(3,284)
Issuance of common stock in connection with employee benefit plans		329		534
Payment of costs associated with issuance of common stock and tangible equity units				(915)
Payment of dividend for mandatory redeemable preferred stock	(2,904)	(2,703)	(8,558)	(8,135)
Dividends paid	(10,224)	(10,065)	(30,517)	(30,067)
Contributions made by noncontrolling interests	4,993	1,492	11,261	1,492
Distributions to noncontrolling interests	(4,694)	(10,685)	(35,240)	(31,823)
Purchase of noncontrolling interests			(1,000)
Other	35	245	108	1,457
Net cash provided by (used in) financing activities	84,472	(115,191)	175,117	(964,512)
Change in cash and cash equivalents	39,374	1,355	40,672	(43,297)
Cash and cash equivalents at beginning of period	100,056	119,536	98,758	164,188
Cash and cash equivalents at end of period	139,430	120,891	139,430	120,891
Supplemental information:
Interest payments	73,755	81,474	181,227	147,924
Income tax payments (refunds)	$ 1,075	(27,414)	2,184	(26,275)
Issuance of common stock in Gentiva Merger (see Note 2)		$ 15		$ 177,456
Non-cash contribution made by noncontrolling interest			$ 2,800

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation

NOTE 1 – BASIS OF PRESENTATION

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, a home health, hospice and community care business, inpatient rehabilitation hospitals (“IRFs”), a contract rehabilitation services business, nursing centers, and assisted living facilities across the United States (collectively, the “Company” or “Kindred”). At September 30, 2016, the Company’s hospital division operated 94 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 22 states. The Company’s Kindred at Home division primarily provided home health, hospice, and community care services from 647 sites of service in 40 states. The Company’s Kindred Rehabilitation Services division operated 19 IRFs and 104 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs), and provided rehabilitation services primarily in hospitals and long-term care settings in 46 states. The Company’s nursing center division operated 91 nursing centers and seven assisted living facilities in 19 states.

Gentiva merger

On October 9, 2014, the Company entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for the Company’s acquisition of Gentiva (the “Gentiva Merger”). On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

Discontinued operations

The Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains associated with these transactions were classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Assets held for sale at September 30, 2016 have been measured at the lower of carrying value or estimated fair value less costs of disposal. See Note 5 for a summary of discontinued operations and assets held for sale.

Recently issued accounting requirements

In October 2016, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which alters how an entity needs to consider indirect interests in a variable interest entity (“VIE”) held through an entity under common control. The amendment eliminates the distinction between the full attribution and proportionate approach, leaving the entity to only consider the latter when evaluating a VIE held through common control. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In August 2016, the FASB issued authoritative guidance to eliminate diversity in practice related to the cash flow statement classification of eight specific cash flow issues, which include debt prepayment or extinguishment costs, maturity of a zero coupon bond, settlement of contingent consideration liabilities after a business combination, proceeds from insurance settlements and distribution from certain equity method investees. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on its consolidated statement of cash flows.

In June 2016, the FASB issued authoritative guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for annual periods beginning after December 15, 2019 and early adoption is permitted beginning after December 15, 2018. The Company is still evaluating its transition approach and the impact of adoption on its business, financial position, results of operations, and liquidity.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In May 2016, the FASB finalized its amendments to the guidance in the new revenue standard on contracts with customers and specifically, collectability, non-cash consideration, presentation of sales taxes, and completed contracts. The amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for interim and annual periods beginning on or after December 15, 2017 with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that requires the tax effects related to share-based payments to be recorded through the income statement at settlement. Under the new guidance, tax benefits in excess of or less than the tax effect of compensation expenses will no longer be recorded in equity for purpose of simplification, which is expected to reduce administrative complexities but could increase the volatility of income tax expense. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB finalized its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. Under the new amendments, the FASB confirmed that a principal in an arrangement controls a good or service before it is transferred to a customer but revised the structure of indicators when an entity is the principal. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for annual and interim periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Under the new guidance, the equity method of accounting should be applied prospectively from the date significant influence is obtained. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB issued authoritative guidance clarifying that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. Under the new guidance, an entity will still need to evaluate whether it is possible that the counterparty will perform under the contract as part of the assessment for hedge accounting. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and expects no material impact on liquidity.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In August 2014, the FASB issued authoritative guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances. The guidance is effective for annual and interim periods ending after December 15, 2016. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB finalized a one-year deferral of the new revenue standard with an updated effective date for interim and annual periods beginning on or after December 15, 2017. Entities are not permitted to adopt the standard earlier than the original effective date, which was on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the nine months ended September 30, 2016 and 2015 (in thousands):

For the nine months ended September 30, 2016	Amounts attributable to Kindred stockholders			Noncontrolling interests			Total equity
Balance at December 31, 2015	$	1,499,854		$	206,193		$	1,706,047
Comprehensive income (loss):
Net income (loss)		(648,823	)		40,347			(608,476	)
Other comprehensive loss		(1,702	)		-			(1,702	)
		(650,525	)		40,347			(610,178	)
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(3,079	)		-			(3,079	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		434			-			434
Stock-based compensation amortization		13,058			-			13,058
Dividends paid		(30,517	)		-			(30,517	)
Contributions made by noncontrolling interests		-			14,061			14,061
Distributions to noncontrolling interests		-			(35,240	)		(35,240	)
Purchase of noncontrolling interests		(234	)		(2,158	)		(2,392	)
Balance at September 30, 2016	$	828,991		$	223,203		$	1,052,194
For the nine months ended September 30, 2015
Balance at December 31, 2014	$	1,441,867		$	44,105		$	1,485,972
Comprehensive income (loss):
Net income (loss)		(139,058	)		30,450			(108,608	)
Other comprehensive loss		(1,777	)		-			(1,777	)
		(140,835	)		30,450			(110,385	)
Issuance of common stock in connection with employee benefit plans		534			-			534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(10,055	)		-			(10,055	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		1,806			-			1,806
Stock-based compensation amortization		15,764			-			15,764
Dividends paid		(30,067	)		-			(30,067	)
Acquired noncontrolling interests		-			149,817			149,817
Contributions made by noncontrolling interests		-			1,492			1,492
Distributions to noncontrolling interests		-			(31,823	)		(31,823	)
Issuance of common stock in Gentiva Merger		177,456			-			177,456
Balance at September 30, 2015	$	1,456,470		$	194,041		$	1,650,511

NOTE 1 – BASIS OF PRESENTATION (Continued)

Derivative financial instruments

In March 2014, the Company entered into an interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under its Third Amended and Restated Term Loan Facility (as defined below). On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated, or otherwise modified. The interest rate swap had an effective date of April 9, 2014, will expire on April 9, 2018, and continues to apply to the Term Loan Facility (as defined below). The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

In January 2016, the Company entered into three interest rate swap agreements to hedge its floating interest rate on an aggregate of $325 million of debt outstanding under its Fourth Amended and Restated Term Loan Facility (as defined below). The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. The Company is required to make payments based upon a fixed interest rate of 1.862% and 1.855% calculated on the notional amount of $175 million and $150 million, respectively. In exchange, the Company will receive interest on $325 million at a variable interest rate that is based upon the three-month LIBOR rate, subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders’ equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months and nine months ended September 30, 2016 and 2015, the ineffectiveness related to the interest rate swaps was immaterial.

The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $8.2 million and $4.5 million at September 30, 2016 and December 31, 2015, respectively. See Note 15.

As used herein, (1) the “Term Loan Facility” refers to the Fifth Amended and Restated Term Loan Facility dated as of June 14, 2016, (2) the “Fourth Amended and Restated Term Loan Facility” refers to the Third Amended and Restated Term Loan Facility, as amended and restated as of November 25, 2014, and as further amended as of March 10, 2015, and (3) the “Third Amended and Restated Term Loan Facility” refers to a previous $225 million senior secured term loan facility dated as of June 1, 2011, as amended as of October 4, 2012, and as further amended and restated as of May 30, 2013, August 21, 2013, and April 9, 2014.

Variable interest entities

The Company follows the provisions of the authoritative guidance for determining whether an entity is a VIE. In order to determine if the Company is a primary beneficiary of a VIE for financial reporting purposes, it must consider whether it has the power to direct activities of the VIE that most significantly impact the performance of the VIE and whether the Company has the obligation to absorb losses or the right to receive returns that would be significant to the VIE. The Company consolidates a VIE when it is the primary beneficiary.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Variable interest entities (Continued)

In January 2015, the Company completed the acquisition of Centerre Healthcare Corporation (“Centerre”), which operated 11 IRFs. The Company opened two IRFs during 2015 and one additional IRF during the nine months ended September 30, 2016. Each entity operating an IRF is subject to a partnership and a management services agreement with the Company. Under United States generally accepted accounting principles (“GAAP”), the Company determined that all of the entities acquired or opened qualify as VIEs and that the Company is the primary beneficiary in all but one arrangement. The Company holds an equity interest and acts as manager in each of the entities. Through the management services agreement, the Company is delegated necessary responsibilities to provide management services, administrative services and direction of the day-to-day operations. Based on the Company’s assessment of the most significant activities of the IRFs, the manager has the ability to direct the majority of those activities in 13 of the entities.

The analysis upon which the consolidation determination rests is complex, involves uncertainties, and requires significant judgment on various matters, some of which could be subject to different interpretations.

The carrying amounts and classifications of the assets and liabilities of the consolidated VIEs are as follows (in thousands):

	September 30,		December 31,
	2016		2015
Assets:
Current assets:
Cash and cash equivalents	$	50,709	$	36,798
Accounts receivable, net		34,521		36,085
Inventories		1,718		1,576
Other		3,617		3,001
		90,565		77,460
Property and equipment, net		17,561		17,100
Goodwill		275,375		271,717
Intangible assets, net		22,048		22,675
Other		34		54
Total assets	$	405,583	$	389,006
Liabilities:
Current liabilities:
Accounts payable	$	33,657	$	26,291
Salaries, wages and other compensation		2,433		3,261
Other accrued liabilities		3,721		2,784
Long-term debt due within one year		1,703		1,106
		41,514		33,442
Long-term debt		601		1,274
Deferred credits and other liabilities		6,830		4,971
Total liabilities	$	48,945	$	39,687

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for quarterly reports on Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2015 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Other information (Continued)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair statement of interim results and, except as otherwise disclosed, all such adjustments are of a normal and recurring nature.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.

Correction of December 31, 2015 balance sheet

During the second quarter ended June 30, 2016, the Company corrected the balance sheet presentation of capitalized lender fees related to debt issuance. These amounts were previously presented as other long-term assets in the Company’s consolidated balance sheet, and the Company has determined that they should have been presented as a contra account to long-term debt similar to a debt discount.

The Company concluded that the correction was not material to any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with Accounting Standards Codification 250, Presentation of Financial Statements, the Company has corrected all prior periods presented. Periods not presented herein will be corrected, as applicable, in future filings. The correction had no impact on total equity, results of operations, or cash flows.

The impact of this correction on the Company’s consolidated balance sheet as of December 31, 2015 was as follows:

	As previously reported		Adjustment			As revised
Other long-term assets	$	289,746	$	(46,964	)	$	242,782
Total assets		6,515,223		(46,964	)		6,468,259
Long-term debt		3,133,312		(46,964	)		3,086,348
Total liabilities and equity		6,515,223		(46,964	)		6,468,259

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Gentiva Merger

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Gentiva Merger

NOTE 2 – GENTIVA MERGER

On October 9, 2014, the Company entered into the Gentiva Merger Agreement, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

At the effective time of the Gentiva Merger, each share of common stock, par value $0.10 per share, of Gentiva (“Gentiva Common Stock”) issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by Kindred, Gentiva and any wholly owned subsidiaries (which were cancelled) and shares owned by stockholders who properly exercised and perfected a demand for appraisal rights under Delaware law), including each deferred share unit, were converted into the right to receive (1) $14.50 in cash (the “Cash Consideration”), without interest, and (2) 0.257 of a validly issued, fully paid and nonassessable share of Kindred common stock, par value $0.25 per share (the “Stock Consideration”). The purchase price totaled $722.3 million and was comprised of $544.8 million of Cash Consideration and $177.5 million of Stock Consideration. The Company also assumed $1.2 billion of long-term debt, which was paid off upon consummation of the Gentiva Merger.

NOTE 2 – GENTIVA MERGER (Continued)

The following transactions (collectively, the “Financing Transactions”) occurred in connection with the Gentiva Merger:

• the Company issued $1.35 billion aggregate principal amount of senior notes;

• the Company issued approximately 15 million shares of its common stock through two common stock offerings and issued 9.7 million shares of its common stock as the Stock Consideration;

• the Company issued 172,500 tangible equity units (the “Units”); and

• the Company amended its credit facilities.

The Company used the net proceeds from the Financing Transactions to fund the Cash Consideration for the Gentiva Merger, repay Gentiva’s existing debt, and pay related transaction fees and expenses.

Operating results in the third quarter of 2016 included transaction and integration costs totaling $1.2 million and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2016 included transaction and integration costs totaling $3.8 million, retention and severance costs totaling $0.7 million, and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results in the third quarter of 2015 included transaction and integration costs totaling $1.1 million, and retention and severance costs totaling $1.9 million related to the Gentiva Merger. Operating results for the nine months ended September 30, 2015 included transaction and integration costs totaling $35.2 million, retention and severance costs totaling $58.8 million, a lease termination charge of $0.8 million and financing costs totaling $23.4 million related to the Gentiva Merger. Transaction, integration, retention and severance costs were recorded as general and administrative expenses, the lease termination charge was recorded as rent expense and financing costs were recorded as general and administrative expenses ($6.0 million) and as interest expense ($17.4 million).

A note receivable totaling $25 million was acquired in the Gentiva Merger. The note receivable was collected in full during the third quarter of 2015 and the Company received all of the cash proceeds.

Purchase price allocation

The Gentiva Merger purchase price of $722.3 million was allocated based upon the estimated fair value of the tangible and intangible assets, and goodwill.

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The following is the Gentiva Merger purchase price allocation (in thousands):

Cash and cash equivalents	$	64,695
Accounts receivable		265,034
Other current assets		123,428
Property and equipment		46,732
Identifiable intangible assets:
Certificates of need (indefinite life)		256,921
Medicare certifications (indefinite life)		94,500
Trade names (indefinite life)		22,200
Trade name		15,600
Non-compete agreements		1,820
Leasehold interests		1,439
Total identifiable intangible assets		392,480
Deferred tax assets		37,429
Other assets		74,407
Current portion of long-term debt		(53,075	)
Accounts payable and other current liabilities		(319,004	)
Long-term debt, less current portion		(1,124,288	)
Deferred tax liabilities		(47,748	)
Other liabilities		(126,088	)
Noncontrolling interests		(3,992	)
Total identifiable net assets		(669,990	)
Goodwill		1,392,271
Net assets	$	722,281

The fair value allocation was measured primarily using a discounted cash flows methodology, which is considered a Level 3 input (as described in Note 15).

The value of gross contractual accounts receivable before determining uncollectable amounts totaled $278.9 million. Accounts estimated to be uncollectable totaled $13.9 million.

The weighted average life of the definite lived intangible assets consisting primarily of a trade name is three years.

The aggregate goodwill arising from the Gentiva Merger is based upon the expected future cash flows of the Gentiva operations, which reflect both growth expectations and cost savings from combining the operations of the Company and Gentiva. Goodwill is not amortized and is not deductible for income tax purposes. Goodwill was assigned to the Company’s home health reporting unit ($612.2 million), hospice reporting unit ($614.0 million) and community care reporting unit ($166.1 million).

NOTE 2 – GENTIVA MERGER (Continued)

Purchase price allocation (Continued)

The unaudited pro forma net effect of the Gentiva Merger assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):

	Three months ended			Nine months ended
	September 30,			September 30,
	2015			2015
Revenues	$	1,764,516		$	5,435,657
Loss from continuing operations attributable to Kindred		(14,501	)		(56,221	)
Loss attributable to Kindred		(12,231	)		(56,950	)
Loss per common share:
Basic:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)
Diluted:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)

The unaudited pro forma financial data have been derived by combining the historical financial results of the Company and the operations acquired in the Gentiva Merger for the periods presented. The unaudited pro forma financial data presented excludes transaction, integration, retention and severance costs, a lease termination charge, and financing costs totaling $135.2 million incurred by both the Company and Gentiva in connection with the Gentiva Merger. These costs have been eliminated from the results of operations for 2015 and have been reflected as expenses incurred as of January 1, 2014 for purposes of the pro forma financial presentation. Revenues and earnings before interest, income taxes, transaction, integration, retention, and severance costs associated with Gentiva aggregated $559.7 million and $77.6 million, respectively, in the third quarter of 2016 and $525.0 million and $67.5 million, respectively, in the third quarter of 2015. Revenues and earnings before interest, income taxes, transaction, integration, retention, and severance costs associated with Gentiva aggregated $1.6 billion and $211.8 million, respectively, for the nine months ended September 30, 2016 and $1.4 billion and $168.7 million, respectively, for 2015 since the date of the Gentiva Merger.

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Other Acquisitions

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Other Acquisitions

NOTE 3 – OTHER ACQUISITIONS

The following is a summary of the Company’s other acquisition activities. The operating results of the acquired businesses have been included in the accompanying unaudited condensed consolidated financial statements of the Company from the respective acquisition dates. The purchase price of acquired businesses resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses. Each of these acquisitions was financed through operating cash flows and borrowings under the Company’s ABL Facility (as defined below in Note 13). Unaudited pro forma financial data related to the acquired businesses have not been presented because the acquisitions are not material individually to the Company’s consolidated financial statements.

During the third quarter of 2016, the Company acquired home health operations from the Arkansas Department of Health, which includes licenses to provide home health, hospice and personal care services throughout the state of Arkansas, for approximately $39 million. In addition, the Company also acquired two certificates of need, one for home health and one for hospice, and an IRF Medicare license for $4.3 million, in aggregate, in the third quarter of 2016.

In June 2016, the Company acquired five LTAC hospitals (233 licensed beds) operated by Select Medical Holdings Corporation (“Select”) and sold three of its LTAC hospitals (255 licensed beds) to Select. In the third quarter of 2016, the Company paid Select $6 million in lieu of selling another LTAC hospital to Select. In connection with the facility swap with Select, the Company recorded a gain of $0.9 million ($0.5 million net of income taxes) during the nine months ended September 30, 2016.

In addition, during the nine months ended September 30, 2016, the Company acquired four home health and hospice businesses for $26.3 million in cash. The Company also acquired a hospice business in exchange for $9.0 million of outstanding accounts receivable owed to the Company.

NOTE 3 – OTHER ACQUISITIONS (Continued)

On January 1, 2015, the Company completed the acquisition of Centerre for a purchase price of approximately $195 million in cash (the “Centerre Acquisition”). Centerre operated 11 IRFs with 614 beds through partnerships.

During the third quarter of 2015, the Company acquired a home health business for $2.0 million.

In addition, during the nine months ended September 30, 2015, the Company acquired two home-based primary care practices for $12.1 million.

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Impairment Charges

9 Months Ended

Sep. 30, 2016

Asset Impairment Charges [Abstract]

Impairment Charges

NOTE 4 – IMPAIRMENT CHARGES

On October 1, 2016, the Company completed the sale of 12 LTAC hospitals (the “Hospitals”) to a group of entities operating under the name “Curahealth”, which are affiliates of a private investment fund sponsored by Nautic Partners, LLC (the “Curahealth Disposal”). In connection with (1) the Curahealth Disposal, (2) the closure of three LTAC hospitals in the third quarter of 2016, (3) a reduction in revenues associated with revenue rate reductions announced by the Center of Medicare and Medicaid Services (“CMS”) on August 2, 2016, (4) continued increases in labor costs during 2016, and (5) a refinement of the impact of LTAC patient criteria that became effective for the majority of the Company’s LTAC hospitals on September 1 (collectively, the “Hospital Division Triggering Event”), the Company was required to assess the recoverability of the hospital division reporting unit goodwill in the third quarter of 2016.

The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. To determine the fair value of the hospital division reporting unit, the Company used a combination of an income approach and a market approach to calculate the fair value of the reporting unit. The discounted cash flow that served as the primary basis for the income approach was based upon the hospital division’s financial forecast of revenue, gross profit margins, operating costs and cash flows. As a result of the Hospital Division Triggering Event, the Company concluded that the carrying value of the hospital division reporting unit exceeded its estimated fair value. The second step of the test was then performed to measure the impairment loss, a process which compares the implied fair value of goodwill to the implied fair value for the reporting unit. The Company determined that a goodwill impairment charge aggregating $261.1 million was necessary for the three months ended September 30, 2016. The Company also assessed the recoverability of the hospital division intangible assets and property and equipment and concluded a property and equipment impairment charge of $3.2 million was necessary. The fair value of the assets was measured using Level 3 inputs such as operating cash flows, market data and replacement cost factoring in depreciation, economic obsolescence and inflation trends. The impairment charges did not impact the Company’s cash flows or liquidity.

During the three months ended September 30, 2016, the Hospitals met assets held for sale criteria and were subsequently sold to Curahealth on October 1, 2016. The Company recorded impairment charges in connection with the sale aggregating $33.0 million, of which $19.7 million was related to property and equipment, and $13.3 million was related to goodwill and other intangible assets. These charges reflect the amounts by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets was measured using a Level 3 input of the pending offer. In addition, in the first quarter of 2016, the Company also recorded a property and equipment impairment charge of $7.8 million under the held and used accounting model related to the planned Curahealth Disposal. The fair value of property and equipment in the first quarter of 2016 was measured using Level 3 inputs, primarily replacement costs.

During 2016, the nursing center division has experienced a decline in financial performance as compared to projected results and in the third quarter of 2016, the Company determined it was more likely than not that it would dispose of its skilled nursing facility business. As a result, the Company tested the recoverability of its nursing center division intangible assets and property and equipment under the held and used accounting model. No goodwill existed on the nursing centers reporting unit’s balance sheet at September 30, 2016. The Company determined that a property and equipment impairment charge aggregating $21.7 million was necessary for the three months ended September 30, 2016. The fair value of the assets was measured using Level 3 inputs, such as operating cash flows and replacement costs.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the planned divestiture and pending offers for a nursing center held for sale and determined its property and equipment was impaired. As a result, the Company recorded an impairment charge of $5.3 million. The fair value of the assets was measured based upon pending offers, a Level 3 input. The impairment charge did not impact the Company’s cash flows or liquidity.

NOTE 4 – IMPAIRMENT CHARGES (Continued)

During the nine months ended September 30, 2016, the Company also recorded an impairment charge of $3.5 million related to certificates of need for two hospitals as part of the annual indefinite-lived intangible assets impairment review at May 1. This charge reflects the amount by which the carrying value of the certificates of need exceeded its estimated fair value. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

During the nine months ended September 30, 2016, the Company recorded an asset impairment charge of $2.6 million related to the sale of a hospital division medical office building. This charge reflects the amount by which the carrying value of the property exceeded its estimated fair value. The fair value of the property was measured using the pending offer, a Level 3 input.

During the nine months ended September 30, 2015, the Company recorded an asset impairment charge of $6.7 million related to previously acquired home health and hospice trade names after the decision in the first quarter of 2015 to rebrand to the Kindred at Home trade name. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

In assessing the carrying values of long-lived assets, the Company estimates future cash flows at the lowest level for which there are independent, identifiable cash flows. For this purpose, these cash flows are aggregated based upon the contractual agreements underlying the operation of the facility or group of facilities. Generally, an individual hospital or nursing center is considered the lowest level for which there are independent, identifiable cash flows. However, to the extent that groups of facilities are leased under a master lease agreement in which the operations of a facility and compliance with the lease terms are interdependent upon other facilities in the agreement (including the Company’s ability to renew the lease or divest a particular property), the Company defines the group of facilities under a master lease agreement, or a renewal bundle in a master lease, as the lowest level for which there are independent, identifiable cash flows. Accordingly, the estimated cash flows of all facilities within a master lease agreement, or a renewal bundle in a master lease, are aggregated for purposes of evaluating the carrying values of long-lived assets.

All of the previously mentioned charges are included in the impairment charges line on the statement of operations for all periods.

The Company determined that there were no other goodwill or other intangible asset impairments as of September 30, 2016. However, adverse changes in the operating environment and related key assumptions used to determine the fair value of the hospital reporting unit and indefinite-lived intangible assets may result in future impairment charges for a portion or all of these assets. Specifically, if the hospital division experiences adverse deviation from revenue or mitigation assumptions associated with LTAC patient criteria or if recent increases in labor costs materially exceed the Company’s projections in the hospital division or the Company’s other reporting units or business segments, an impairment charge of a portion or all of these assets may be required. An impairment charge could have a material adverse effect on the Company’s business, financial position and results of operations, but would not be expected to have an impact on the Company’s cash flows or liquidity.

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Discontinued Operations

9 Months Ended

Sep. 30, 2016

Discontinued Operations And Disposal Groups [Abstract]

Discontinued Operations

NOTE 5 – DISCONTINUED OPERATIONS

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestitures of unprofitable businesses discussed in Note 1 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the gains or losses associated with these transactions have been classified as discontinued operations, net of income taxes, in the accompanying unaudited condensed consolidated statement of operations based upon the authoritative guidance which was in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. As of September 30, 2016, the Company has sold all facilities held for sale as discontinued operations.

On December 27, 2014, the Company entered into an agreement with Ventas, Inc. (“Ventas”) to transition the operations under the leases for nine non-strategic nursing centers (the “2014 Expiring Facilities”). Each lease terminated when the operation of such nursing center was transferred to a new operator. At September 30, 2016, the Company had transferred the operations for all of the 2014 Expiring Facilities to new operators. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale, and the Company reflected the operating results as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all historical periods. Under the terms of the agreement to transition the operations of the 2014 Expiring Facilities, the Company incurred a $40 million termination fee in exchange for the early termination of the leases, which was paid to Ventas in January 2015.

NOTE 5 – DISCONTINUED OPERATIONS (Continued)

A summary of discontinued operations follows (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues	$	756		$	12,935		$	5,921		$	36,934
Salaries, wages and benefits		2			5,306			1,781			17,877
Supplies		-			595			133			1,995
Rent		469			1,951			1,690			6,608
Other operating expenses		29			2,001			567			7,008
General and administrative expenses (income)		271			(920	)		(2,496	)		5,699
Depreciation		-			266			237			632
Interest expense		5			2			16			3
Investment income		-			(7	)		(1	)		(12	)
		776			9,194			1,927			39,810
Income (loss) from operations before income taxes		(20	)		3,741			3,994			(2,876	)
Provision (benefit) for income taxes		(8	)		1,472			1,572			(1,132	)
Income (loss) from operations		(12	)		2,269			2,422			(1,744	)
Gain (loss) on divestiture of operations		-			-			179			983
Income (loss) from discontinued operations		(12	)		2,269			2,601			(761	)
(Earnings) loss attributable to noncontrolling interests		(1	)		1			(6	)		32
Income (loss) attributable to Kindred	$	(13	)	$	2,270		$	2,595		$	(729	)

The following table sets forth certain discontinued operating data by business segment (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016		2015
Revenues:
Hospital division	$	511		$	158		$	1,393	$	1,747
Nursing center division		245			12,777			4,528		35,187
	$	756		$	12,935		$	5,921	$	36,934
Segment EBITDAR:
Hospital division	$	580		$	(14	)	$	1,476	$	408
Nursing center division		(126	)		5,967			4,460		3,947
	$	454		$	5,953		$	5,936	$	4,355
Rent:
Hospital division	$	468		$	477		$	1,395	$	1,514
Nursing center division		1			1,474			295		5,094
	$	469		$	1,951		$	1,690	$	6,608
Depreciation:
Hospital division	$	-		$	-		$	-	$	-
Nursing center division		-			266			237		632
	$	-		$	266		$	237	$	632

NOTE 5 – DISCONTINUED OPERATIONS (Continued)

Assets held for sale at September 30, 2016 relate to 12 hospitals and one nursing center. A summary of the net assets held for sale follows (in thousands):

	September 30,			December 31,
	2016			2015
Current assets	$	34,207		$	-
Long-term assets:
Property and equipment, net		4,499			571
Other		-			42
		4,499			613
Current liabilities		(13,182	)		-
	$	25,524		$	613

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Restructuring Charges

9 Months Ended

Sep. 30, 2016

Restructuring And Related Activities [Abstract]

Restructuring Charges

NOTE 6 – RESTRUCTURING CHARGES

The Company has initiated various restructuring activities whereby it has incurred costs associated with reorganizing its operations, including the divestiture, swap, closure and consolidation of facilities and branches, reduced headcount and realigned operations in order to improve cost efficiencies in response to changes in the healthcare industry and to partially mitigate reductions in reimbursement rates from third party payors. The costs associated with these activities are reported as restructuring charges in the statement of operations and would have been recorded as general and administrative expense or rent expense if not classified as restructuring charges.

NOTE 6 – RESTRUCTURING CHARGES (Continued)

The following table sets forth the restructuring charges incurred by business segment (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Hospital division	$	78,476	$	332	$	78,743	$	897
Kindred at Home:
Home health		1,240		2,597		1,976		4,853
Hospice		541		420		1,203		2,691
		1,781		3,017		3,179		7,544
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		128		-		128		-
RehabCare		586		-		586		-
		714		-		714		-
Nursing center division		-		-		4,010		352
Support center		492		-		1,577		-
	$	81,463	$	3,349	$	88,223	$	8,793

Restructuring Activities:

LTAC Portfolio Repositioning

During the first quarter of 2016, the Company approved an LTAC portfolio repositioning plan that incorporates the divestiture, swap or closure of certain LTAC hospitals as part of its mitigation strategies to prepare for new patient criteria for LTAC hospitals under the Pathway for SGR Reform Act of 2013 (the “LTAC Legislation”). The activities related to the LTAC portfolio repositioning plan are expected to be substantially complete by the end of 2016.

During the nine months ended September 30, 2016, the Company entered into a facility swap with Select, and signed a definitive agreement regarding the Curahealth Disposal. In addition, the Company closed three LTAC hospitals in the third quarter of 2016. See Notes 3 and 18.

The composition of the restructuring charges that the Company has incurred for these activities is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Lease termination cost	$	56,869	$	207	$	56,869	$	207
Facility closure, loss on disposal and other costs		20,212		-		19,109		167
Severance		1,395		125		2,765		523
Transaction costs		492		-		1,577		-
	$	78,968	$	332	$	80,320	$	897

The following table (in thousands) summarizes the Company’s LTAC portfolio repositioning liability activity (included in other accrued liabilities) during the nine months ended September 30, 2016, which does not include the non-cash charges of $13.8 million related to facility closure, loss on disposal and other costs, and lease termination costs.

	Lease termination costs			Severance and transaction costs			Total
Liability balance at January 1, 2016	$	-		$	-		$	-
Expense		62,190			4,342			66,532
Payments		(3,500	)		(3,600	)		(7,100	)
Liability balance at September 30, 2016	$	58,690		$	742		$	59,432

NOTE 6 – RESTRUCTURING CHARGES (Continued)

Kindred at Home Branch Consolidations

During the first quarter of 2015, the Company approved and initiated branch consolidations in specific markets to improve operations and cost efficiencies in the Kindred at Home division. The branch consolidations included branches that served both the home health and hospice business segment operations. Gentiva initiated similar branch consolidations prior to the Gentiva Merger and these activities and acquired liabilities are included herein. These activities are expected to be substantially complete by the end of 2016.

The composition of the restructuring costs that the Company has incurred for these consolidations is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Lease termination cost	$	1,781	$	601	$	2,494	$	1,272
Facility closure and other costs		-		2,416		685		6,272
	$	1,781	$	3,017	$	3,179	$	7,544

The following table summarizes the Company’s Kindred at Home branch consolidation restructuring liability activity (included in other accrued liabilities) during the nine months ended September 30, 2016 (in thousands):

	Lease termination costs
Liability balance at January 1, 2016		$	1,863
Expense			2,494
Payments			(1,771	)
Adjustments			(60	)
Liability balance at September 30, 2016		$	2,526

2016 Division Reorganizations

During the nine months ended September 30, 2016, the Company initiated a restructuring plan to improve operations and cost efficiencies in the nursing center division. In addition, during the third quarter of 2016, the Company initiated a similar restructuring plan in the Kindred Rehabilitation Services division. Actions related to these plans were completed by the end of the third quarter of 2016.

The composition of the restructuring costs that the Company has incurred for these division reorganizations is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Severance	$	714	$	-	$	2,284	$	-
Facility closure and other costs		-		-		2,440		-
Lease termination cost		-		-		-		352
	$	714	$	-	$	4,724	$	352

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Revenues

9 Months Ended

Sep. 30, 2016

Income Statement [Abstract]

Revenues

NOTE 7 – REVENUES

Revenues are recorded based upon estimated amounts due from patients and third party payors for healthcare services provided, including anticipated settlements under reimbursement agreements with Medicare, Medicaid, Medicare Advantage, Medicaid Managed, and other third party payors. Revenues under third party agreements are subject to examination and retroactive adjustment. Provisions for estimated third party adjustments are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in the periods the interim or final settlements are determined.

A summary of revenues by payor type follows (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Medicare	$	921,911		$	915,778		$	2,859,760		$	2,673,753
Medicaid		209,640			210,688			610,119			610,911
Medicare Advantage		140,774			127,905			423,117			401,199
Medicaid Managed		66,903			52,736			191,837			147,137
Other		506,385			517,047			1,548,966			1,626,264
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958

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Loss Per Share and Dividends

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Loss Per Share and Dividends

NOTE 8 – LOSS PER SHARE AND DIVIDENDS

Loss per common share is based upon the weighted average number of common shares outstanding during the respective periods. Because the Company reported a loss from continuing operations attributable to the Company for both the three months ended September 30, 2016 and 2015, and for both the nine months ended September 30, 2016 and 2015, the diluted calculation of earnings per common share excludes the dilutive impact of stock options and the Units. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method.

NOTE 8 – LOSS PER SHARE AND DIVIDENDS (Continued)

A computation of loss per common share follows (in thousands, except per share amounts):

	Three months ended September 30,												Nine months ended September 30,
	2016						2015						2016						2015
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Loss:
Amounts attributable to Kindred stockholders:
Loss from continuing operations:
As reported in Statement of Operations	$	(685,600	)	$	(685,600	)	$	(16,869	)	$	(16,869	)	$	(651,418	)	$	(651,418	)	$	(138,329	)	$	(138,329	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(685,600	)	$	(685,600	)	$	(16,869	)	$	(16,869	)	$	(651,418	)	$	(651,418	)	$	(138,329	)	$	(138,329	)
Discontinued operations, net of income taxes:
Income (loss) from operations:
As reported in Statement of Operations	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,416		$	2,416		$	(1,712	)	$	(1,712	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,416		$	2,416		$	(1,712	)	$	(1,712	)
Gain on divestiture of operations:
As reported in Statement of Operations	$	-		$	-		$	-		$	-		$	179		$	179		$	983		$	983
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	-		$	-		$	-		$	-		$	179		$	179		$	983		$	983
Income (loss) from discontinued operations:
As reported in Statement of Operations	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,595		$	2,595		$	(729	)	$	(729	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,595		$	2,595		$	(729	)	$	(729	)
Net loss:
As reported in Statement of Operations	$	(685,613	)	$	(685,613	)	$	(14,599	)	$	(14,599	)	$	(648,823	)	$	(648,823	)	$	(139,058	)	$	(139,058	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(685,613	)	$	(685,613	)	$	(14,599	)	$	(14,599	)	$	(648,823	)	$	(648,823	)	$	(139,058	)	$	(139,058	)
Shares used in the computation:
Weighted average shares outstanding - basic      computation		86,869			86,869			86,184			86,184			86,766			86,766			83,960			83,960
Dilutive effect of employee stock options					-						-						-						-
Dilutive effect of tangible equity units					-						-						-						-
Adjusted weighted average shares outstanding -      diluted computation					86,869						86,184						86,766						83,960
Loss per common share:
Loss from continuing operations	$	(7.89	)	$	(7.89	)	$	(0.20	)	$	(0.20	)	$	(7.51	)	$	(7.51	)	$	(1.65	)	$	(1.65	)
Discontinued operations:
Income (loss) from operations		-			-			0.03			0.03			0.03			0.03			(0.02	)		(0.02	)
Gain on divestiture of operations		-			-			-			-			-			-			0.01			0.01
Income (loss) from discontinued operations		-			-			0.03			0.03			0.03			0.03			(0.01	)		(0.01	)
Net loss	$	(7.89	)	$	(7.89	)	$	(0.17	)	$	(0.17	)	$	(7.48	)	$	(7.48	)	$	(1.66	)	$	(1.66	)
Number of antidilutive stock options and tangible      equity units excluded from shares used in the      diluted loss per common share computation					1,743						1,548						1,744						2,572

NOTE 8 – LOSS PER SHARE AND DIVIDENDS (Continued)

During the nine months ended September 30, 2016, the Company paid a cash dividend of $0.12 per common share on September 2, 2016 to shareholders of record as of the close of business on August 18, 2016 and also paid a cash dividend of $0.12 per common share on June 10, 2016 and April 1, 2016 to shareholders.

During the nine months ended September 30, 2015, the Company paid a cash dividend of $0.12 per common share on September 4, 2015 to shareholders of record as of the close of business on August 19, 2015 and also paid a cash dividend of $0.12 per common share on June 10, 2015 and April 1, 2015 to shareholders.

Future declarations of dividends will be subject to the approval of Kindred’s Board of Directors.

The Company made an installment payment on the Company’s Units on September 1, 2016 to holders of record on August 15, 2016, which consisted of a quarterly installment payment of $18.75 per Unit. The Company made an installment payment on the Company’s Units on June 1, 2016, which consisted of a quarterly installment payment of $18.76 per Unit. The Company also made installment payments on the Company’s Units on March 1, 2016, December 1, 2015, September 1, 2015 and June 1, 2015, each of which consisted of a quarterly installment payment of $18.75 per Unit. In addition, the Company also made an installment payment on the Company’s Units on March 2, 2015, which consisted of a quarterly installment payment of $18.75 per Unit, plus a one-time incremental payment of $1.25 per Unit for the period between November 25, 2014 and December 1, 2014, for a total payment of $20.00 per Unit. Each Unit is composed of a prepaid stock purchase contract (a “Purchase Contract”) and one share of 7.25% Mandatory Redeemable Preferred Stock, Series A (the “Mandatory Redeemable Preferred Stock”) having a final preferred stock installment payment date of December 1, 2017 and an initial liquidation preference of $201.58 per share of Mandatory Redeemable Preferred Stock. To the extent that any Unit has been separated into its constituent Purchase Contract and its constituent share of Mandatory Redeemable Preferred Stock, the installment payment is payable only on the constituent share of Mandatory Redeemable Preferred Stock.

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Business Segment Data

9 Months Ended

Sep. 30, 2016

Segment Reporting [Abstract]

Business Segment Data

NOTE 9 – BUSINESS SEGMENT DATA

The Company is organized into four operating divisions: the hospital division, the Kindred at Home division, the Kindred Rehabilitation Services division and the nursing center division. Based upon the authoritative guidance for business segments, the operating divisions represent six reportable operating segments, including (1) hospitals, (2) home health services, (3) hospice services, (4) Kindred Hospital Rehabilitation Services, (5) RehabCare and (6) nursing centers. These reportable operating segments are consistent with information used by the Company’s President and Chief Executive Officer and its Chief Operating Officer to assess performance and allocate resources. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.

For segment purposes, the Company defines segment EBITDAR as earnings before interest, income taxes, depreciation, amortization, and rent. Segment EBITDAR reported for each of the Company’s operating segments excludes litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

The following table sets forth certain data by business segment (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues:
Hospital division	$	575,323		$	579,497		$	1,852,317		$	1,847,186
Kindred at Home:
Home health		449,958			424,054			1,318,549			1,152,741
Hospice		188,575			181,140			550,642			478,202
		638,533			605,194			1,869,191			1,630,943
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		169,018			149,435			504,607			453,543
RehabCare		192,480			219,518			592,803			708,904
		361,498			368,953			1,097,410			1,162,447
Nursing center division		270,259			270,510			814,881			818,688
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations:
Kindred Hospital Rehabilitation Services		(22,330	)		(22,081	)		(69,515	)		(69,284	)
RehabCare		(28,075	)		(35,943	)		(85,708	)		(111,994	)
Nursing centers		(1,681	)		(1,614	)		(5,008	)		(4,028	)
		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958
Loss from continuing operations:
Segment EBITDAR:
Hospital division	$	82,752		$	96,108		$	344,179		$	361,751
Kindred at Home:
Home health		75,073			67,682			218,044			187,397
Hospice		31,326			34,025			87,521			78,908
		106,399			101,707			305,565			266,305
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		49,470			42,141			147,809			131,236
RehabCare		9,248			14,544			34,504			44,933
		58,718			56,685			182,313			176,169
Nursing center division		29,922			35,923			93,684			112,763
Support center		(61,751	)		(55,439	)		(199,363	)		(192,213	)
Litigation contingency expense		-			(31,462	)		(2,840	)		(130,387	)
Impairment charges		(324,289	)		-			(338,208	)		(6,726	)
Restructuring charges		(22,813	)		(2,541	)		(28,860	)		(6,962	)
Transaction costs		(2,982	)		(3,846	)		(6,513	)		(103,764	)
EBITDAR		(134,044	)		197,135			349,957			476,936
Rent		(98,415	)		(95,436	)		(296,025	)		(282,955	)
Restructuring charges - rent		(58,650	)		(808	)		(59,363	)		(1,831	)
Depreciation and amortization		(40,382	)		(39,329	)		(121,320	)		(116,889	)
Interest, net		(58,052	)		(56,008	)		(172,856	)		(173,925	)
Income (loss) from continuing operations before      income taxes		(389,543	)		5,554			(299,607	)		(98,664	)
Provision for income taxes		281,752			12,523			311,470			9,183
	$	(671,295	)	$	(6,969	)	$	(611,077	)	$	(107,847	)

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Rent:
Hospital division	$	52,555	$	51,726	$	158,259	$	154,584
Kindred at Home:
Home health		8,472		8,675		25,730		24,149
Hospice		4,342		4,428		13,047		12,188
		12,814		13,103		38,777		36,337
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		8,852		7,591		26,511		22,473
RehabCare		925		937		2,697		2,946
		9,777		8,528		29,208		25,419
Nursing center division		22,697		21,510		68,151		64,039
Support center		572		569		1,630		2,576
	$	98,415	$	95,436	$	296,025	$	282,955
Depreciation and amortization:
Hospital division	$	12,627	$	12,956	$	38,896	$	40,963
Kindred at Home:
Home health		3,803		4,653		11,916		12,519
Hospice		1,563		1,821		4,688		4,759
		5,366		6,474		16,604		17,278
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		3,573		3,344		10,620		10,076
RehabCare		2,011		1,955		5,983		5,790
		5,584		5,299		16,603		15,866
Nursing center division		7,552		6,695		22,020		21,151
Support center		9,253		7,905		27,197		21,631
	$	40,382	$	39,329	$	121,320	$	116,889

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Capital expenditures, excluding acquisitions    (including discontinued operations):
Hospital division:
Routine	$	5,649	$	5,127	$	17,499	$	20,017
Development		-		-		-		-
		5,649		5,127		17,499		20,017
Kindred at Home:
Home health:
Routine		1,300		1,225		5,009		2,336
Development		-		-		-		-
		1,300		1,225		5,009		2,336
Hospice:
Routine		637		352		1,928		834
Development		-		-		-		-
		637		352		1,928		834
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Routine		380		350		1,058		625
Development		4,973		1,281		15,344		1,342
		5,353		1,631		16,402		1,967
RehabCare:
Routine		698		532		1,205		1,248
Development		-		-		-		-
		698		532		1,205		1,248
Nursing center division:
Routine		5,486		4,738		13,247		14,146
Development		585		2,085		5,923		8,330
		6,071		6,823		19,170		22,476
Support center:
Routine:
Information systems		7,031		22,765		24,744		40,335
Other		692		333		4,013		1,150
Development		2,828		2,394		5,845		2,394
		10,551		25,492		34,602		43,879
Totals:
Routine		21,873		35,422		68,703		80,691
Development		8,386		5,760		27,112		12,066
	$	30,259	$	41,182	$	95,815	$	92,757

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	September 30,		December 31,
	2016		2015
Assets at end of period:
Hospital division	$	1,335,743	$	1,633,801
Kindred at Home:
Home health		1,527,366		1,435,176
Hospice		949,726		922,710
		2,477,092		2,357,886
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		819,995		802,686
RehabCare		333,564		347,738
		1,153,559		1,150,424
Nursing center division		485,181		494,066
Support center		775,765		832,082
	$	6,227,340	$	6,468,259
Goodwill:
Hospital division	$	361,310	$	628,519
Kindred at Home:
Home health		913,703		905,989
Hospice		647,507		639,006
		1,561,210		1,544,995
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		499,953		496,296
RehabCare		-		-
		499,953		496,296
	$	2,422,473	$	2,669,810

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Income Taxes

9 Months Ended

Sep. 30, 2016

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 10 – INCOME TAXES

At each balance sheet date, management assesses all available positive and negative evidence to determine whether a valuation allowance is needed against its deferred tax assets. The authoritative guidance requires evidence related to events that have actually happened to be weighted more significantly than evidence that is projected or expected to happen. A significant piece of negative evidence according to this weighting standard is that there are cumulative losses in the two most recent years and the current year, which is the case for the Company at September 30, 2016. The Company’s outlook of taxable income for 2016 changed in the third quarter of 2016 after the Company recorded $286.0 million of goodwill and property and equipment impairment charges associated with (1) the Hospital Division Triggering Event and (2) the decline in nursing center division financial performance in 2016 combined with the planned disposal of the Company’s skilled nursing facility business. In addition, the divestiture of the skilled nursing facility business may generate additional taxable losses in the future related to the transaction.

In addition, the Company has deferred tax liabilities related to tax amortization of acquired indefinite lived intangible assets because these assets are not amortized for financial reporting purposes. The tax amortization in current and future years created a deferred tax liability which will reverse at the time of ultimate sale or book impairment. Due to the uncertain timing of this reversal, the temporary difference associated with indefinite lived intangible assets cannot be considered a source of future taxable income for purposes of determining the valuation allowance. As such, this deferred tax liability cannot be used to offset the deferred tax asset related to the net deferred tax assets.  

On the basis of this evaluation, as of September 30, 2016, the Company recorded a valuation allowance of $366.5 million against the Company’s deferred tax assets. As of September 30, 2016, the Company has a net deferred tax liability of $200.3 million representing indefinite lived intangible assets. The amount of deferred tax asset considered realizable, however, could be adjusted if the weighting of the positive and negative evidence changes.

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Insurance Risks

9 Months Ended

Sep. 30, 2016

Text Block [Abstract]

Insurance Risks

NOTE 11 – INSURANCE RISKS

The Company insures a substantial portion of its professional liability risks and workers compensation risks through its wholly owned limited purpose insurance subsidiaries. Provisions for loss for these risks are based upon management’s best available information including actuarially determined estimates. Effective with the Gentiva Merger, the Company cancelled all policies issued by the Gentiva wholly owned limited purpose insurance subsidiary and insures all post-merger risks through its insurance subsidiary.

The allowance for professional liability risks includes an estimate of the expected cost to settle reported claims and an amount, based upon past experiences, for losses incurred but not reported. These risks are necessarily based upon estimates and, while management believes that the provision for loss is adequate, the ultimate liability may be in excess of, or less than, the amounts recorded. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):

	Three months ended					Nine months ended
	September 30,					September 30,
	2016		2015			2016			2015
Professional liability:
Continuing operations	$	19,486	$	19,778		$	64,614		$	51,067
Discontinued operations		84		(1,741	)		(2,940	)		(2,408	)
Workers compensation:
Continuing operations	$	16,792	$	11,165		$	45,797		$	40,021
Discontinued operations		163		(2,219	)		(512	)		(2,225	)

A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):

	September 30, 2016						December 31, 2015
	Professional liability		Workers compensation		Total		Professional liability		Workers compensation		Total
Assets:
Current:
Insurance subsidiary investments	$	59,268	$	46,078	$	105,346	$	61,889	$	44,749	$	106,638
Reinsurance and other     recoverables		10,184		1,302		11,486		9,282		1,020		10,302
Other		-		50		50		-		100		100
		69,452		47,430		116,882		71,171		45,869		117,040
Non-current:
Insurance subsidiary investments		94,860		100,657		195,517		82,207		122,291		204,498
Reinsurance and other     recoverables		98,886		95,272		194,158		90,387		86,943		177,330
Deposits		4,225		24,061		28,286		3,980		4,337		8,317
Other		-		-		-		-		38		38
		197,971		219,990		417,961		176,574		213,609		390,183
	$	267,423	$	267,420	$	534,843	$	247,745	$	259,478	$	507,223
Liabilities:
Allowance for insurance risks:
Current	$	61,036	$	50,297	$	111,333	$	64,099	$	48,770	$	112,869
Non-current		283,048		213,639		496,687		263,273		206,079		469,352
	$	344,084	$	263,936	$	608,020	$	327,372	$	254,849	$	582,221

Provisions for loss for professional liability risks retained by the Company’s limited purpose insurance subsidiary have been discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1%. The discount rate is based upon the risk-free interest rate for the respective year. Amounts equal to the discounted loss provision are funded annually. The Company does not fund the portion of professional liability risks related to estimated claims that have been incurred but not reported. Accordingly, these liabilities are not discounted. If the Company did not discount any of the allowances for professional liability risks, these balances would have approximated $346.5 million at September 30, 2016 and $329.9 million at December 31, 2015.

Provisions for loss for workers compensation risks retained by the Company’s limited purpose insurance subsidiary are not discounted and amounts equal to the loss provision are funded annually.

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Insurance Subsidiary Investments

9 Months Ended

Sep. 30, 2016

Summary Of Investments Other Than Investments In Related Parties [Abstract]

Insurance Subsidiary Investments

NOTE 12 – INSURANCE SUBSIDIARY INVESTMENTS

The Company maintains investments, consisting principally of cash and cash equivalents, debt securities, equities, and certificates of deposit for the payment of claims and expenses related to professional liability and workers compensation risks. These investments have been categorized as available-for-sale and are reported at fair value.

The cost for equities, amortized cost for debt securities and estimated fair value of the Company’s insurance subsidiary investments follows (in thousands):

	September 30, 2016									December 31, 2015
	Cost		Unrealized gains		Unrealized losses			Fair value		Cost		Unrealized gains		Unrealized losses			Fair value
Cash and cash equivalents (a)	$	177,550	$	-	$	-		$	177,550	$	186,029	$	-	$	-		$	186,029
Debt securities:
Corporate bonds		56,934		108		(10	)		57,032		46,940		5		(122	)		46,823
U.S. Treasury notes		26,447		36		-			26,483		33,386		-		(55	)		33,331
Debt securities issued     by U.S. government     agencies		17,643		27		(1	)		17,669		22,497		-		(43	)		22,454
		101,024		171		(11	)		101,184		102,823		5		(220	)		102,608
Equities by industry:
Technology		1,721		51		(16	)		1,756		1,533		66		(98	)		1,501
Consumer		1,687		11		(73	)		1,625		2,271		182		(36	)		2,417
Healthcare		1,230		16		(56	)		1,190		1,896		116		(37	)		1,975
Financial services		1,262		-		(113	)		1,149		1,854		55		(81	)		1,828
Industrials		998		1		(65	)		934		1,994		86		(157	)		1,923
Energy		-		-		-			-		1,015		-		(15	)		1,000
Other		3,060		1		(42	)		3,019		3,849		26		(268	)		3,607
		9,958		80		(365	)		9,673		14,412		531		(692	)		14,251
Certificates of deposit		12,450		6		-			12,456		8,250		-		(2	)		8,248
	$	300,982	$	257	$	(376	)	$	300,863	$	311,514	$	536	$	(914	)	$	311,136

(a) Includes $19.9 million and $29.6 million of money market funds at September 30, 2016 and December 31, 2015, respectively.

Since the Company’s insurance subsidiary investments are restricted for a limited purpose, they are classified in the accompanying unaudited condensed consolidated balance sheet based upon the expected current and long-term cash requirements of the Company’s limited purpose insurance subsidiaries.

The Company’s investment policy governing insurance subsidiary investments precludes the investment portfolio managers from selling any security at a loss without prior authorization from the Company. The investment managers also limit the exposure to any one issue, issuer or type of investment. The Company intends, and has the ability, to hold insurance subsidiary investments for a long duration without the necessity of selling securities to fund the underwriting needs of its insurance subsidiary. This ability to hold securities allows sufficient time for recovery of temporary declines in the market value of equity securities and the par value of debt securities as of their stated maturity date.

The Company considered the severity and duration of its unrealized losses at September 30, 2016 and recognized pretax other-than-temporary-impairments of $0.2 million during the nine months ended September 30, 2016 for various investments held in its insurance subsidiary investment portfolio. These investments were determined to be impaired after considering the duration of the declines in values and the likelihood of near term price recovery of each investment. Because the Company considered the remaining unrealized losses at September 30, 2016 to be temporary, the Company did not record any additional impairment losses related to these investments. The Company considered the severity and duration of its unrealized losses at September 30, 2015 for various investments held in its insurance subsidiary investment portfolio and determined that these unrealized losses were temporary and did not record any impairment losses related to these investments.

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Long-Term Debt

9 Months Ended

Sep. 30, 2016

Debt Disclosure [Abstract]

Long-Term Debt

NOTE 13 – LONG-TERM DEBT

Term Loan Amendment Agreement

On June 14, 2016, the Company entered into a fifth amendment and restatement agreement (the “Term Loan Amendment Agreement”) among the Company, the other credit parties party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto. The Term Loan Amendment Agreement amends and restates the Fourth Amended and Restated Term Loan Facility to provide for, among other things, (1) additional joint venture flexibility, including an increased ability to enter into and make investments in joint ventures that are non-guarantor restricted subsidiaries and to incur debt and liens of such joint ventures and other non-guarantor restricted subsidiaries, (2) an increase in the size of a basket for asset sales from 15% to 25% of consolidated total assets, (3) maintaining a maximum total leverage ratio of 6.00:1.00 for each quarterly measurement date after the date of such amendment, (4) a prepayment premium of 1.00% in connection with any repricing transaction within six months of the closing date, and (5) an incremental term loan in an aggregate principal amount of $200 million.

The incremental term loan under the Term Loan Amendment Agreement was issued with 95 basis points of original issue discount (“OID”) and has the same terms as, and is fungible with, the $1.18 billion in aggregate principal amount of term loans that were outstanding under the Fourth Amended and Restated Term Loan Facility immediately prior to the effectiveness of the Term Loan Amendment Agreement. The net proceeds from the incremental term loan were used to repay a portion of the Company’s outstanding borrowings under its ABL Facility (as defined below).

ABL Amendment Agreement

Also on June 14, 2016, the Company entered into a fourth amendment and restatement agreement (the “ABL Amendment Agreement”) among the Company, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto. The ABL Amendment Agreement amends and restates the ABL Credit Agreement dated as of June 1, 2011 (as amended by that certain Amendment No. 1 to the ABL Credit Agreement dated as of October 4, 2012 and as amended and restated by that certain Amendment and Restatement Agreement dated as of August 21, 2013, that certain Second Amendment and Restatement Agreement dated as of April 9, 2014 and that certain Third Amendment and Restatement Agreement dated as of October 31, 2014, and as further amended by that certain Incremental ABL Joinder dated as of December 12, 2014 and that certain Amendment No. 2 dated as of June 3, 2015), among the Company, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders party thereto (the “Prior ABL Facility”).

The ABL Amendment Agreement amends and restates the Prior ABL Facility (as amended and restated, the “ABL Facility”) to provide for, among other things, (1) additional joint venture flexibility, including an increased ability to enter into and make investments in joint ventures that are non-guarantor restricted subsidiaries and to incur debt and liens of such joint ventures and other non-guarantor restricted subsidiaries, and (2) an increase in the size of a basket for asset sales from 15% to 25% of consolidated total assets.

Incremental Term Loan Amendment

On March 10, 2015, the Company entered into an incremental amendment agreement, which provided for an incremental term loan in an aggregate principal amount of $200 million under its Fourth Amended and Restated Term Loan Facility. The Company used the net proceeds of the incremental term loan to repay outstanding borrowings under its Prior ABL Facility. The incremental term loan was issued with 50 basis points of OID and has the same terms as, and is fungible with, all other term loans outstanding under the Company’s Term Loan Facility.

Amendment to Notes due 2022

On April 9, 2014, the Company completed a private placement of $500 million aggregate principal amount of 6.375% senior notes due 2022 (the “Notes due 2022”). The Notes due 2022 were issued pursuant to the indenture dated April 9, 2014 (the “2022 Indenture”) among the Company, the guarantors party thereto (the “2022 Guarantors”), and Wells Fargo Bank, National Association, as trustee.

On January 30, 2015, following the receipt ofsufficient consentsto approve the proposed amendments(the “Amendments”),the Company, the 2022 Guarantors,and WellsFargo Bank, National Association, astrustee, entered into the first supplemental indenture(the “2022 NotesSupplemental Indenture”)to the 2022 Indenture. The 2022 NotesSupplemental Indenture conformscertain covenants, definitions,and other termsinthe 2022 Indenture to the covenants, definitions,and termscontained in the indentures governing the Notes (as defined in Note 15). The Amendmentsbecame operative following the consummation of the Gentiva Merger.

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Contingencies

9 Months Ended

Sep. 30, 2016

Commitments And Contingencies Disclosure [Abstract]

Contingencies

NOTE 14 – CONTINGENCIES

Management continually evaluates contingencies based upon the best available information. In addition, allowances for losses are provided currently for disputed items that have continuing significance, such as certain third party reimbursements and deductions that continue to be claimed in current cost reports and tax returns.

Management believes that allowances for losses have been provided to the extent necessary and that its assessment of contingencies is reasonable.

Principal contingencies are described below.

Revenues – Certain third party payments are subject to examination by agencies administering the various reimbursement programs. The Company is contesting certain issues raised in audits of prior year cost reports and the denial of payment by third parties to the Company’s customers.

Professional liability risks – The Company has provided for losses for professional liability risks based upon management’s best available information including actuarially determined estimates. Ultimate claims costs may differ from the provisions for loss. See Note 11.

Legal and regulatory proceedings – The Company is a party to various legal actions and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including investigations resulting from the Company’s obligation to self-report suspected violations of law). The Company cannot predict the ultimate outcome of pending litigation and regulatory and other governmental and internal audits and investigations. The U.S. Department of Justice (the “DOJ”), CMS or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties (some of which may not be covered by insurance), which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity. See Note 17.

Other indemnifications – In the ordinary course of business, the Company enters into contracts containing standard indemnification provisions and indemnifications specific to a transaction, such as a disposal of an operating facility. These indemnifications may cover claims related to employment-related matters, governmental regulations, environmental issues, and tax matters, as well as patient, third party payor, supplier, and contractual relationships. The Company also is subject to indemnity claims under contracts with its Kindred Rehabilitation Services division customers related to the provision of its services. Obligations under these indemnities generally are initiated by a breach of the terms of a contract or by a third party claim or event. These indemnifications could potentially subject the Company to damages and other payments which may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, or liquidity.

Income taxes – The Company is subject to various federal and state income tax audits in the ordinary course of business. Such audits could result in increased tax payments, interest, and penalties.

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Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Measurements

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The Company follows the provisions of the authoritative guidance for fair value measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance related to fair value measures establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency asset backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

The Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and any associated losses are summarized below (in thousands): 

	Fair value measurements
	Level 1		Level 2			Level 3			Assets/liabilities at fair value			Total losses
September 30, 2016
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	57,032		$	-		$	57,032		$	-
U.S. Treasury notes		26,483		-			-			26,483			-
Debt securities issued by U.S. government    agencies		-		17,669			-			17,669			-
		26,483		74,701			-			101,184			-
Available-for-sale equity securities		9,673		-			-			9,673			-
Money market funds		21,549		-			-			21,549			-
Certificates of deposit		-		12,456			-			12,456			-
Total available-for-sale investments		57,705		87,157			-			144,862			-
Deposits held in money market funds		11,901		4,126			-			16,027			-
	$	69,606	$	91,283		$	-		$	160,889		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(4,883	)	$	(4,883	)	$	-
Interest rate swaps		-		(8,234	)		-			(8,234	)		-
	$	-	$	(8,234	)	$	(4,883	)	$	(13,117	)	$	-
Non-recurring:
Assets:
Property and equipment	$	-	$	-		$	645,723		$	645,723		$	(24,902	)
Goodwill		-		-			361,310			361,310			(261,129	)
Intangible assets - certificates of need		-		-			641			641			(3,559	)
Nursing center available for sale		-		-			4,499			4,499			(5,310	)
Hospitals available for sale		-		-			21,025			21,025			(43,308	)
	$	-	$	-		$	1,033,198		$	1,033,198		$	(338,208	)
Liabilities	$	-	$	-		$	-		$	-		$	-
December 31, 2015
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	46,823		$	-		$	46,823		$	-
U.S. Treasury notes		33,331		-			-			33,331			-
Debt securities issued by U.S. government    agencies		-		22,454			-			22,454			-
		33,331		69,277			-			102,608			-
Available-for-sale equity securities		14,251		-			-			14,251			-
Money market funds		31,429		-			-			31,429			-
Certificates of deposit		-		8,248			-			8,248			-
Total available-for-sale investments		79,011		77,525			-			156,536			-
Deposits held in money market funds		100		3,880			-			3,980			-
	$	79,111	$	81,405		$	-		$	160,516		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(6,437	)	$	(6,437	)	$	-
Interest rate swaps		-		(4,472	)		-			(4,472	)		-
	$	-	$	(4,472	)	$	(6,437	)	$	(10,909	)	$	-
Non-recurring:
Assets:
Intangible assets - trade names	$	-	$	-		$	98,774		$	98,774		$	(24,757	)
Liabilities	$	-	$	-		$	-		$	-		$	-

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Recurring measurements

The Company’s available-for-sale investments held by its limited purpose insurance subsidiaries consist of debt securities, equities, money market funds, and certificates of deposit. These available-for-sale investments and the insurance subsidiaries’ cash and cash equivalents of $157.7 million as of September 30, 2016 and $156.4 million as of December 31, 2015, classified as insurance subsidiary investments, are maintained for the payment of claims and expenses related to professional liability and workers compensation risks.

The Company also has available-for-sale investments totaling $1.7 million as of September 30, 2016 and $1.8 million as of December 31, 2015 related to a deferred compensation plan that is maintained for certain of the Company’s current and former employees.

The fair value of actively traded debt and equity securities and money market funds is based upon quoted market prices and is generally classified as Level 1. The fair value of inactively traded debt securities and certificates of deposit is based upon either quoted market prices of similar securities or observable inputs such as interest rates using either a market or income valuation approach and is generally classified as Level 2. The Company’s investment advisors obtain and review pricing for each security. The Company is responsible for the determination of fair value and as such the Company reviews the pricing information from its advisors in determining reasonable estimates of fair value. Based upon the Company’s internal review procedures, there were no adjustments to the prices during the three months or nine months ended September 30, 2016 or September 30, 2015.

The Company’s deposits held in money market funds consist primarily of cash and cash equivalents held for the Company’s insurance programs and for general corporate purposes.

The Company acquired a contingent consideration liability in the Gentiva Merger from a prior acquisition by Gentiva with an initial estimated fair value of $7.9 million. The fair value is determined using a discounted cash flow approach utilizing Level 2 and Level 3 inputs which includes observable market discount rates, fixed payment schedules, and assumptions based on achieving certain predefined performance criteria. As of September 30, 2016, the fair value of the Level 2 and 3 contingent consideration liability was $4.9 million. The change in fair value in the third quarter of 2016 consists of $0.1 million in accrued interest included in interest expense in the accompanying unaudited condensed consolidated statement of operations. A one percent change in the discount rate used to calculate the accretion of the present value of the contingent consideration liability would have an impact on the fair value of approximately $0.1 million.

The fair value of the derivative liability associated with the interest rate swaps is estimated using industry-standard valuation models, which are Level 2 measurements. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The carrying value is equal to fair value for financial instruments that are based upon quoted market prices or current market rates. The Company’s long-term debt is based upon Level 2 inputs.

	September 30, 2016				December 31, 2015
(In thousands)	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	139,430	$	139,430	$	98,758	$	98,758
Insurance subsidiary investments		300,863		300,863		311,136		311,136
Long-term debt, including amounts due within one year    (excluding capital lease obligations totaling $0.6 million and    $0.8 million at September 30, 2016 and December 31, 2015,     respectively)		3,343,416		3,389,569		3,110,130		2,978,890

Non-recurring measurements

During the third quarter of 2016, the Company recorded a goodwill impairment charge of $261.1 million and a property and equipment impairment charge of $3.2 million related to the Hospital Division Triggering Event. These charges reflect the amounts by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets were measured using Level 3 inputs such as operating cash flows, market data and replacement cost factoring in depreciation, economic obsolescence and inflation trends.

NOTE 15 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

Non-recurring measurements (Continued)

During the third quarter of 2016, the Company recorded impairment charges aggregating $33.0 million, comprised of $19.7 million related to property and equipment, and $13.3 million related to goodwill and other intangible assets. These charges reflect the amounts by which the carrying value of the assets exceeded their estimated fair value. The fair value of the assets was measured using a Level 3 input of the pending offer from Curahealth. In addition, during the first quarter of 2016, the Company recorded asset impairment charges of $7.8 million under the held and used accounting model related to the planned Curahealth Disposal. These charges reflect the amount by which the carrying value of certain property and equipment exceeded its estimated fair value. The fair value of property and equipment was measured using Level 3 inputs, primarily replacement costs.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the decline in financial performance of its nursing center division. After determining it was more likely than not that the Company would dispose of its skilled nursing facility business, the Company determined that its property and equipment was impaired. As a result, the Company recorded an impairment charge of $21.7 million. The fair value of the assets was measured using Level 3 inputs, such as operating cash flows and replacement costs.

During the third quarter of 2016, the Company reviewed the long-lived assets related to the planned divestiture and pending offers for a nursing center held for sale and determined its property and equipment was impaired. As a result, the Company recorded an impairment charge of $5.3 million. The fair value of the assets was measured based upon pending offers, a Level 3 input.

During the nine months ended September 30, 2016, the Company recorded an asset impairment charge of $2.6 million related to the sale of a medical office building. This charge reflects the amount by which the carrying value of the property exceeded its estimated fair value. The fair value of the property was measured using a Level 3 input of the pending offer.

During the nine months ended September 30, 2016, the Company also recorded an impairment charge of $3.5 million related to certificates of need for two hospitals as part of the annual indefinite-lived intangible assets impairment review at May 1. This charge reflects the amount by which the carrying value of the certificates of need exceeded its estimated fair value. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

During the nine months ended September 30, 2015, the Company recorded an asset impairment charge of $6.7 million related to previously acquired home health and hospice trade names after the decision in the first quarter of 2015 to rebrand to the Kindred at Home trade name. These charges reflect the amount by which the carrying value exceeded its estimated fair value. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

XML

Condensed Consolidating Financial Information

9 Months Ended

Sep. 30, 2016

Condensed Financial Information Of Parent Company Only Disclosure [Abstract]

Condensed Consolidating Financial Information

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The Company’s $750 million aggregate principal amount of 8.00% Senior Notes due 2020 (the “Notes due 2020”), Notes due 2022 and $600 million aggregate principal amount of 8.75% Senior Notes due 2023 (the “Notes due 2023”) (the Notes due 2020 and the Notes due 2023 are collectively referred to as the “Notes”) are all fully and unconditionally guaranteed by substantially all of the Company’s domestic 100% owned subsidiaries. The equity method has been used with respect to the parent company’s investment in subsidiaries.

The following unaudited condensed consolidating financial data present the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of September 30, 2016 and December 31, 2015, and the respective results of operations and cash flows for the three months and nine months ended September 30, 2016 and September 30, 2015.

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

	Three months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	1,559,255		$	259,800		$	(25,528	)	$	1,793,527
Salaries, wages and benefits		-			895,394			62,250			-			957,644
Supplies		-			82,509			12,991			-			95,500
Rent		-			77,529			20,886			-			98,415
Other operating expenses		-			190,299			27,065			-			217,364
General and administrative expenses		-			230,612			105,323			(25,528	)		310,407
Other (income) expense		-			246			(692	)		-			(446	)
Litigation contingency expense		-			-			-			-			-
Impairment charges		-			202,617			121,672			-			324,289
Restructuring charges		-			80,268			1,195			-			81,463
Depreciation and amortization		-			37,883			2,499			-			40,382
Management fees		-			(2,277	)		2,277			-			-
Intercompany interest (income) expense from     affiliates		(56,169	)		44,514			11,655			-			-
Interest expense (income)		59,859			(17	)		20			-			59,862
Investment income		-			(90	)		(1,720	)		-			(1,810	)
Equity in net loss of consolidating affiliates		683,376			-			-			(683,376	)		-
		687,066			1,839,487			365,421			(708,904	)		2,183,070
Loss from continuing operations before income     taxes		(687,066	)		(280,232	)		(105,621	)		683,376			(389,543	)
Provision (benefit) for income taxes		(1,453	)		282,602			603			-			281,752
Loss from continuing operations		(685,613	)		(562,834	)		(106,224	)		683,376			(671,295	)
Discontinued operations, net of income taxes:
Income (loss) from operations		-			(73	)		61			-			(12	)
Loss on divestiture of operations		-			-			-			-			-
Income (loss) from discontinued operations		-			(73	)		61			-			(12	)
Net loss		(685,613	)		(562,907	)		(106,163	)		683,376			(671,307	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(14,305	)		-			(14,305	)
Discontinued operations		-			-			(1	)		-			(1	)
		-			-			(14,306	)		-			(14,306	)
Loss attributable to Kindred	$	(685,613	)	$	(562,907	)	$	(120,469	)	$	683,376		$	(685,613	)
Comprehensive loss	$	(685,055	)	$	(562,907	)	$	(106,849	)	$	684,062		$	(670,749	)
Comprehensive loss attributable to Kindred	$	(685,055	)	$	(562,907	)	$	(121,155	)	$	684,062		$	(685,055	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Three months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	1,553,814		$	236,783		$	(26,081	)	$	1,764,516
Salaries, wages and benefits		-			869,689			52,451			-			922,140
Supplies		-			83,840			12,711			-			96,551
Rent		-			76,275			19,161			-			95,436
Other operating expenses		-			186,036			21,801			-			207,837
General and administrative expenses		-			226,402			107,179			(26,081	)		307,500
Other (income) expense		-			35			(685	)		-			(650	)
Litigation contingency expense		-			31,462			-			-			31,462
Restructuring charges		-			3,349			-			-			3,349
Depreciation and amortization		-			36,920			2,409			-			39,329
Management fees		-			(5,170	)		5,170			-			-
Intercompany interest (income) expense from     affiliates		(51,099	)		39,769			11,330			-			-
Interest expense		56,350			27			63			-			56,440
Investment income		-			(177	)		(255	)		-			(432	)
Equity in net loss of consolidating affiliates		11,415			-			-			(11,415	)		-
		16,666			1,548,457			231,335			(37,496	)		1,758,962
Income (loss) from continuing operations before     income taxes		(16,666	)		5,357			5,448			11,415			5,554
Provision (benefit) for income taxes		(2,067	)		14,411			179			-			12,523
Income (loss) from continuing operations		(14,599	)		(9,054	)		5,269			11,415			(6,969	)
Income (loss) from discontinued operations, net of     income taxes		-			2,311			(42	)		-			2,269
Net income (loss)		(14,599	)		(6,743	)		5,227			11,415			(4,700	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		-			-			(9,900	)		-			(9,900	)
Discontinued operations		-			-			1			-			1
		-			-			(9,899	)		-			(9,899	)
Loss attributable to Kindred	$	(14,599	)	$	(6,743	)	$	(4,672	)	$	11,415		$	(14,599	)
Comprehensive income (loss)	$	(15,716	)	$	(6,743	)	$	4,591		$	12,051		$	(5,817	)
Comprehensive loss attributable to Kindred	$	(15,716	)	$	(6,743	)	$	(5,308	)	$	12,051		$	(15,716	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Nine months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	4,769,100		$	781,053		$	(76,585	)	$	5,473,568
Salaries, wages and benefits		-			2,627,827			184,985			-			2,812,812
Supplies		-			254,818			39,508			-			294,326
Rent		-			233,264			62,761			-			296,025
Other operating expenses		-			567,203			82,712			-			649,915
General and administrative expenses		-			762,273			312,871			(76,585	)		998,559
Other (income) expense		-			550			(2,459	)		-			(1,909	)
Litigation contingency expense		-			2,840			-			-			2,840
Impairment charges		-			213,964			124,244			-			338,208
Restructuring charges		-			87,028			1,195			-			88,223
Depreciation and amortization		-			113,542			7,778			-			121,320
Management fees		-			(7,003	)		7,003			-			-
Intercompany interest (income) expense from     affiliates		(166,673	)		131,499			35,174			-			-
Interest expense (income)		175,372			(34	)		79			-			175,417
Investment income		-			(305	)		(2,256	)		-			(2,561	)
Equity in net loss of consolidating affiliates		643,548			-			-			(643,548	)		-
		652,247			4,987,466			853,595			(720,133	)		5,773,175
Loss from continuing operations before income taxes		(652,247	)		(218,366	)		(72,542	)		643,548			(299,607	)
Provision (benefit) for income taxes		(3,424	)		313,569			1,325			-			311,470
Loss from continuing operations		(648,823	)		(531,935	)		(73,867	)		643,548			(611,077	)
Discontinued operations, net of income taxes:
Income from operations		-			2,336			86			-			2,422
Gain on divestiture of operations		-			179			-			-			179
Income from discontinued operations		-			2,515			86			-			2,601
Net loss		(648,823	)		(529,420	)		(73,781	)		643,548			(608,476	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(40,341	)		-			(40,341	)
Discontinued operations		-			-			(6	)		-			(6	)
		-			-			(40,347	)		-			(40,347	)
Loss attributable to Kindred	$	(648,823	)	$	(529,420	)	$	(114,128	)	$	643,548		$	(648,823	)
Comprehensive loss	$	(650,525	)	$	(529,420	)	$	(73,613	)	$	643,380		$	(610,178	)
Comprehensive loss attributable to Kindred	$	(650,525	)	$	(529,420	)	$	(113,960	)	$	643,380		$	(650,525	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Nine months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	4,626,164		$	724,586		$	(76,792	)	$	5,273,958
Salaries, wages and benefits		-			2,534,133			170,787			-			2,704,920
Supplies		-			249,995			38,064			-			288,059
Rent		-			226,417			56,538			-			282,955
Other operating expenses		-			542,682			74,999			-			617,681
General and administrative expenses		-			815,833			304,945			(76,792	)		1,043,986
Other (income) expense		-			355			(2,054	)		-			(1,699	)
Litigation contingency expense		-			130,387			-			-			130,387
Impairment charges		-			6,726			-			-			6,726
Restructuring charges		-			8,793			-			-			8,793
Depreciation and amortization		-			109,571			7,318			-			116,889
Management fees		-			(14,766	)		14,766			-			-
Intercompany interest (income) expense from     affiliates		(154,140	)		120,173			33,967			-			-
Interest expense		172,534			3,371			223			-			176,128
Investment income		-			(1,525	)		(678	)		-			(2,203	)
Equity in net loss of consolidating affiliates		127,902			-			-			(127,902	)		-
		146,296			4,732,145			698,875			(204,694	)		5,372,622
Income (loss) from continuing operations before     income taxes		(146,296	)		(105,981	)		25,711			127,902			(98,664	)
Provision (benefit) for income taxes		(7,238	)		15,956			465			-			9,183
Income (loss) from continuing operations		(139,058	)		(121,937	)		25,246			127,902			(107,847	)
Discontinued operations, net of income taxes:
Loss from operations		-			(793	)		(951	)		-			(1,744	)
Gain on divestiture of operations		-			983			-			-			983
Income (loss) from discontinued operations		-			190			(951	)		-			(761	)
Net income (loss)		(139,058	)		(121,747	)		24,295			127,902			(108,608	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		-			-			(30,482	)		-			(30,482	)
Discontinued operations		-			-			32			-			32
		-			-			(30,450	)		-			(30,450	)
Loss attributable to Kindred	$	(139,058	)	$	(121,747	)	$	(6,155	)	$	127,902		$	(139,058	)
Comprehensive income (loss)	$	(140,835	)	$	(121,747	)	$	23,748		$	128,449		$	(110,385	)
Comprehensive loss attributable to Kindred	$	(140,835	)	$	(121,747	)	$	(6,702	)	$	128,449		$	(140,835	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet

	As of September 30, 2016
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	32,623		$	106,807		$	-		$	139,430
Insurance subsidiary investments		-		-			105,346			-			105,346
Accounts receivable, net		-		1,101,665			164,880			-			1,266,545
Inventories		-		20,568			4,694			-			25,262
Income taxes		-		11,432			984			-			12,416
Other		-		85,318			9,558			-			94,876
		-		1,251,606			392,269			-			1,643,875
Property and equipment, net		-		807,137			70,414			-			877,551
Goodwill		-		1,972,402			450,071			-			2,422,473
Intangible assets, net		-		758,045			46,557			-			804,602
Insurance subsidiary investments		-		-			195,517			-			195,517
Intercompany		4,940,207		-			-			(4,940,207	)		-
Deferred tax assets		-		-			8,189			(8,189	)		-
Other		11,123		113,557			158,642			-			283,322
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	104,206		$	99,220		$	-		$	203,426
Salaries, wages and other     compensation		-		331,453			59,290			-			390,743
Due to third party payors		-		57,945			-			-			57,945
Professional liability risks		-		5,086			55,950			-			61,036
Other accrued liabilities		60,217		199,168			20,920			-			280,305
Long-term debt due within one     year		26,186		-			1,703			-			27,889
		86,403		697,858			237,083			-			1,021,344
Long-term debt		3,315,573		-			601			-			3,316,174
Intercompany/deficiency in earnings of     consolidated subsidiaries		720,363		4,344,909			595,298			(5,660,570	)		-
Professional liability risks		-		73,117			209,931			-			283,048
Deferred tax liabilities		-		208,523			-			(8,189	)		200,334
Deferred credits and other liabilities		-		214,438			139,808			-			354,246
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		828,991		(636,098	)		(84,265	)		720,363			828,991
Noncontrolling interests		-		-			223,203			-			223,203
		828,991		(636,098	)		138,938			720,363			1,052,194
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet (Continued)

	As of December 31, 2015
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries		Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	18,232		$	80,526	$	-		$	98,758
Insurance subsidiary investments		-		-			106,638		-			106,638
Accounts receivable, net		-		1,039,761			155,107		-			1,194,868
Inventories		-		23,125			4,666		-			27,791
Income taxes		-		10,913			877		-			11,790
Other		-		53,648			7,406		-			61,054
		-		1,145,679			355,220		-			1,500,899
Property and equipment, net		-		911,611			60,385		-			971,996
Goodwill		-		2,098,812			570,998		-			2,669,810
Intangible assets, net		-		707,792			47,863		-			755,655
Insurance subsidiary investments		-		-			204,498		-			204,498
Intercompany		4,749,257		-			-		(4,749,257	)		-
Deferred tax assets		-		95,721			8,409		-			104,130
Acquisition deposit		-		18,489			-		-			18,489
Other		11,312		116,692			114,778		-			242,782
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	106,253		$	80,808	$	-		$	187,061
Salaries, wages and other     compensation		-		348,548			56,377		-			404,925
Due to third party payors		-		36,251			-		-			36,251
Professional liability risks		-		4,813			59,286		-			64,099
Other accrued liabilities		75,134		297,608			21,504		-			394,246
Long-term debt due within one     year		23,524		-			1,106		-			24,630
		98,658		793,473			219,081		-			1,111,212
Long-term debt		3,085,074		-			1,274		-			3,086,348
Intercompany/deficiency in earnings of     consolidated subsidiaries		76,983		4,142,653			606,604		(4,826,240	)		-
Professional liability risks		-		61,472			201,801		-			263,273
Deferred credits and other liabilities		-		175,173			126,206		-			301,379
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		1,499,854		(77,975	)		992		76,983			1,499,854
Noncontrolling interests		-		-			206,193		-			206,193
		1,499,854		(77,975	)		207,185		76,983			1,706,047
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows

	Three months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(22,220	)	$	36,799		$	21,503		$	-	$	36,082
Cash flows from investing activities:
Routine capital expenditures		-			(19,562	)		(2,311	)		-		(21,873	)
Development capital expenditures		-			(3,413	)		(4,973	)		-		(8,386	)
Acquisitions, net of cash acquired		-			(49,329	)		-			-		(49,329	)
Sale of assets		-			3,739			-			-		3,739
Purchase of insurance subsidiary investments		-			-			(22,427	)		-		(22,427	)
Sale of insurance subsidiary investments		-			-			31,875			-		31,875
Net change in insurance subsidiary cash and     cash equivalents		-			-			(14,680	)		-		(14,680	)
Net change in other investments		-			(63	)		114			-		51
Other		-			(150	)		-			-		(150	)
Net cash used in investing activities		-			(68,778	)		(12,402	)		-		(81,180	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		489,200			-			-			-		489,200
Repayment of borrowings under revolving credit		(388,100	)		-			-			-		(388,100	)
Proceeds from issuance of term loan, net of discount		-			-			-			-		-
Repayment of term loan		(3,508	)		-			-			-		(3,508	)
Repayment of other long-term debt		-			-			(276	)		-		(276	)
Payment of deferred financing costs		(50	)		-			-			-		(50	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(2,904	)		-			-			-		(2,904	)
Dividends paid		(10,224	)		-			-			-		(10,224	)
Contributions made by noncontrolling interests		-			-			4,993			-		4,993
Distributions to noncontrolling interests		-			-			(4,694	)		-		(4,694	)
Other		-			35			-			-		35
Net change in intercompany accounts		(62,194	)		40,530			21,664			-		-
Net cash provided by financing activities		22,220			40,565			21,687			-		84,472
Change in cash and cash equivalents		-			8,586			30,788			-		39,374
Cash and cash equivalents at beginning of period		-			24,037			76,019			-		100,056
Cash and cash equivalents at end of period	$	-		$	32,623		$	106,807		$	-	$	139,430

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Three months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(28,117	)	$	137,155		$	23,252		$	-	$	132,290
Cash flows from investing activities:
Routine capital expenditures		-			(32,663	)		(2,759	)		-		(35,422	)
Development capital expenditures		-			(5,760	)		-			-		(5,760	)
Acquisitions, net of cash acquired		-			(1,577	)		(425	)		-		(2,002	)
Sale of assets		-			3,884			-			-		3,884
Purchase of insurance subsidiary investments		-			-			(16,357	)		-		(16,357	)
Sale of insurance subsidiary investments		-			-			15,987			-		15,987
Net change in insurance subsidiary cash and cash    equivalents		-			-			(2,633	)		-		(2,633	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			176			-			-		176
Other		-			1,383			-			-		1,383
Net cash used in investing activities		-			(9,557	)		(6,187	)		-		(15,744	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		259,700			-			-			-		259,700
Repayment of borrowings under revolving credit		(349,700	)		-			-			-		(349,700	)
Repayment of term loan		(3,003	)										(3,003	)
Repayment of other long-term debt		-			-			(500	)		-		(500	)
Payment of deferred financing costs		(301	)		-			-			-		(301	)
Issuance of common stock in connection with    employee benefit plans		329			-			-			-		329
Payment of dividend for Mandatory Redeemable    Preferred Stock		(2,703	)		-			-			-		(2,703	)
Dividends paid		(10,065	)		-			-			-		(10,065	)
Contributions made by noncontrolling interests		-			-			1,492			-		1,492
Distributions to noncontrolling interests		-			-			(10,685	)		-		(10,685	)
Other		-			245			-			-		245
Net change in intercompany accounts		133,860			(136,275	)		2,415			-		-
Net cash provided by (used in) financing    activities		28,117			(136,030	)		(7,278	)		-		(115,191	)
Change in cash and cash equivalents		-			(8,432	)		9,787			-		1,355
Cash and cash equivalents at beginning of period		-			53,234			66,302			-		119,536
Cash and cash equivalent at end of period	$	-		$	44,802		$	76,089		$	-	$	120,891

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Nine months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(20,910	)	$	12,114		$	46,844		$	-	$	38,048
Cash flows from investing activities:
Routine capital expenditures		-			(63,476	)		(5,227	)		-		(68,703	)
Development capital expenditures		-			(11,768	)		(15,344	)		-		(27,112	)
Acquisitions, net of cash acquired		-			(77,040	)		-			-		(77,040	)
Acquisition deposits		-			18,489			-			-		18,489
Sale of assets		-			4,962			-			-		4,962
Purchase of insurance subsidiary investments		-			-			(75,422	)		-		(75,422	)
Sale of insurance subsidiary investments		-			-			78,478			-		78,478
Net change in insurance subsidiary cash and cash    equivalents		-			-			8,479			-		8,479
Net change in other investments		-			(34,546	)		1,199			-		(33,347	)
Other		-			(1,277	)		-			-		(1,277	)
Net cash used in investing activities		-			(164,656	)		(7,837	)		-		(172,493	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,267,200			-			-			-		1,267,200
Repayment of borrowings under revolving credit		(1,215,800	)		-			-			-		(1,215,800	)
Proceeds from issuance of term loan, net of discount		198,100			-			-			-		198,100
Proceeds from other long-term debt		-			-			750			-		750
Repayment of term loan		(10,019	)		-			-			-		(10,019	)
Repayment of other long-term debt		-			-			(826	)		-		(826	)
Payment of deferred financing costs		(342	)		-			-			-		(342	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(8,558	)		-			-			-		(8,558	)
Dividends paid		(30,517	)		-			-			-		(30,517	)
Contributions made by noncontrolling interests		-			-			11,261			-		11,261
Distributions to noncontrolling interests		-			-			(35,240	)		-		(35,240	)
Purchase of noncontrolling interests		-			-			(1,000	)		-		(1,000	)
Other		-			108			-			-		108
Net change in intercompany accounts		(179,154	)		166,825			12,329			-		-
Net cash provided by (used in) financing    activities		20,910			166,933			(12,726	)		-		175,117
Change in cash and cash equivalents		-			14,391			26,281			-		40,672
Cash and cash equivalents at beginning of period		-			18,232			80,526			-		98,758
Cash and cash equivalents at end of period	$	-		$	32,623		$	106,807		$	-	$	139,430

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Nine months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by operating activities	$	361		$	29,691		$	63,015		$	-	$	93,067
Cash flows from investing activities:
Routine capital expenditures		-			(75,033	)		(5,658	)		-		(80,691	)
Development capital expenditures		-			(12,066	)		-			-		(12,066	)
Acquisitions, net of cash acquired		-			(501,875	)		(161,882	)		-		(663,757	)
Acquisition deposits		-			195,000			-			-		195,000
Sale of assets		-			7,061			-			-		7,061
Proceeds from senior unsecured notes offering    held in escrow		-			-			1,350,000			-		1,350,000
Interest in escrow for senior unsecured notes		-			-			23,438			-		23,438
Purchase of insurance subsidiary investments		-			-			(59,186	)		-		(59,186	)
Sale of insurance subsidiary investments		-			-			50,780			-		50,780
Net change in insurance subsidiary cash and cash    equivalents		-			-			(8,396	)		-		(8,396	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			375			-			-		375
Other		-			590			-			-		590
Net cash provided by (used in) investing    activities		-			(360,948	)		1,189,096			-		828,148
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,414,850			-			-			-		1,414,850
Repayment of borrowings under revolving credit		(1,319,850	)		-			-			-		(1,319,850	)
Proceeds from issuance of term loan, net of discount		199,000											199,000
Proceeds from issuance of senior unsecured notes    due 2020 and 2023		1,350,000			-			(1,350,000	)		-		-
Repayment of Gentiva debt		-			(1,177,363	)		-			-		(1,177,363	)
Repayment of term loan		(9,008	)		-			-			-		(9,008	)
Repayment of other long-term debt		-			-			(1,400	)		-		(1,400	)
Payment of deferred financing costs		(3,284	)		-			-			-		(3,284	)
Issuance of common stock in connection with    employee benefit plans		534			-			-			-		534
Payment of costs associated with issuance of    common stock and tangible equity units		(915	)		-			-			-		(915	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(8,135	)		-			-			-		(8,135	)
Dividends paid		(30,067	)		-			-			-		(30,067	)
Contributions made by noncontrolling interests		-			-			1,492			-		1,492
Distributions to noncontrolling interests		-			-			(31,823	)		-		(31,823	)
Other		-			1,457			-			-		1,457
Net change in intercompany accounts		(1,593,486	)		1,422,557			170,929			-		-
Net cash provided by (used in) financing    activities		(361	)		246,651			(1,210,802	)		-		(964,512	)
Change in cash and cash equivalents		-			(84,606	)		41,309			-		(43,297	)
Cash and cash equivalents at beginning of period		-			129,408			34,780			-		164,188
Cash and cash equivalents at end of period	$	-		$	44,802		$	76,089		$	-	$	120,891

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Legal and Regulatory Proceedings

9 Months Ended

Sep. 30, 2016

Legal And Regulatory Proceedings [Abstract]

Legal and Regulatory Proceedings

NOTE 17 – LEGAL AND REGULATORY PROCEEDINGS

The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations in the ordinary course of business (including investigations resulting from the Company’s obligation to self-report suspected violations of law). These matters could (1) require the Company to pay substantial damages, fines, penalties or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under the Company’s insurance policies where coverage applies and is available; (2) cause the Company to incur substantial expenses; (3) require significant time and attention from the Company’s management; (4) subject the Company to sanctions, including possible exclusions from the Medicare and Medicaid programs; and (5) cause the Company to close or sell one or more facilities or otherwise modify the way the Company conducts business. The ultimate resolution of these matters, whether as a result of litigation or settlement, could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

In accordance with authoritative accounting guidance related to loss contingencies, the Company records an accrued liability for litigation and regulatory matters that are both probable and reasonably estimable. Additional losses in excess of amounts accrued may be reasonably possible. The Company reviews loss contingencies that are reasonably possible and determines whether an estimate of the possible loss or range of loss, individually or in aggregate, can be disclosed in the Company’s consolidated financial statements. These estimates are based upon currently available information for those legal and regulatory proceedings in which the Company is involved, taking into account the Company’s best estimate of losses for those matters for which such estimate can be made. The Company’s estimates involve significant judgment and a variety of assumptions, given that (1) these legal and regulatory proceedings may be in early stages; (2) discovery may not be completed; (3) damages sought in these legal and regulatory proceedings can be unsubstantiated or indeterminate; (4) the matters often involve legal uncertainties or evolving areas of law; (5) there are often significant facts in dispute; and/or (6) there is a wide range of possible outcomes. Accordingly, the Company’s estimated loss or range of loss may change from time to time, and actual losses may be more or less than the current estimate. At this time, except as otherwise specifically noted, no estimate of the possible loss or range of loss, individually or in the aggregate, in excess of the amounts accrued, if any, can be made regarding the matters described below.

Set forth below are descriptions of the Company’s significant legal proceedings.

Medicare and Medicaid payment reviews, audits, and investigations—As a result of the Company’s participation in the Medicare and Medicaid programs, the Company faces and is currently subject to various governmental and internal reviews, audits, and investigations to verify the Company’s compliance with these programs and applicable laws and regulations. The Company is routinely subject to audits under various government programs, such as the CMS Recovery Audit Contractor program, in which third-party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments to healthcare providers under the Medicare program. In addition, the Company, like other healthcare providers, is subject to ongoing investigations by the U.S. Department of Health and Human Services Office of Inspector General (the “OIG”), the DOJ and state attorneys general into the billing of services provided to Medicare and Medicaid patients, including whether such services were properly documented and billed, whether services provided were medically necessary, and general compliance with conditions of participation in the Medicare and Medicaid programs. Private pay sources such as third-party insurance and managed care entities also often reserve the right to conduct audits. The Company’s costs to respond to and defend any such reviews, audits, and investigations are significant and are likely to increase in the current enforcement environment. These audits and investigations may require the Company to refund or retroactively adjust amounts that have been paid under the relevant government program or by other payors. Further, an adverse review, audit, or investigation also could result in other adverse consequences, particularly if the underlying conduct is found to be pervasive or systemic. These consequences include (1) state or federal agencies imposing fines, penalties, and other sanctions on the Company; (2) loss of the Company’s right to participate in the Medicare or Medicaid programs or one or more third party payor networks; (3) indemnity claims asserted by customers and others for which the Company provides services; and (4) damage to the Company’s reputation in various markets, which could adversely affect the Company’s ability to attract patients, residents and employees.

NOTE 17 – LEGAL AND REGULATORY PROCEEDINGS (Continued)

On January 12, 2016, the Company entered into a settlement agreement (the “Settlement Agreement”) with the United States of America, acting through the DOJ and on behalf of the OIG (the “United States”), to resolve the pending DOJ investigation concerning the operations of RehabCare Group, Inc. and its subsidiaries (“RehabCare”), a therapy services company acquired by the Company on June 1, 2011. Under the Settlement Agreement, the Company paid $125 million, plus accrued interest from August 31, 2015, at the rate of 1.875% per annum (the “Settlement Payment”) to the United States during the first quarter of 2016. In the first quarter of 2015, the Company recorded a $95 million loss reserve for this matter and disclosed an estimated settlement range of $95 million to $125 million. Based on the progress of continuing settlement discussions through October 2015, the Company recorded an additional $30 million loss provision in the third quarter of 2015. The Company recorded an additional loss reserve of approximately $2 million in the fourth quarter of 2015 related to the Settlement Agreement and associated costs and, in connection with establishing the final terms of the Settlement Agreement, also recorded an income tax benefit of $47 million in the fourth quarter of 2015. In connection with the resolution of this matter, and in exchange for the OIG’s agreement not to exclude the Company or its subsidiaries from participating in the federal healthcare programs, on January 11, 2016, the Company entered into a five-year corporate integrity agreement with the OIG.

In connection with the Settlement Agreement, RehabCare has received requests for indemnification from some of its current and former customers related to alleged damages stemming from payments made by these customers to the DOJ and the related legal and other costs. At this time, the Company has recorded an estimated aggregate loss contingency reserve of $4.2 million for these matters. No estimate of the possible loss in excess of the amount accrued can be made regarding these matters at this time. There is no certainty about the timing or likelihood of any definitive resolutions relating to these indemnification claims. The Company disputes the allegations in these indemnification claims and will defend these and any related claims vigorously.

Whistleblower lawsuits—The Company is also subject to qui tam or “whistleblower” lawsuits under the federal False Claims Act and comparable state laws for allegedly submitting fraudulent bills for services to the Medicare and Medicaid programs. These lawsuits can result in monetary damages, fines, attorneys’ fees, and the award of bounties to private qui tam plaintiffs who successfully bring these lawsuits and to the respective government programs. The Company also could be subject to civil penalties (including the loss of the Company’s licenses to operate one or more facilities or healthcare activities), criminal penalties (for violations of certain laws and regulations), and exclusion of one or more facilities or healthcare activities from participation in the Medicare, Medicaid, and other federal and state healthcare programs. The lawsuits are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes.

Employment-related lawsuits—The Company’s operations are subject to a variety of federal and state employment-related laws and regulations, including but not limited to the U.S. Fair Labor Standards Act (“FLSA”), Equal Employment Opportunity laws, and enforcement policies of the Equal Employment Opportunity Commission, the Office of Civil Rights and state attorneys general, federal and state wage and hour laws, and a variety of laws enacted by the federal and state governments that govern these and other employment-related matters. Accordingly, the Company is currently subject to employee-related claims, class action and other lawsuits and proceedings in connection with the Company’s operations, including but not limited to those related to alleged wrongful discharge, illegal discrimination, and violations of equal employment and federal and state wage and hour laws. Because labor represents such a large portion of the Company’s operating costs, noncompliance with these evolving federal and state laws and regulations could subject the Company to significant back pay awards, fines, and additional lawsuits and proceedings. These claims, lawsuits, and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes.

NOTE 17 – LEGAL AND REGULATORY PROCEEDINGS (Continued)

As a result of the decertification of a wage and hour class action lawsuit (Rindfleisch v. Gentiva), single-plaintiff lawsuits with identical claims have been filed against the Company. Including Rindfleisch, which has four plaintiffs, there are 143 lawsuits pending in federal district court for the Northern District of Georgia. These lawsuits pertain to a compensation plan that paid Gentiva’s home health employees on both a per visit and an hourly basis, thereby allegedly voiding their FLSA exempt status and entitling them to overtime pay. The plaintiffs in these lawsuits are seeking attorneys’ fees and costs, back wages, and liquidated damages as allowed under the FLSA. The Company recorded an estimated loss contingency reserve of $5.5 million related to these matters. At this time, no estimate of the possible loss or range of loss in excess of the amount accrued can be made regarding these lawsuits. The Company disputes the allegations made in these lawsuits and will defend these and any related claims vigorously.

Minimum staffing lawsuits—Various states in which the Company operates hospitals and nursing centers have established minimum staffing requirements or may establish minimum staffing requirements in the future. While the Company seeks to comply with all applicable staffing requirements, the regulations in this area are complex and the Company may experience compliance issues from time to time. Failure to comply with such minimum staffing requirements may result in one or more facilities failing to meet the conditions of participation under relevant federal and state healthcare programs and the imposition of significant fines, damages, or other sanctions.

Shareholder actions—The Company is also subject to lawsuits and other shareholder actions brought from time to time. A shareholder derivative action (the “Complaint”) is currently pending against certain of the Company’s current and former officers and directors in circuit court for Jefferson County, Kentucky. The Complaint also names the Company as a nominal defendant. The Complaint alleges that the named current and former officers and directors of the Company breached their respective duties of good faith, loyalty, and candor, and other general fiduciary duties owed to the Company and its shareholders by, among other things, failing to exercise reasonable and prudent supervision over the management, polices, and controls of the Company in order to detect practices that existed at RehabCare resulting in the Company having to enter into two separate settlement agreements with the DOJ. The Company disputes the allegations made in the Complaint and will defend this action and any related claims vigorously.

Ordinary course matters—In addition to the matters described above, the Company is subject to investigations, claims, and lawsuits in the ordinary course of business, including investigations resulting from the Company’s obligation to self-report suspected violations of law and professional liability claims, particularly in its hospital and nursing center operations. In many of these claims, plaintiffs’ attorneys are seeking significant fines and compensatory and punitive damages in addition to attorneys’ fees. The Company maintains professional and general liability insurance in amounts and coverage that management believes are sufficient for the Company’s operations. However, the Company’s insurance may not cover all claims against the Company or the full extent of the Company’s liability.

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Subsequent Events

9 Months Ended

Sep. 30, 2016

Subsequent Events [Abstract]

Subsequent Events

NOTE 18 – SUBSEQUENT EVENTS

Plan to Exit the Skilled Nursing Facility Business

On November 7, 2016, the Company announced plans to exit its skilled nursing facility business as an owner and operator. This strategic decision will reduce annual rent obligations and annual capital expenditures. In addition, the Company will optimize its overhead structure by eliminating divisional and corporate overhead above the facility level, much of which is associated with supporting the Company’s skilled nursing facilities.

Curahealth Disposal

On October 1, 2016, the Company completed the Curahealth Disposal for $27.5 million. The Hospitals have a total of 783 licensed beds in Arizona, Louisiana, Massachusetts, Oklahoma, Pennsylvania, and Tennessee. As of September 30, 2016, the Hospitals were classified as assets held for sale.

In connection with the sale of the Hospitals, the Company entered into amendments to certain of its master lease agreements with Ventas on April 3, 2016 to transition the operations of seven of the Hospitals formerly leased from Ventas (the “Leased Hospitals”). Six of the Leased Hospitals were leased under master lease agreement No. 5 and one was leased under master lease agreement No. 1. The Leased Hospitals were leased under the applicable master lease agreement until the closing of the Curahealth Disposal. The Company paid a fee to Ventas of $3.5 million upon signing of the amendments and paid an additional $3 million upon the closing of the sale of the Leased Hospitals. Ventas paid the Company 50% of the sales proceeds for the real estate (after deduction of Ventas’s closing costs) attributed to the Leased Hospitals in the sale, which was immaterial.

NOTE 18 – SUBSEQUENT EVENTS (Continued)

Curahealth Disposal (Continued)

Under separate lease amendments, the annual rent on the Leased Hospitals, which had annual rent of $7.7 million, was reallocated to the remaining facilities the Company leases from Ventas under the various master lease agreements. As required under GAAP, the reallocated rents were recorded as a lease termination fee by the Company upon the cease use date of the Leased Hospitals. The total annual payments on Ventas’s post-acute care portfolio operated by the Company will remain the same as its prior level.

In connection with these transactions, the Company incurred a pretax lease termination fee of $51.8 million comprised of the $6.5 million of fees paid to Ventas in conjunction with execution of the amendments and $45.3 million of aggregate reallocated rents attributable to the Leased Hospitals, which was recorded upon the cease use date of the Leased Hospitals. The lease termination fee was recorded as a long-term liability discounted at the Company’s credit-adjusted risk-free rate through the end of the original lease term of the Leased Hospitals, or through 2025. The Company does not expect any additional lease termination fees related to the transactions.

The Company recognized a non-cash pretax impairment charge related to property and equipment of $27.5 million during the nine months ended September 30, 2016, of which $19.7 million was recorded during the third quarter of 2016. In addition, the Company recognized a pretax loss on disposal of $21.4 million during the third quarter of 2016, which included a non-cash pretax write-off of both goodwill and other intangible assets of $13.3 million allocable to the Hospitals.

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Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Business

Business

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates transitional care (“TC”) hospitals, a home health, hospice and community care business, inpatient rehabilitation hospitals (“IRFs”), a contract rehabilitation services business, nursing centers, and assisted living facilities across the United States (collectively, the “Company” or “Kindred”). At September 30, 2016, the Company’s hospital division operated 94 TC hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program) in 22 states. The Company’s Kindred at Home division primarily provided home health, hospice, and community care services from 647 sites of service in 40 states. The Company’s Kindred Rehabilitation Services division operated 19 IRFs and 104 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs), and provided rehabilitation services primarily in hospitals and long-term care settings in 46 states. The Company’s nursing center division operated 91 nursing centers and seven assisted living facilities in 19 states.

Gentiva Merger

Gentiva merger

On October 9, 2014, the Company entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for the Company’s acquisition of Gentiva (the “Gentiva Merger”). On February 2, 2015, the Company consummated the Gentiva Merger, with Gentiva continuing as the surviving company and the Company’s wholly owned subsidiary.

Discontinued Operations

Discontinued operations

The Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. For accounting purposes, the operating results of these businesses and the gains associated with these transactions were classified as discontinued operations in the accompanying unaudited condensed consolidated statement of operations for all periods presented in accordance with the authoritative guidance in effect through December 31, 2014. Effective January 1, 2015, the authoritative guidance modified the requirements for reporting discontinued operations. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Assets held for sale at September 30, 2016 have been measured at the lower of carrying value or estimated fair value less costs of disposal. See Note 5 for a summary of discontinued operations and assets held for sale.

Recently Issued Accounting Requirements

Recently issued accounting requirements

In October 2016, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which alters how an entity needs to consider indirect interests in a variable interest entity (“VIE”) held through an entity under common control. The amendment eliminates the distinction between the full attribution and proportionate approach, leaving the entity to only consider the latter when evaluating a VIE held through common control. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations or liquidity.

In August 2016, the FASB issued authoritative guidance to eliminate diversity in practice related to the cash flow statement classification of eight specific cash flow issues, which include debt prepayment or extinguishment costs, maturity of a zero coupon bond, settlement of contingent consideration liabilities after a business combination, proceeds from insurance settlements and distribution from certain equity method investees. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently assessing the impact on its consolidated statement of cash flows.

In June 2016, the FASB issued authoritative guidance for accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new guidance is effective for annual periods beginning after December 15, 2019 and early adoption is permitted beginning after December 15, 2018. The Company is still evaluating its transition approach and the impact of adoption on its business, financial position, results of operations, and liquidity.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In May 2016, the FASB finalized its amendments to the guidance in the new revenue standard on contracts with customers and specifically, collectability, non-cash consideration, presentation of sales taxes, and completed contracts. The amendments are intended to reduce the risk of diversity in practice and the cost and complexity of applying certain aspects of the revenue standard. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for interim and annual periods beginning on or after December 15, 2017 with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that requires the tax effects related to share-based payments to be recorded through the income statement at settlement. Under the new guidance, tax benefits in excess of or less than the tax effect of compensation expenses will no longer be recorded in equity for purpose of simplification, which is expected to reduce administrative complexities but could increase the volatility of income tax expense. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB finalized its amendments to the guidance in the new revenue standard on assessing whether an entity is a principal or an agent in a revenue transaction. Under the new amendments, the FASB confirmed that a principal in an arrangement controls a good or service before it is transferred to a customer but revised the structure of indicators when an entity is the principal. The amendments have the same effective date and transition requirements as the new revenue standard, which is effective for annual and interim periods beginning on or after December 15, 2017, with early adoption permitted on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

In March 2016, the FASB issued authoritative guidance that eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Under the new guidance, the equity method of accounting should be applied prospectively from the date significant influence is obtained. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In March 2016, the FASB issued authoritative guidance clarifying that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. Under the new guidance, an entity will still need to evaluate whether it is possible that the counterparty will perform under the contract as part of the assessment for hedge accounting. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In February 2016, the FASB issued amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and expects no material impact on liquidity.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Recently issued accounting requirements (Continued)

In January 2016, the FASB issued amended authoritative guidance which makes targeted improvements for financial instruments. The new provisions impact certain aspects of recognition, measurement, presentation and disclosure requirements of financial instruments. Specifically, the guidance will (1) require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose the method and assumptions used to estimate fair value for financial instruments measured at amortized cost, and (4) require separate presentation of financial assets and financial liabilities by measurement category. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted. The adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, or liquidity.

In August 2014, the FASB issued authoritative guidance requiring management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide disclosures in certain circumstances. The guidance is effective for annual and interim periods ending after December 15, 2016. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under the new provisions, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB finalized a one-year deferral of the new revenue standard with an updated effective date for interim and annual periods beginning on or after December 15, 2017. Entities are not permitted to adopt the standard earlier than the original effective date, which was on or after December 15, 2016. The Company is still assessing whether it will elect the full retrospective or modified adoption approach and the impact of the adoption of the new revenue standard on its business, financial position, results of operations, and liquidity.

Equity

Equity

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the nine months ended September 30, 2016 and 2015 (in thousands):

For the nine months ended September 30, 2016	Amounts attributable to Kindred stockholders			Noncontrolling interests			Total equity
Balance at December 31, 2015	$	1,499,854		$	206,193		$	1,706,047
Comprehensive income (loss):
Net income (loss)		(648,823	)		40,347			(608,476	)
Other comprehensive loss		(1,702	)		-			(1,702	)
		(650,525	)		40,347			(610,178	)
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(3,079	)		-			(3,079	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		434			-			434
Stock-based compensation amortization		13,058			-			13,058
Dividends paid		(30,517	)		-			(30,517	)
Contributions made by noncontrolling interests		-			14,061			14,061
Distributions to noncontrolling interests		-			(35,240	)		(35,240	)
Purchase of noncontrolling interests		(234	)		(2,158	)		(2,392	)
Balance at September 30, 2016	$	828,991		$	223,203		$	1,052,194
For the nine months ended September 30, 2015
Balance at December 31, 2014	$	1,441,867		$	44,105		$	1,485,972
Comprehensive income (loss):
Net income (loss)		(139,058	)		30,450			(108,608	)
Other comprehensive loss		(1,777	)		-			(1,777	)
		(140,835	)		30,450			(110,385	)
Issuance of common stock in connection with employee benefit plans		534			-			534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(10,055	)		-			(10,055	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		1,806			-			1,806
Stock-based compensation amortization		15,764			-			15,764
Dividends paid		(30,067	)		-			(30,067	)
Acquired noncontrolling interests		-			149,817			149,817
Contributions made by noncontrolling interests		-			1,492			1,492
Distributions to noncontrolling interests		-			(31,823	)		(31,823	)
Issuance of common stock in Gentiva Merger		177,456			-			177,456
Balance at September 30, 2015	$	1,456,470		$	194,041		$	1,650,511

Derivative Financial Instruments

Derivative financial instruments

In March 2014, the Company entered into an interest rate swap agreement to hedge its floating interest rate on an aggregate of $400 million of debt outstanding under its Third Amended and Restated Term Loan Facility (as defined below). On April 8, 2014, the Company completed a novation of a portion of its $400 million swap agreement to two new counterparties, each in the amount of $125 million. The original swap contract was not amended, terminated, or otherwise modified. The interest rate swap had an effective date of April 9, 2014, will expire on April 9, 2018, and continues to apply to the Term Loan Facility (as defined below). The Company is required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, the Company will receive interest on $400 million at a variable interest rate that is based upon the three-month London Interbank Offered Rate (“LIBOR”), subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

In January 2016, the Company entered into three interest rate swap agreements to hedge its floating interest rate on an aggregate of $325 million of debt outstanding under its Fourth Amended and Restated Term Loan Facility (as defined below). The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. The Company is required to make payments based upon a fixed interest rate of 1.862% and 1.855% calculated on the notional amount of $175 million and $150 million, respectively. In exchange, the Company will receive interest on $325 million at a variable interest rate that is based upon the three-month LIBOR rate, subject to a minimum rate of 1.0%. The Company determined these interest rate swaps continue to qualify for cash flow hedge accounting treatment at September 30, 2016.

The Company records the effective portion of the gain or loss on these derivative financial instruments in accumulated other comprehensive income (loss) as a component of stockholders’ equity and records the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. For the three months and nine months ended September 30, 2016 and 2015, the ineffectiveness related to the interest rate swaps was immaterial.

The aggregate fair value of the interest rate swaps recorded in other accrued liabilities was $8.2 million and $4.5 million at September 30, 2016 and December 31, 2015, respectively. See Note 15.

As used herein, (1) the “Term Loan Facility” refers to the Fifth Amended and Restated Term Loan Facility dated as of June 14, 2016, (2) the “Fourth Amended and Restated Term Loan Facility” refers to the Third Amended and Restated Term Loan Facility, as amended and restated as of November 25, 2014, and as further amended as of March 10, 2015, and (3) the “Third Amended and Restated Term Loan Facility” refers to a previous $225 million senior secured term loan facility dated as of June 1, 2011, as amended as of October 4, 2012, and as further amended and restated as of May 30, 2013, August 21, 2013, and April 9, 2014.

Variable Interest Entities

Variable interest entities

The Company follows the provisions of the authoritative guidance for determining whether an entity is a VIE. In order to determine if the Company is a primary beneficiary of a VIE for financial reporting purposes, it must consider whether it has the power to direct activities of the VIE that most significantly impact the performance of the VIE and whether the Company has the obligation to absorb losses or the right to receive returns that would be significant to the VIE. The Company consolidates a VIE when it is the primary beneficiary.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Variable interest entities (Continued)

In January 2015, the Company completed the acquisition of Centerre Healthcare Corporation (“Centerre”), which operated 11 IRFs. The Company opened two IRFs during 2015 and one additional IRF during the nine months ended September 30, 2016. Each entity operating an IRF is subject to a partnership and a management services agreement with the Company. Under United States generally accepted accounting principles (“GAAP”), the Company determined that all of the entities acquired or opened qualify as VIEs and that the Company is the primary beneficiary in all but one arrangement. The Company holds an equity interest and acts as manager in each of the entities. Through the management services agreement, the Company is delegated necessary responsibilities to provide management services, administrative services and direction of the day-to-day operations. Based on the Company’s assessment of the most significant activities of the IRFs, the manager has the ability to direct the majority of those activities in 13 of the entities.

The analysis upon which the consolidation determination rests is complex, involves uncertainties, and requires significant judgment on various matters, some of which could be subject to different interpretations.

The carrying amounts and classifications of the assets and liabilities of the consolidated VIEs are as follows (in thousands):

	September 30,		December 31,
	2016		2015
Assets:
Current assets:
Cash and cash equivalents	$	50,709	$	36,798
Accounts receivable, net		34,521		36,085
Inventories		1,718		1,576
Other		3,617		3,001
		90,565		77,460
Property and equipment, net		17,561		17,100
Goodwill		275,375		271,717
Intangible assets, net		22,048		22,675
Other		34		54
Total assets	$	405,583	$	389,006
Liabilities:
Current liabilities:
Accounts payable	$	33,657	$	26,291
Salaries, wages and other compensation		2,433		3,261
Other accrued liabilities		3,721		2,784
Long-term debt due within one year		1,703		1,106
		41,514		33,442
Long-term debt		601		1,274
Deferred credits and other liabilities		6,830		4,971
Total liabilities	$	48,945	$	39,687

Other Information

Other information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for quarterly reports on Form 10-Q of Regulation S-X and do not include all of the disclosures normally required by GAAP or those normally required in annual reports on Form 10-K. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on Form 10-K. The accompanying condensed consolidated balance sheet at December 31, 2015 was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

NOTE 1 – BASIS OF PRESENTATION (Continued)

Other information (Continued)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the Company’s customary accounting practices. Management believes that financial information included herein reflects all adjustments necessary for a fair statement of interim results and, except as otherwise disclosed, all such adjustments are of a normal and recurring nature.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.

Reclassifications

Reclassifications

Certain prior period amounts have been reclassified to conform with the current period presentation.

Correction of December 31, 2015 balance sheet

During the second quarter ended June 30, 2016, the Company corrected the balance sheet presentation of capitalized lender fees related to debt issuance. These amounts were previously presented as other long-term assets in the Company’s consolidated balance sheet, and the Company has determined that they should have been presented as a contra account to long-term debt similar to a debt discount.

The Company concluded that the correction was not material to any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with Accounting Standards Codification 250, Presentation of Financial Statements, the Company has corrected all prior periods presented. Periods not presented herein will be corrected, as applicable, in future filings. The correction had no impact on total equity, results of operations, or cash flows.

The impact of this correction on the Company’s consolidated balance sheet as of December 31, 2015 was as follows:

	As previously reported		Adjustment			As revised
Other long-term assets	$	289,746	$	(46,964	)	$	242,782
Total assets		6,515,223		(46,964	)		6,468,259
Long-term debt		3,133,312		(46,964	)		3,086,348
Total liabilities and equity		6,515,223		(46,964	)		6,468,259

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Basis of Presentation (Tables)

9 Months Ended

Sep. 30, 2016

Changes in Equity Attributable to Noncontrolling Interests and Equity Attributable to Kindred

The following table sets forth the changes in equity attributable to noncontrolling interests and equity attributable to Kindred stockholders for the nine months ended September 30, 2016 and 2015 (in thousands):

For the nine months ended September 30, 2016	Amounts attributable to Kindred stockholders			Noncontrolling interests			Total equity
Balance at December 31, 2015	$	1,499,854		$	206,193		$	1,706,047
Comprehensive income (loss):
Net income (loss)		(648,823	)		40,347			(608,476	)
Other comprehensive loss		(1,702	)		-			(1,702	)
		(650,525	)		40,347			(610,178	)
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(3,079	)		-			(3,079	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		434			-			434
Stock-based compensation amortization		13,058			-			13,058
Dividends paid		(30,517	)		-			(30,517	)
Contributions made by noncontrolling interests		-			14,061			14,061
Distributions to noncontrolling interests		-			(35,240	)		(35,240	)
Purchase of noncontrolling interests		(234	)		(2,158	)		(2,392	)
Balance at September 30, 2016	$	828,991		$	223,203		$	1,052,194
For the nine months ended September 30, 2015
Balance at December 31, 2014	$	1,441,867		$	44,105		$	1,485,972
Comprehensive income (loss):
Net income (loss)		(139,058	)		30,450			(108,608	)
Other comprehensive loss		(1,777	)		-			(1,777	)
		(140,835	)		30,450			(110,385	)
Issuance of common stock in connection with employee benefit plans		534			-			534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(10,055	)		-			(10,055	)
Income tax benefit in connection with the issuance of common stock under employee    benefit plans		1,806			-			1,806
Stock-based compensation amortization		15,764			-			15,764
Dividends paid		(30,067	)		-			(30,067	)
Acquired noncontrolling interests		-			149,817			149,817
Contributions made by noncontrolling interests		-			1,492			1,492
Distributions to noncontrolling interests		-			(31,823	)		(31,823	)
Issuance of common stock in Gentiva Merger		177,456			-			177,456
Balance at September 30, 2015	$	1,456,470		$	194,041		$	1,650,511

Classifications of the Assets and Liabilities of the Consolidated Entities

Condensed Consolidating Balance Sheet

	As of September 30, 2016
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	32,623		$	106,807		$	-		$	139,430
Insurance subsidiary investments		-		-			105,346			-			105,346
Accounts receivable, net		-		1,101,665			164,880			-			1,266,545
Inventories		-		20,568			4,694			-			25,262
Income taxes		-		11,432			984			-			12,416
Other		-		85,318			9,558			-			94,876
		-		1,251,606			392,269			-			1,643,875
Property and equipment, net		-		807,137			70,414			-			877,551
Goodwill		-		1,972,402			450,071			-			2,422,473
Intangible assets, net		-		758,045			46,557			-			804,602
Insurance subsidiary investments		-		-			195,517			-			195,517
Intercompany		4,940,207		-			-			(4,940,207	)		-
Deferred tax assets		-		-			8,189			(8,189	)		-
Other		11,123		113,557			158,642			-			283,322
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	104,206		$	99,220		$	-		$	203,426
Salaries, wages and other     compensation		-		331,453			59,290			-			390,743
Due to third party payors		-		57,945			-			-			57,945
Professional liability risks		-		5,086			55,950			-			61,036
Other accrued liabilities		60,217		199,168			20,920			-			280,305
Long-term debt due within one     year		26,186		-			1,703			-			27,889
		86,403		697,858			237,083			-			1,021,344
Long-term debt		3,315,573		-			601			-			3,316,174
Intercompany/deficiency in earnings of     consolidated subsidiaries		720,363		4,344,909			595,298			(5,660,570	)		-
Professional liability risks		-		73,117			209,931			-			283,048
Deferred tax liabilities		-		208,523			-			(8,189	)		200,334
Deferred credits and other liabilities		-		214,438			139,808			-			354,246
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		828,991		(636,098	)		(84,265	)		720,363			828,991
Noncontrolling interests		-		-			223,203			-			223,203
		828,991		(636,098	)		138,938			720,363			1,052,194
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet (Continued)

	As of December 31, 2015
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries		Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	18,232		$	80,526	$	-		$	98,758
Insurance subsidiary investments		-		-			106,638		-			106,638
Accounts receivable, net		-		1,039,761			155,107		-			1,194,868
Inventories		-		23,125			4,666		-			27,791
Income taxes		-		10,913			877		-			11,790
Other		-		53,648			7,406		-			61,054
		-		1,145,679			355,220		-			1,500,899
Property and equipment, net		-		911,611			60,385		-			971,996
Goodwill		-		2,098,812			570,998		-			2,669,810
Intangible assets, net		-		707,792			47,863		-			755,655
Insurance subsidiary investments		-		-			204,498		-			204,498
Intercompany		4,749,257		-			-		(4,749,257	)		-
Deferred tax assets		-		95,721			8,409		-			104,130
Acquisition deposit		-		18,489			-		-			18,489
Other		11,312		116,692			114,778		-			242,782
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	106,253		$	80,808	$	-		$	187,061
Salaries, wages and other     compensation		-		348,548			56,377		-			404,925
Due to third party payors		-		36,251			-		-			36,251
Professional liability risks		-		4,813			59,286		-			64,099
Other accrued liabilities		75,134		297,608			21,504		-			394,246
Long-term debt due within one     year		23,524		-			1,106		-			24,630
		98,658		793,473			219,081		-			1,111,212
Long-term debt		3,085,074		-			1,274		-			3,086,348
Intercompany/deficiency in earnings of     consolidated subsidiaries		76,983		4,142,653			606,604		(4,826,240	)		-
Professional liability risks		-		61,472			201,801		-			263,273
Deferred credits and other liabilities		-		175,173			126,206		-			301,379
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		1,499,854		(77,975	)		992		76,983			1,499,854
Noncontrolling interests		-		-			206,193		-			206,193
		1,499,854		(77,975	)		207,185		76,983			1,706,047
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259

Schedule of Impact of Correction on Consolidated Balance Sheet

The impact of this correction on the Company’s consolidated balance sheet as of December 31, 2015 was as follows:

	As previously reported		Adjustment			As revised
Other long-term assets	$	289,746	$	(46,964	)	$	242,782
Total assets		6,515,223		(46,964	)		6,468,259
Long-term debt		3,133,312		(46,964	)		3,086,348
Total liabilities and equity		6,515,223		(46,964	)		6,468,259

Variable Interest Entity, Primary Beneficiary

Classifications of the Assets and Liabilities of the Consolidated Entities

The carrying amounts and classifications of the assets and liabilities of the consolidated VIEs are as follows (in thousands):

	September 30,		December 31,
	2016		2015
Assets:
Current assets:
Cash and cash equivalents	$	50,709	$	36,798
Accounts receivable, net		34,521		36,085
Inventories		1,718		1,576
Other		3,617		3,001
		90,565		77,460
Property and equipment, net		17,561		17,100
Goodwill		275,375		271,717
Intangible assets, net		22,048		22,675
Other		34		54
Total assets	$	405,583	$	389,006
Liabilities:
Current liabilities:
Accounts payable	$	33,657	$	26,291
Salaries, wages and other compensation		2,433		3,261
Other accrued liabilities		3,721		2,784
Long-term debt due within one year		1,703		1,106
		41,514		33,442
Long-term debt		601		1,274
Deferred credits and other liabilities		6,830		4,971
Total liabilities	$	48,945	$	39,687

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Gentiva Merger (Tables)

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Purchase Price Allocation

The following is the Gentiva Merger purchase price allocation (in thousands):

Cash and cash equivalents	$	64,695
Accounts receivable		265,034
Other current assets		123,428
Property and equipment		46,732
Identifiable intangible assets:
Certificates of need (indefinite life)		256,921
Medicare certifications (indefinite life)		94,500
Trade names (indefinite life)		22,200
Trade name		15,600
Non-compete agreements		1,820
Leasehold interests		1,439
Total identifiable intangible assets		392,480
Deferred tax assets		37,429
Other assets		74,407
Current portion of long-term debt		(53,075	)
Accounts payable and other current liabilities		(319,004	)
Long-term debt, less current portion		(1,124,288	)
Deferred tax liabilities		(47,748	)
Other liabilities		(126,088	)
Noncontrolling interests		(3,992	)
Total identifiable net assets		(669,990	)
Goodwill		1,392,271
Net assets	$	722,281

Unaudited Pro Forma Net Effect of Gentiva Merger

The unaudited pro forma net effect of the Gentiva Merger assuming the acquisition occurred as of January 1, 2014 is as follows (in thousands, except per share amounts):

	Three months ended			Nine months ended
	September 30,			September 30,
	2015			2015
Revenues	$	1,764,516		$	5,435,657
Loss from continuing operations attributable to Kindred		(14,501	)		(56,221	)
Loss attributable to Kindred		(12,231	)		(56,950	)
Loss per common share:
Basic:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)
Diluted:
Loss from continuing operations		(0.17	)		(0.66	)
Net loss		(0.14	)		(0.67	)

XML

Discontinued Operations (Tables)

9 Months Ended

Sep. 30, 2016

Discontinued Operations And Disposal Groups [Abstract]

Discontinued Operations

NOTE 5 – DISCONTINUED OPERATIONS (Continued)

A summary of discontinued operations follows (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues	$	756		$	12,935		$	5,921		$	36,934
Salaries, wages and benefits		2			5,306			1,781			17,877
Supplies		-			595			133			1,995
Rent		469			1,951			1,690			6,608
Other operating expenses		29			2,001			567			7,008
General and administrative expenses (income)		271			(920	)		(2,496	)		5,699
Depreciation		-			266			237			632
Interest expense		5			2			16			3
Investment income		-			(7	)		(1	)		(12	)
		776			9,194			1,927			39,810
Income (loss) from operations before income taxes		(20	)		3,741			3,994			(2,876	)
Provision (benefit) for income taxes		(8	)		1,472			1,572			(1,132	)
Income (loss) from operations		(12	)		2,269			2,422			(1,744	)
Gain (loss) on divestiture of operations		-			-			179			983
Income (loss) from discontinued operations		(12	)		2,269			2,601			(761	)
(Earnings) loss attributable to noncontrolling interests		(1	)		1			(6	)		32
Income (loss) attributable to Kindred	$	(13	)	$	2,270		$	2,595		$	(729	)

Discontinued Operations Data by Business Segment

The following table sets forth certain discontinued operating data by business segment (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016		2015
Revenues:
Hospital division	$	511		$	158		$	1,393	$	1,747
Nursing center division		245			12,777			4,528		35,187
	$	756		$	12,935		$	5,921	$	36,934
Segment EBITDAR:
Hospital division	$	580		$	(14	)	$	1,476	$	408
Nursing center division		(126	)		5,967			4,460		3,947
	$	454		$	5,953		$	5,936	$	4,355
Rent:
Hospital division	$	468		$	477		$	1,395	$	1,514
Nursing center division		1			1,474			295		5,094
	$	469		$	1,951		$	1,690	$	6,608
Depreciation:
Hospital division	$	-		$	-		$	-	$	-
Nursing center division		-			266			237		632
	$	-		$	266		$	237	$	632

Net Assets Held for Sale

A summary of the net assets held for sale follows (in thousands):

	September 30,			December 31,
	2016			2015
Current assets	$	34,207		$	-
Long-term assets:
Property and equipment, net		4,499			571
Other		-			42
		4,499			613
Current liabilities		(13,182	)		-
	$	25,524		$	613

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Restructuring Charges (Tables)

9 Months Ended

Sep. 30, 2016

Restructuring Charges Incurred by Business Segment

The following table sets forth the restructuring charges incurred by business segment (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Hospital division	$	78,476	$	332	$	78,743	$	897
Kindred at Home:
Home health		1,240		2,597		1,976		4,853
Hospice		541		420		1,203		2,691
		1,781		3,017		3,179		7,544
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		128		-		128		-
RehabCare		586		-		586		-
		714		-		714		-
Nursing center division		-		-		4,010		352
Support center		492		-		1,577		-
	$	81,463	$	3,349	$	88,223	$	8,793

Home Health And Hospice

Schedule of Restructuring Charges

The composition of the restructuring costs that the Company has incurred for these consolidations is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Lease termination cost	$	1,781	$	601	$	2,494	$	1,272
Facility closure and other costs		-		2,416		685		6,272
	$	1,781	$	3,017	$	3,179	$	7,544

Schedule of Restructuring Liability Activity

The following table summarizes the Company’s Kindred at Home branch consolidation restructuring liability activity (included in other accrued liabilities) during the nine months ended September 30, 2016 (in thousands):

	Lease termination costs
Liability balance at January 1, 2016		$	1,863
Expense			2,494
Payments			(1,771	)
Adjustments			(60	)
Liability balance at September 30, 2016		$	2,526

Nursing Center Division

Schedule of Restructuring Charges

The composition of the restructuring costs that the Company has incurred for these division reorganizations is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Severance	$	714	$	-	$	2,284	$	-
Facility closure and other costs		-		-		2,440		-
Lease termination cost		-		-		-		352
	$	714	$	-	$	4,724	$	352

LTAC Portfolio Repositioning Plan

Schedule of Restructuring Charges

The composition of the restructuring charges that the Company has incurred for these activities is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Lease termination cost	$	56,869	$	207	$	56,869	$	207
Facility closure, loss on disposal and other costs		20,212		-		19,109		167
Severance		1,395		125		2,765		523
Transaction costs		492		-		1,577		-
	$	78,968	$	332	$	80,320	$	897

Schedule of Restructuring Liability Activity

The following table (in thousands) summarizes the Company’s LTAC portfolio repositioning liability activity (included in other accrued liabilities) during the nine months ended September 30, 2016, which does not include the non-cash charges of $13.8 million related to facility closure, loss on disposal and other costs, and lease termination costs.

	Lease termination costs			Severance and transaction costs			Total
Liability balance at January 1, 2016	$	-		$	-		$	-
Expense		62,190			4,342			66,532
Payments		(3,500	)		(3,600	)		(7,100	)
Liability balance at September 30, 2016	$	58,690		$	742		$	59,432

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Revenues (Tables)

9 Months Ended

Sep. 30, 2016

Income Statement [Abstract]

Summary of Revenues by Payor Type

A summary of revenues by payor type follows (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Medicare	$	921,911		$	915,778		$	2,859,760		$	2,673,753
Medicaid		209,640			210,688			610,119			610,911
Medicare Advantage		140,774			127,905			423,117			401,199
Medicaid Managed		66,903			52,736			191,837			147,137
Other		506,385			517,047			1,548,966			1,626,264
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958

XML

Loss Per Share and Dividends (Tables)

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Computation of Loss Per Common Share

A computation of loss per common share follows (in thousands, except per share amounts):

	Three months ended September 30,												Nine months ended September 30,
	2016						2015						2016						2015
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Loss:
Amounts attributable to Kindred stockholders:
Loss from continuing operations:
As reported in Statement of Operations	$	(685,600	)	$	(685,600	)	$	(16,869	)	$	(16,869	)	$	(651,418	)	$	(651,418	)	$	(138,329	)	$	(138,329	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(685,600	)	$	(685,600	)	$	(16,869	)	$	(16,869	)	$	(651,418	)	$	(651,418	)	$	(138,329	)	$	(138,329	)
Discontinued operations, net of income taxes:
Income (loss) from operations:
As reported in Statement of Operations	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,416		$	2,416		$	(1,712	)	$	(1,712	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,416		$	2,416		$	(1,712	)	$	(1,712	)
Gain on divestiture of operations:
As reported in Statement of Operations	$	-		$	-		$	-		$	-		$	179		$	179		$	983		$	983
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	-		$	-		$	-		$	-		$	179		$	179		$	983		$	983
Income (loss) from discontinued operations:
As reported in Statement of Operations	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,595		$	2,595		$	(729	)	$	(729	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(13	)	$	(13	)	$	2,270		$	2,270		$	2,595		$	2,595		$	(729	)	$	(729	)
Net loss:
As reported in Statement of Operations	$	(685,613	)	$	(685,613	)	$	(14,599	)	$	(14,599	)	$	(648,823	)	$	(648,823	)	$	(139,058	)	$	(139,058	)
Allocation to participating unvested      restricted stockholders		-			-			-			-			-			-			-			-
Available to common stockholders	$	(685,613	)	$	(685,613	)	$	(14,599	)	$	(14,599	)	$	(648,823	)	$	(648,823	)	$	(139,058	)	$	(139,058	)
Shares used in the computation:
Weighted average shares outstanding - basic      computation		86,869			86,869			86,184			86,184			86,766			86,766			83,960			83,960
Dilutive effect of employee stock options					-						-						-						-
Dilutive effect of tangible equity units					-						-						-						-
Adjusted weighted average shares outstanding -      diluted computation					86,869						86,184						86,766						83,960
Loss per common share:
Loss from continuing operations	$	(7.89	)	$	(7.89	)	$	(0.20	)	$	(0.20	)	$	(7.51	)	$	(7.51	)	$	(1.65	)	$	(1.65	)
Discontinued operations:
Income (loss) from operations		-			-			0.03			0.03			0.03			0.03			(0.02	)		(0.02	)
Gain on divestiture of operations		-			-			-			-			-			-			0.01			0.01
Income (loss) from discontinued operations		-			-			0.03			0.03			0.03			0.03			(0.01	)		(0.01	)
Net loss	$	(7.89	)	$	(7.89	)	$	(0.17	)	$	(0.17	)	$	(7.48	)	$	(7.48	)	$	(1.66	)	$	(1.66	)
Number of antidilutive stock options and tangible      equity units excluded from shares used in the      diluted loss per common share computation					1,743						1,548						1,744						2,572

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Business Segment Data (Tables)

9 Months Ended

Sep. 30, 2016

Segment Reporting [Abstract]

Data by Business Segment

The following table sets forth certain data by business segment (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenues:
Hospital division	$	575,323		$	579,497		$	1,852,317		$	1,847,186
Kindred at Home:
Home health		449,958			424,054			1,318,549			1,152,741
Hospice		188,575			181,140			550,642			478,202
		638,533			605,194			1,869,191			1,630,943
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		169,018			149,435			504,607			453,543
RehabCare		192,480			219,518			592,803			708,904
		361,498			368,953			1,097,410			1,162,447
Nursing center division		270,259			270,510			814,881			818,688
		1,845,613			1,824,154			5,633,799			5,459,264
Eliminations:
Kindred Hospital Rehabilitation Services		(22,330	)		(22,081	)		(69,515	)		(69,284	)
RehabCare		(28,075	)		(35,943	)		(85,708	)		(111,994	)
Nursing centers		(1,681	)		(1,614	)		(5,008	)		(4,028	)
		(52,086	)		(59,638	)		(160,231	)		(185,306	)
	$	1,793,527		$	1,764,516		$	5,473,568		$	5,273,958
Loss from continuing operations:
Segment EBITDAR:
Hospital division	$	82,752		$	96,108		$	344,179		$	361,751
Kindred at Home:
Home health		75,073			67,682			218,044			187,397
Hospice		31,326			34,025			87,521			78,908
		106,399			101,707			305,565			266,305
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		49,470			42,141			147,809			131,236
RehabCare		9,248			14,544			34,504			44,933
		58,718			56,685			182,313			176,169
Nursing center division		29,922			35,923			93,684			112,763
Support center		(61,751	)		(55,439	)		(199,363	)		(192,213	)
Litigation contingency expense		-			(31,462	)		(2,840	)		(130,387	)
Impairment charges		(324,289	)		-			(338,208	)		(6,726	)
Restructuring charges		(22,813	)		(2,541	)		(28,860	)		(6,962	)
Transaction costs		(2,982	)		(3,846	)		(6,513	)		(103,764	)
EBITDAR		(134,044	)		197,135			349,957			476,936
Rent		(98,415	)		(95,436	)		(296,025	)		(282,955	)
Restructuring charges - rent		(58,650	)		(808	)		(59,363	)		(1,831	)
Depreciation and amortization		(40,382	)		(39,329	)		(121,320	)		(116,889	)
Interest, net		(58,052	)		(56,008	)		(172,856	)		(173,925	)
Income (loss) from continuing operations before      income taxes		(389,543	)		5,554			(299,607	)		(98,664	)
Provision for income taxes		281,752			12,523			311,470			9,183
	$	(671,295	)	$	(6,969	)	$	(611,077	)	$	(107,847	)

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Rent:
Hospital division	$	52,555	$	51,726	$	158,259	$	154,584
Kindred at Home:
Home health		8,472		8,675		25,730		24,149
Hospice		4,342		4,428		13,047		12,188
		12,814		13,103		38,777		36,337
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		8,852		7,591		26,511		22,473
RehabCare		925		937		2,697		2,946
		9,777		8,528		29,208		25,419
Nursing center division		22,697		21,510		68,151		64,039
Support center		572		569		1,630		2,576
	$	98,415	$	95,436	$	296,025	$	282,955
Depreciation and amortization:
Hospital division	$	12,627	$	12,956	$	38,896	$	40,963
Kindred at Home:
Home health		3,803		4,653		11,916		12,519
Hospice		1,563		1,821		4,688		4,759
		5,366		6,474		16,604		17,278
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		3,573		3,344		10,620		10,076
RehabCare		2,011		1,955		5,983		5,790
		5,584		5,299		16,603		15,866
Nursing center division		7,552		6,695		22,020		21,151
Support center		9,253		7,905		27,197		21,631
	$	40,382	$	39,329	$	121,320	$	116,889

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Capital expenditures, excluding acquisitions    (including discontinued operations):
Hospital division:
Routine	$	5,649	$	5,127	$	17,499	$	20,017
Development		-		-		-		-
		5,649		5,127		17,499		20,017
Kindred at Home:
Home health:
Routine		1,300		1,225		5,009		2,336
Development		-		-		-		-
		1,300		1,225		5,009		2,336
Hospice:
Routine		637		352		1,928		834
Development		-		-		-		-
		637		352		1,928		834
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Routine		380		350		1,058		625
Development		4,973		1,281		15,344		1,342
		5,353		1,631		16,402		1,967
RehabCare:
Routine		698		532		1,205		1,248
Development		-		-		-		-
		698		532		1,205		1,248
Nursing center division:
Routine		5,486		4,738		13,247		14,146
Development		585		2,085		5,923		8,330
		6,071		6,823		19,170		22,476
Support center:
Routine:
Information systems		7,031		22,765		24,744		40,335
Other		692		333		4,013		1,150
Development		2,828		2,394		5,845		2,394
		10,551		25,492		34,602		43,879
Totals:
Routine		21,873		35,422		68,703		80,691
Development		8,386		5,760		27,112		12,066
	$	30,259	$	41,182	$	95,815	$	92,757

NOTE 9 – BUSINESS SEGMENT DATA (Continued)

	September 30,		December 31,
	2016		2015
Assets at end of period:
Hospital division	$	1,335,743	$	1,633,801
Kindred at Home:
Home health		1,527,366		1,435,176
Hospice		949,726		922,710
		2,477,092		2,357,886
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		819,995		802,686
RehabCare		333,564		347,738
		1,153,559		1,150,424
Nursing center division		485,181		494,066
Support center		775,765		832,082
	$	6,227,340	$	6,468,259
Goodwill:
Hospital division	$	361,310	$	628,519
Kindred at Home:
Home health		913,703		905,989
Hospice		647,507		639,006
		1,561,210		1,544,995
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		499,953		496,296
RehabCare		-		-
		499,953		496,296
	$	2,422,473	$	2,669,810

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Insurance Risks (Tables)

9 Months Ended

Sep. 30, 2016

Text Block [Abstract]

Provision for Loss for Insurance Risks

The provision for loss for insurance risks, including the cost of coverage maintained with unaffiliated commercial insurance carriers, follows (in thousands):

	Three months ended					Nine months ended
	September 30,					September 30,
	2016		2015			2016			2015
Professional liability:
Continuing operations	$	19,486	$	19,778		$	64,614		$	51,067
Discontinued operations		84		(1,741	)		(2,940	)		(2,408	)
Workers compensation:
Continuing operations	$	16,792	$	11,165		$	45,797		$	40,021
Discontinued operations		163		(2,219	)		(512	)		(2,225	)

Assets and Liabilities Related to Insurance Risks

A summary of the assets and liabilities related to insurance risks included in the accompanying unaudited condensed consolidated balance sheet follows (in thousands):

	September 30, 2016						December 31, 2015
	Professional liability		Workers compensation		Total		Professional liability		Workers compensation		Total
Assets:
Current:
Insurance subsidiary investments	$	59,268	$	46,078	$	105,346	$	61,889	$	44,749	$	106,638
Reinsurance and other     recoverables		10,184		1,302		11,486		9,282		1,020		10,302
Other		-		50		50		-		100		100
		69,452		47,430		116,882		71,171		45,869		117,040
Non-current:
Insurance subsidiary investments		94,860		100,657		195,517		82,207		122,291		204,498
Reinsurance and other     recoverables		98,886		95,272		194,158		90,387		86,943		177,330
Deposits		4,225		24,061		28,286		3,980		4,337		8,317
Other		-		-		-		-		38		38
		197,971		219,990		417,961		176,574		213,609		390,183
	$	267,423	$	267,420	$	534,843	$	247,745	$	259,478	$	507,223
Liabilities:
Allowance for insurance risks:
Current	$	61,036	$	50,297	$	111,333	$	64,099	$	48,770	$	112,869
Non-current		283,048		213,639		496,687		263,273		206,079		469,352
	$	344,084	$	263,936	$	608,020	$	327,372	$	254,849	$	582,221

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Insurance Subsidiary Investments (Tables)

9 Months Ended

Sep. 30, 2016

Summary Of Investments Other Than Investments In Related Parties [Abstract]

Cost of Equities, Amortized Cost of Debt Securities and Estimated Fair Value of Insurance Subsidiary Investments

The cost for equities, amortized cost for debt securities and estimated fair value of the Company’s insurance subsidiary investments follows (in thousands):

	September 30, 2016									December 31, 2015
	Cost		Unrealized gains		Unrealized losses			Fair value		Cost		Unrealized gains		Unrealized losses			Fair value
Cash and cash equivalents (a)	$	177,550	$	-	$	-		$	177,550	$	186,029	$	-	$	-		$	186,029
Debt securities:
Corporate bonds		56,934		108		(10	)		57,032		46,940		5		(122	)		46,823
U.S. Treasury notes		26,447		36		-			26,483		33,386		-		(55	)		33,331
Debt securities issued     by U.S. government     agencies		17,643		27		(1	)		17,669		22,497		-		(43	)		22,454
		101,024		171		(11	)		101,184		102,823		5		(220	)		102,608
Equities by industry:
Technology		1,721		51		(16	)		1,756		1,533		66		(98	)		1,501
Consumer		1,687		11		(73	)		1,625		2,271		182		(36	)		2,417
Healthcare		1,230		16		(56	)		1,190		1,896		116		(37	)		1,975
Financial services		1,262		-		(113	)		1,149		1,854		55		(81	)		1,828
Industrials		998		1		(65	)		934		1,994		86		(157	)		1,923
Energy		-		-		-			-		1,015		-		(15	)		1,000
Other		3,060		1		(42	)		3,019		3,849		26		(268	)		3,607
		9,958		80		(365	)		9,673		14,412		531		(692	)		14,251
Certificates of deposit		12,450		6		-			12,456		8,250		-		(2	)		8,248
	$	300,982	$	257	$	(376	)	$	300,863	$	311,514	$	536	$	(914	)	$	311,136

(a) Includes $19.9 million and $29.6 million of money market funds at September 30, 2016 and December 31, 2015, respectively.

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Financial Instruments and Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value of Assets and Liabilities Measured on Recurring and Non-Recurring Basis

The Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis and any associated losses are summarized below (in thousands): 

	Fair value measurements
	Level 1		Level 2			Level 3			Assets/liabilities at fair value			Total losses
September 30, 2016
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	57,032		$	-		$	57,032		$	-
U.S. Treasury notes		26,483		-			-			26,483			-
Debt securities issued by U.S. government    agencies		-		17,669			-			17,669			-
		26,483		74,701			-			101,184			-
Available-for-sale equity securities		9,673		-			-			9,673			-
Money market funds		21,549		-			-			21,549			-
Certificates of deposit		-		12,456			-			12,456			-
Total available-for-sale investments		57,705		87,157			-			144,862			-
Deposits held in money market funds		11,901		4,126			-			16,027			-
	$	69,606	$	91,283		$	-		$	160,889		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(4,883	)	$	(4,883	)	$	-
Interest rate swaps		-		(8,234	)		-			(8,234	)		-
	$	-	$	(8,234	)	$	(4,883	)	$	(13,117	)	$	-
Non-recurring:
Assets:
Property and equipment	$	-	$	-		$	645,723		$	645,723		$	(24,902	)
Goodwill		-		-			361,310			361,310			(261,129	)
Intangible assets - certificates of need		-		-			641			641			(3,559	)
Nursing center available for sale		-		-			4,499			4,499			(5,310	)
Hospitals available for sale		-		-			21,025			21,025			(43,308	)
	$	-	$	-		$	1,033,198		$	1,033,198		$	(338,208	)
Liabilities	$	-	$	-		$	-		$	-		$	-
December 31, 2015
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	46,823		$	-		$	46,823		$	-
U.S. Treasury notes		33,331		-			-			33,331			-
Debt securities issued by U.S. government    agencies		-		22,454			-			22,454			-
		33,331		69,277			-			102,608			-
Available-for-sale equity securities		14,251		-			-			14,251			-
Money market funds		31,429		-			-			31,429			-
Certificates of deposit		-		8,248			-			8,248			-
Total available-for-sale investments		79,011		77,525			-			156,536			-
Deposits held in money market funds		100		3,880			-			3,980			-
	$	79,111	$	81,405		$	-		$	160,516		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(6,437	)	$	(6,437	)	$	-
Interest rate swaps		-		(4,472	)		-			(4,472	)		-
	$	-	$	(4,472	)	$	(6,437	)	$	(10,909	)	$	-
Non-recurring:
Assets:
Intangible assets - trade names	$	-	$	-		$	98,774		$	98,774		$	(24,757	)
Liabilities	$	-	$	-		$	-		$	-		$	-

Carrying Amount and Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments. The carrying value is equal to fair value for financial instruments that are based upon quoted market prices or current market rates. The Company’s long-term debt is based upon Level 2 inputs.

	September 30, 2016				December 31, 2015
(In thousands)	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	139,430	$	139,430	$	98,758	$	98,758
Insurance subsidiary investments		300,863		300,863		311,136		311,136
Long-term debt, including amounts due within one year    (excluding capital lease obligations totaling $0.6 million and    $0.8 million at September 30, 2016 and December 31, 2015,     respectively)		3,343,416		3,389,569		3,110,130		2,978,890

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Condensed Consolidating Financial Information (Tables)

9 Months Ended

Sep. 30, 2016

Condensed Financial Information Of Parent Company Only Disclosure [Abstract]

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

	Three months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	1,559,255		$	259,800		$	(25,528	)	$	1,793,527
Salaries, wages and benefits		-			895,394			62,250			-			957,644
Supplies		-			82,509			12,991			-			95,500
Rent		-			77,529			20,886			-			98,415
Other operating expenses		-			190,299			27,065			-			217,364
General and administrative expenses		-			230,612			105,323			(25,528	)		310,407
Other (income) expense		-			246			(692	)		-			(446	)
Litigation contingency expense		-			-			-			-			-
Impairment charges		-			202,617			121,672			-			324,289
Restructuring charges		-			80,268			1,195			-			81,463
Depreciation and amortization		-			37,883			2,499			-			40,382
Management fees		-			(2,277	)		2,277			-			-
Intercompany interest (income) expense from     affiliates		(56,169	)		44,514			11,655			-			-
Interest expense (income)		59,859			(17	)		20			-			59,862
Investment income		-			(90	)		(1,720	)		-			(1,810	)
Equity in net loss of consolidating affiliates		683,376			-			-			(683,376	)		-
		687,066			1,839,487			365,421			(708,904	)		2,183,070
Loss from continuing operations before income     taxes		(687,066	)		(280,232	)		(105,621	)		683,376			(389,543	)
Provision (benefit) for income taxes		(1,453	)		282,602			603			-			281,752
Loss from continuing operations		(685,613	)		(562,834	)		(106,224	)		683,376			(671,295	)
Discontinued operations, net of income taxes:
Income (loss) from operations		-			(73	)		61			-			(12	)
Loss on divestiture of operations		-			-			-			-			-
Income (loss) from discontinued operations		-			(73	)		61			-			(12	)
Net loss		(685,613	)		(562,907	)		(106,163	)		683,376			(671,307	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(14,305	)		-			(14,305	)
Discontinued operations		-			-			(1	)		-			(1	)
		-			-			(14,306	)		-			(14,306	)
Loss attributable to Kindred	$	(685,613	)	$	(562,907	)	$	(120,469	)	$	683,376		$	(685,613	)
Comprehensive loss	$	(685,055	)	$	(562,907	)	$	(106,849	)	$	684,062		$	(670,749	)
Comprehensive loss attributable to Kindred	$	(685,055	)	$	(562,907	)	$	(121,155	)	$	684,062		$	(685,055	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Three months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	1,553,814		$	236,783		$	(26,081	)	$	1,764,516
Salaries, wages and benefits		-			869,689			52,451			-			922,140
Supplies		-			83,840			12,711			-			96,551
Rent		-			76,275			19,161			-			95,436
Other operating expenses		-			186,036			21,801			-			207,837
General and administrative expenses		-			226,402			107,179			(26,081	)		307,500
Other (income) expense		-			35			(685	)		-			(650	)
Litigation contingency expense		-			31,462			-			-			31,462
Restructuring charges		-			3,349			-			-			3,349
Depreciation and amortization		-			36,920			2,409			-			39,329
Management fees		-			(5,170	)		5,170			-			-
Intercompany interest (income) expense from     affiliates		(51,099	)		39,769			11,330			-			-
Interest expense		56,350			27			63			-			56,440
Investment income		-			(177	)		(255	)		-			(432	)
Equity in net loss of consolidating affiliates		11,415			-			-			(11,415	)		-
		16,666			1,548,457			231,335			(37,496	)		1,758,962
Income (loss) from continuing operations before     income taxes		(16,666	)		5,357			5,448			11,415			5,554
Provision (benefit) for income taxes		(2,067	)		14,411			179			-			12,523
Income (loss) from continuing operations		(14,599	)		(9,054	)		5,269			11,415			(6,969	)
Income (loss) from discontinued operations, net of     income taxes		-			2,311			(42	)		-			2,269
Net income (loss)		(14,599	)		(6,743	)		5,227			11,415			(4,700	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		-			-			(9,900	)		-			(9,900	)
Discontinued operations		-			-			1			-			1
		-			-			(9,899	)		-			(9,899	)
Loss attributable to Kindred	$	(14,599	)	$	(6,743	)	$	(4,672	)	$	11,415		$	(14,599	)
Comprehensive income (loss)	$	(15,716	)	$	(6,743	)	$	4,591		$	12,051		$	(5,817	)
Comprehensive loss attributable to Kindred	$	(15,716	)	$	(6,743	)	$	(5,308	)	$	12,051		$	(15,716	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Nine months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	4,769,100		$	781,053		$	(76,585	)	$	5,473,568
Salaries, wages and benefits		-			2,627,827			184,985			-			2,812,812
Supplies		-			254,818			39,508			-			294,326
Rent		-			233,264			62,761			-			296,025
Other operating expenses		-			567,203			82,712			-			649,915
General and administrative expenses		-			762,273			312,871			(76,585	)		998,559
Other (income) expense		-			550			(2,459	)		-			(1,909	)
Litigation contingency expense		-			2,840			-			-			2,840
Impairment charges		-			213,964			124,244			-			338,208
Restructuring charges		-			87,028			1,195			-			88,223
Depreciation and amortization		-			113,542			7,778			-			121,320
Management fees		-			(7,003	)		7,003			-			-
Intercompany interest (income) expense from     affiliates		(166,673	)		131,499			35,174			-			-
Interest expense (income)		175,372			(34	)		79			-			175,417
Investment income		-			(305	)		(2,256	)		-			(2,561	)
Equity in net loss of consolidating affiliates		643,548			-			-			(643,548	)		-
		652,247			4,987,466			853,595			(720,133	)		5,773,175
Loss from continuing operations before income taxes		(652,247	)		(218,366	)		(72,542	)		643,548			(299,607	)
Provision (benefit) for income taxes		(3,424	)		313,569			1,325			-			311,470
Loss from continuing operations		(648,823	)		(531,935	)		(73,867	)		643,548			(611,077	)
Discontinued operations, net of income taxes:
Income from operations		-			2,336			86			-			2,422
Gain on divestiture of operations		-			179			-			-			179
Income from discontinued operations		-			2,515			86			-			2,601
Net loss		(648,823	)		(529,420	)		(73,781	)		643,548			(608,476	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(40,341	)		-			(40,341	)
Discontinued operations		-			-			(6	)		-			(6	)
		-			-			(40,347	)		-			(40,347	)
Loss attributable to Kindred	$	(648,823	)	$	(529,420	)	$	(114,128	)	$	643,548		$	(648,823	)
Comprehensive loss	$	(650,525	)	$	(529,420	)	$	(73,613	)	$	643,380		$	(610,178	)
Comprehensive loss attributable to Kindred	$	(650,525	)	$	(529,420	)	$	(113,960	)	$	643,380		$	(650,525	)

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Continued)

	Nine months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	4,626,164		$	724,586		$	(76,792	)	$	5,273,958
Salaries, wages and benefits		-			2,534,133			170,787			-			2,704,920
Supplies		-			249,995			38,064			-			288,059
Rent		-			226,417			56,538			-			282,955
Other operating expenses		-			542,682			74,999			-			617,681
General and administrative expenses		-			815,833			304,945			(76,792	)		1,043,986
Other (income) expense		-			355			(2,054	)		-			(1,699	)
Litigation contingency expense		-			130,387			-			-			130,387
Impairment charges		-			6,726			-			-			6,726
Restructuring charges		-			8,793			-			-			8,793
Depreciation and amortization		-			109,571			7,318			-			116,889
Management fees		-			(14,766	)		14,766			-			-
Intercompany interest (income) expense from     affiliates		(154,140	)		120,173			33,967			-			-
Interest expense		172,534			3,371			223			-			176,128
Investment income		-			(1,525	)		(678	)		-			(2,203	)
Equity in net loss of consolidating affiliates		127,902			-			-			(127,902	)		-
		146,296			4,732,145			698,875			(204,694	)		5,372,622
Income (loss) from continuing operations before     income taxes		(146,296	)		(105,981	)		25,711			127,902			(98,664	)
Provision (benefit) for income taxes		(7,238	)		15,956			465			-			9,183
Income (loss) from continuing operations		(139,058	)		(121,937	)		25,246			127,902			(107,847	)
Discontinued operations, net of income taxes:
Loss from operations		-			(793	)		(951	)		-			(1,744	)
Gain on divestiture of operations		-			983			-			-			983
Income (loss) from discontinued operations		-			190			(951	)		-			(761	)
Net income (loss)		(139,058	)		(121,747	)		24,295			127,902			(108,608	)
(Earnings) loss attributable to noncontrolling     interests:
Continuing operations		-			-			(30,482	)		-			(30,482	)
Discontinued operations		-			-			32			-			32
		-			-			(30,450	)		-			(30,450	)
Loss attributable to Kindred	$	(139,058	)	$	(121,747	)	$	(6,155	)	$	127,902		$	(139,058	)
Comprehensive income (loss)	$	(140,835	)	$	(121,747	)	$	23,748		$	128,449		$	(110,385	)
Comprehensive loss attributable to Kindred	$	(140,835	)	$	(121,747	)	$	(6,702	)	$	128,449		$	(140,835	)

Classifications of the Assets and Liabilities of the Consolidated Entities

Condensed Consolidating Balance Sheet

	As of September 30, 2016
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	32,623		$	106,807		$	-		$	139,430
Insurance subsidiary investments		-		-			105,346			-			105,346
Accounts receivable, net		-		1,101,665			164,880			-			1,266,545
Inventories		-		20,568			4,694			-			25,262
Income taxes		-		11,432			984			-			12,416
Other		-		85,318			9,558			-			94,876
		-		1,251,606			392,269			-			1,643,875
Property and equipment, net		-		807,137			70,414			-			877,551
Goodwill		-		1,972,402			450,071			-			2,422,473
Intangible assets, net		-		758,045			46,557			-			804,602
Insurance subsidiary investments		-		-			195,517			-			195,517
Intercompany		4,940,207		-			-			(4,940,207	)		-
Deferred tax assets		-		-			8,189			(8,189	)		-
Other		11,123		113,557			158,642			-			283,322
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	104,206		$	99,220		$	-		$	203,426
Salaries, wages and other     compensation		-		331,453			59,290			-			390,743
Due to third party payors		-		57,945			-			-			57,945
Professional liability risks		-		5,086			55,950			-			61,036
Other accrued liabilities		60,217		199,168			20,920			-			280,305
Long-term debt due within one     year		26,186		-			1,703			-			27,889
		86,403		697,858			237,083			-			1,021,344
Long-term debt		3,315,573		-			601			-			3,316,174
Intercompany/deficiency in earnings of     consolidated subsidiaries		720,363		4,344,909			595,298			(5,660,570	)		-
Professional liability risks		-		73,117			209,931			-			283,048
Deferred tax liabilities		-		208,523			-			(8,189	)		200,334
Deferred credits and other liabilities		-		214,438			139,808			-			354,246
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		828,991		(636,098	)		(84,265	)		720,363			828,991
Noncontrolling interests		-		-			223,203			-			223,203
		828,991		(636,098	)		138,938			720,363			1,052,194
	$	4,951,330	$	4,902,747		$	1,321,659		$	(4,948,396	)	$	6,227,340

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Balance Sheet (Continued)

	As of December 31, 2015
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries		Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	18,232		$	80,526	$	-		$	98,758
Insurance subsidiary investments		-		-			106,638		-			106,638
Accounts receivable, net		-		1,039,761			155,107		-			1,194,868
Inventories		-		23,125			4,666		-			27,791
Income taxes		-		10,913			877		-			11,790
Other		-		53,648			7,406		-			61,054
		-		1,145,679			355,220		-			1,500,899
Property and equipment, net		-		911,611			60,385		-			971,996
Goodwill		-		2,098,812			570,998		-			2,669,810
Intangible assets, net		-		707,792			47,863		-			755,655
Insurance subsidiary investments		-		-			204,498		-			204,498
Intercompany		4,749,257		-			-		(4,749,257	)		-
Deferred tax assets		-		95,721			8,409		-			104,130
Acquisition deposit		-		18,489			-		-			18,489
Other		11,312		116,692			114,778		-			242,782
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	106,253		$	80,808	$	-		$	187,061
Salaries, wages and other     compensation		-		348,548			56,377		-			404,925
Due to third party payors		-		36,251			-		-			36,251
Professional liability risks		-		4,813			59,286		-			64,099
Other accrued liabilities		75,134		297,608			21,504		-			394,246
Long-term debt due within one     year		23,524		-			1,106		-			24,630
		98,658		793,473			219,081		-			1,111,212
Long-term debt		3,085,074		-			1,274		-			3,086,348
Intercompany/deficiency in earnings of     consolidated subsidiaries		76,983		4,142,653			606,604		(4,826,240	)		-
Professional liability risks		-		61,472			201,801		-			263,273
Deferred credits and other liabilities		-		175,173			126,206		-			301,379
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		1,499,854		(77,975	)		992		76,983			1,499,854
Noncontrolling interests		-		-			206,193		-			206,193
		1,499,854		(77,975	)		207,185		76,983			1,706,047
	$	4,760,569	$	5,094,796		$	1,362,151	$	(4,749,257	)	$	6,468,259

Condensed Consolidating Statement of Cash Flows

Condensed Consolidating Statement of Cash Flows

	Three months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(22,220	)	$	36,799		$	21,503		$	-	$	36,082
Cash flows from investing activities:
Routine capital expenditures		-			(19,562	)		(2,311	)		-		(21,873	)
Development capital expenditures		-			(3,413	)		(4,973	)		-		(8,386	)
Acquisitions, net of cash acquired		-			(49,329	)		-			-		(49,329	)
Sale of assets		-			3,739			-			-		3,739
Purchase of insurance subsidiary investments		-			-			(22,427	)		-		(22,427	)
Sale of insurance subsidiary investments		-			-			31,875			-		31,875
Net change in insurance subsidiary cash and     cash equivalents		-			-			(14,680	)		-		(14,680	)
Net change in other investments		-			(63	)		114			-		51
Other		-			(150	)		-			-		(150	)
Net cash used in investing activities		-			(68,778	)		(12,402	)		-		(81,180	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		489,200			-			-			-		489,200
Repayment of borrowings under revolving credit		(388,100	)		-			-			-		(388,100	)
Proceeds from issuance of term loan, net of discount		-			-			-			-		-
Repayment of term loan		(3,508	)		-			-			-		(3,508	)
Repayment of other long-term debt		-			-			(276	)		-		(276	)
Payment of deferred financing costs		(50	)		-			-			-		(50	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(2,904	)		-			-			-		(2,904	)
Dividends paid		(10,224	)		-			-			-		(10,224	)
Contributions made by noncontrolling interests		-			-			4,993			-		4,993
Distributions to noncontrolling interests		-			-			(4,694	)		-		(4,694	)
Other		-			35			-			-		35
Net change in intercompany accounts		(62,194	)		40,530			21,664			-		-
Net cash provided by financing activities		22,220			40,565			21,687			-		84,472
Change in cash and cash equivalents		-			8,586			30,788			-		39,374
Cash and cash equivalents at beginning of period		-			24,037			76,019			-		100,056
Cash and cash equivalents at end of period	$	-		$	32,623		$	106,807		$	-	$	139,430

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Three months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(28,117	)	$	137,155		$	23,252		$	-	$	132,290
Cash flows from investing activities:
Routine capital expenditures		-			(32,663	)		(2,759	)		-		(35,422	)
Development capital expenditures		-			(5,760	)		-			-		(5,760	)
Acquisitions, net of cash acquired		-			(1,577	)		(425	)		-		(2,002	)
Sale of assets		-			3,884			-			-		3,884
Purchase of insurance subsidiary investments		-			-			(16,357	)		-		(16,357	)
Sale of insurance subsidiary investments		-			-			15,987			-		15,987
Net change in insurance subsidiary cash and cash    equivalents		-			-			(2,633	)		-		(2,633	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			176			-			-		176
Other		-			1,383			-			-		1,383
Net cash used in investing activities		-			(9,557	)		(6,187	)		-		(15,744	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		259,700			-			-			-		259,700
Repayment of borrowings under revolving credit		(349,700	)		-			-			-		(349,700	)
Repayment of term loan		(3,003	)										(3,003	)
Repayment of other long-term debt		-			-			(500	)		-		(500	)
Payment of deferred financing costs		(301	)		-			-			-		(301	)
Issuance of common stock in connection with    employee benefit plans		329			-			-			-		329
Payment of dividend for Mandatory Redeemable    Preferred Stock		(2,703	)		-			-			-		(2,703	)
Dividends paid		(10,065	)		-			-			-		(10,065	)
Contributions made by noncontrolling interests		-			-			1,492			-		1,492
Distributions to noncontrolling interests		-			-			(10,685	)		-		(10,685	)
Other		-			245			-			-		245
Net change in intercompany accounts		133,860			(136,275	)		2,415			-		-
Net cash provided by (used in) financing    activities		28,117			(136,030	)		(7,278	)		-		(115,191	)
Change in cash and cash equivalents		-			(8,432	)		9,787			-		1,355
Cash and cash equivalents at beginning of period		-			53,234			66,302			-		119,536
Cash and cash equivalent at end of period	$	-		$	44,802		$	76,089		$	-	$	120,891

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Nine months ended September 30, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(20,910	)	$	12,114		$	46,844		$	-	$	38,048
Cash flows from investing activities:
Routine capital expenditures		-			(63,476	)		(5,227	)		-		(68,703	)
Development capital expenditures		-			(11,768	)		(15,344	)		-		(27,112	)
Acquisitions, net of cash acquired		-			(77,040	)		-			-		(77,040	)
Acquisition deposits		-			18,489			-			-		18,489
Sale of assets		-			4,962			-			-		4,962
Purchase of insurance subsidiary investments		-			-			(75,422	)		-		(75,422	)
Sale of insurance subsidiary investments		-			-			78,478			-		78,478
Net change in insurance subsidiary cash and cash    equivalents		-			-			8,479			-		8,479
Net change in other investments		-			(34,546	)		1,199			-		(33,347	)
Other		-			(1,277	)		-			-		(1,277	)
Net cash used in investing activities		-			(164,656	)		(7,837	)		-		(172,493	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,267,200			-			-			-		1,267,200
Repayment of borrowings under revolving credit		(1,215,800	)		-			-			-		(1,215,800	)
Proceeds from issuance of term loan, net of discount		198,100			-			-			-		198,100
Proceeds from other long-term debt		-			-			750			-		750
Repayment of term loan		(10,019	)		-			-			-		(10,019	)
Repayment of other long-term debt		-			-			(826	)		-		(826	)
Payment of deferred financing costs		(342	)		-			-			-		(342	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(8,558	)		-			-			-		(8,558	)
Dividends paid		(30,517	)		-			-			-		(30,517	)
Contributions made by noncontrolling interests		-			-			11,261			-		11,261
Distributions to noncontrolling interests		-			-			(35,240	)		-		(35,240	)
Purchase of noncontrolling interests		-			-			(1,000	)		-		(1,000	)
Other		-			108			-			-		108
Net change in intercompany accounts		(179,154	)		166,825			12,329			-		-
Net cash provided by (used in) financing    activities		20,910			166,933			(12,726	)		-		175,117
Change in cash and cash equivalents		-			14,391			26,281			-		40,672
Cash and cash equivalents at beginning of period		-			18,232			80,526			-		98,758
Cash and cash equivalents at end of period	$	-		$	32,623		$	106,807		$	-	$	139,430

NOTE 16 – CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)

Condensed Consolidating Statement of Cash Flows (Continued)

	Nine months ended September 30, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by operating activities	$	361		$	29,691		$	63,015		$	-	$	93,067
Cash flows from investing activities:
Routine capital expenditures		-			(75,033	)		(5,658	)		-		(80,691	)
Development capital expenditures		-			(12,066	)		-			-		(12,066	)
Acquisitions, net of cash acquired		-			(501,875	)		(161,882	)		-		(663,757	)
Acquisition deposits		-			195,000			-			-		195,000
Sale of assets		-			7,061			-			-		7,061
Proceeds from senior unsecured notes offering    held in escrow		-			-			1,350,000			-		1,350,000
Interest in escrow for senior unsecured notes		-			-			23,438			-		23,438
Purchase of insurance subsidiary investments		-			-			(59,186	)		-		(59,186	)
Sale of insurance subsidiary investments		-			-			50,780			-		50,780
Net change in insurance subsidiary cash and cash    equivalents		-			-			(8,396	)		-		(8,396	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			375			-			-		375
Other		-			590			-			-		590
Net cash provided by (used in) investing    activities		-			(360,948	)		1,189,096			-		828,148
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,414,850			-			-			-		1,414,850
Repayment of borrowings under revolving credit		(1,319,850	)		-			-			-		(1,319,850	)
Proceeds from issuance of term loan, net of discount		199,000											199,000
Proceeds from issuance of senior unsecured notes    due 2020 and 2023		1,350,000			-			(1,350,000	)		-		-
Repayment of Gentiva debt		-			(1,177,363	)		-			-		(1,177,363	)
Repayment of term loan		(9,008	)		-			-			-		(9,008	)
Repayment of other long-term debt		-			-			(1,400	)		-		(1,400	)
Payment of deferred financing costs		(3,284	)		-			-			-		(3,284	)
Issuance of common stock in connection with    employee benefit plans		534			-			-			-		534
Payment of costs associated with issuance of    common stock and tangible equity units		(915	)		-			-			-		(915	)
Payment of dividend for Mandatory Redeemable    Preferred Stock		(8,135	)		-			-			-		(8,135	)
Dividends paid		(30,067	)		-			-			-		(30,067	)
Contributions made by noncontrolling interests		-			-			1,492			-		1,492
Distributions to noncontrolling interests		-			-			(31,823	)		-		(31,823	)
Other		-			1,457			-			-		1,457
Net change in intercompany accounts		(1,593,486	)		1,422,557			170,929			-		-
Net cash provided by (used in) financing    activities		(361	)		246,651			(1,210,802	)		-		(964,512	)
Change in cash and cash equivalents		-			(84,606	)		41,309			-		(43,297	)
Cash and cash equivalents at beginning of period		-			129,408			34,780			-		164,188
Cash and cash equivalents at end of period	$	-		$	44,802		$	76,089		$	-	$	120,891

XML

Basis of Presentation - Additional Information (Details) $ in Millions				1 Months Ended			9 Months Ended	12 Months Ended
	Jun. 14, 2016	Jan. 11, 2016	Mar. 10, 2015	Jan. 31, 2016 USD ($) Derivative	Jan. 31, 2015 Facility	Mar. 31, 2014 USD ($) Derivative	Sep. 30, 2016 USD ($) Facility State Location	Dec. 31, 2015 USD ($) Facility	Apr. 08, 2014 USD ($) Derivative
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of hospitals directed by the manager							13
Variable Interest Entity, Primary Beneficiary
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of hospitals operated					11
Additional number of hospital operated							1	2
Interest Rate Swap
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of interest rate swaps | Derivative				3
Term Loan Facility
Principal Accounting Policies And Basis Of Preparation [Line Items]
Applicable margin	0.95%		0.50%
Term Loan Facility | Interest Rate Swap
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of interest rate swaps | Derivative						1			2
Term loan facility, amount outstanding | $						$ 400.0			$ 125.0
Term loan facility, effective date				Jan. 11, 2016		Apr. 09, 2014
Term loan facility, expiration date		Jan. 09, 2021		Jan. 11, 2016		Apr. 09, 2018
Annual interest rate						1.867%
Applicable margin						1.00%
Derivative liability notional amount | $				$ 325.0
Fair value of interest rate swaps | $							$ 8.2	$ 4.5
Term Loan Facility | Interest Rate Swap | Minimum
Principal Accounting Policies And Basis Of Preparation [Line Items]
Applicable margin				1.00%
Term Loan Facility | Interest rate swap one
Principal Accounting Policies And Basis Of Preparation [Line Items]
Derivative liability notional amount | $				$ 175.0
Annual interest rate				1.862%
Term Loan Facility | Interest rate swap two
Principal Accounting Policies And Basis Of Preparation [Line Items]
Derivative liability notional amount | $				$ 150.0
Annual interest rate				1.855%
Gentiva Health Services Inc
Principal Accounting Policies And Basis Of Preparation [Line Items]
Merger agreement, date of agreement and plan							Oct. 09, 2014
Merger agreement, latest consummation date							Feb. 02, 2015
Hospital Division
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of hospitals operated							94
Number of states in which entity operates | State							22
Kindred Hospital Rehabilitation Services
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of states in which entity operates | State							46
Number of inpatient rehabilitation hospitals							19
Number of hospital-based acute rehabilitation units							104
Nursing Center Division
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of states in which entity operates | State							19
Number of nursing and rehabilitation centers							91
Number of assisted living facilities							7
Home Health And Hospice
Principal Accounting Policies And Basis Of Preparation [Line Items]
Number of states in which entity operates | State							40
Number of locations where entity operates | Location							647

XML

Summary of Changes in Equity Attributable to Noncontrolling Interests and Equity Attributable to Kindred (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Stockholders Equity [Line Items]
Beginning Balance			$ 1,706,047	$ 1,485,972
Comprehensive income (loss):
Net income (loss)	$ (671,307)	$ (4,700)	(608,476)	(108,608)
Other comprehensive loss	558	(1,117)	(1,702)	(1,777)
Comprehensive loss	(670,749)	(5,817)	(610,178)	(110,385)
Issuance of common stock in connection with employee benefit plans				534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock			(3,079)	(10,055)
Income tax benefit in connection with the issuance of common stock under employee benefit plans			434	1,806
Stock-based compensation amortization			13,058	15,764
Dividends paid			(30,517)	(30,067)
Acquired noncontrolling interests				149,817
Contributions made by noncontrolling interests			14,061	1,492
Distributions to noncontrolling interests			(35,240)	(31,823)
Issuance of common stock in Gentiva Merger				177,456
Purchase of noncontrolling interests			(2,392)
Ending Balance	1,052,194	1,650,511	1,052,194	1,650,511
Amounts Attributable To Kindred Stockholders
Stockholders Equity [Line Items]
Beginning Balance			1,499,854	1,441,867
Comprehensive income (loss):
Net income (loss)			(648,823)	(139,058)
Other comprehensive loss			(1,702)	(1,777)
Comprehensive loss			(650,525)	(140,835)
Issuance of common stock in connection with employee benefit plans				534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock			(3,079)	(10,055)
Income tax benefit in connection with the issuance of common stock under employee benefit plans			434	1,806
Stock-based compensation amortization			13,058	15,764
Dividends paid			(30,517)	(30,067)
Issuance of common stock in Gentiva Merger				177,456
Purchase of noncontrolling interests			(234)
Ending Balance	828,991	1,456,470	828,991	1,456,470
Noncontrolling Interest
Stockholders Equity [Line Items]
Beginning Balance			206,193	44,105
Comprehensive income (loss):
Net income (loss)			40,347	30,450
Comprehensive loss			40,347	30,450
Acquired noncontrolling interests				149,817
Contributions made by noncontrolling interests			14,061	1,492
Distributions to noncontrolling interests			(35,240)	(31,823)
Purchase of noncontrolling interests			(2,158)
Ending Balance	$ 223,203	$ 194,041	$ 223,203	$ 194,041

XML

Summary of Changes in Classifications of Assets and Liabilities of Consolidated Entities (Details) - USD ($) $ in Thousands		Sep. 30, 2016	Jun. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents		$ 139,430	$ 100,056	$ 98,758	$ 120,891	$ 119,536	$ 164,188
Accounts receivable, net		1,266,545		1,194,868
Inventories		25,262		27,791
Other		94,876		61,054
Current assets		1,643,875		1,500,899
Property and equipment, net		877,551		971,996
Goodwill		2,422,473		2,669,810
Intangible assets, net		804,602		755,655
Other		283,322		242,782
Total assets	[1]	6,227,340		6,468,259
Current liabilities:
Accounts payable		203,426		187,061
Salaries, wages and other compensation		390,743		404,925
Other accrued liabilities		280,305		394,246
Long-term debt due within one year		27,889		24,630
Current liabilities		1,021,344		1,111,212
Long-term debt		3,316,174		3,086,348
Deferred credits and other liabilities		354,246		301,379
Variable Interest Entity, Primary Beneficiary
Current assets:
Cash and cash equivalents		50,709		36,798
Accounts receivable, net		34,521		36,085
Inventories		1,718		1,576
Other		3,617		3,001
Current assets		90,565		77,460
Property and equipment, net		17,561		17,100
Goodwill		275,375		271,717
Intangible assets, net		22,048		22,675
Other		34		54
Total assets		405,583		389,006
Current liabilities:
Accounts payable		33,657		26,291
Salaries, wages and other compensation		2,433		3,261
Other accrued liabilities		3,721		2,784
Long-term debt due within one year		1,703		1,106
Current liabilities		41,514		33,442
Long-term debt		601		1,274
Deferred credits and other liabilities		6,830		4,971
Total liabilities		$ 48,945		$ 39,687

[1] The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements

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Schedule of Impact of Correction on Consolidated Balance Sheet (Details) - USD ($) $ in Thousands		Sep. 30, 2016	Dec. 31, 2015
Condensed Balance Sheet Statements Captions [Line Items]
Other long-term assets		$ 283,322	$ 242,782
Total assets	[1]	6,227,340	6,468,259
Long-term debt		3,316,174	3,086,348
Total liabilities and equity	[1]	$ 6,227,340	6,468,259
As previously reported
Condensed Balance Sheet Statements Captions [Line Items]
Other long-term assets			289,746
Total assets			6,515,223
Long-term debt			3,133,312
Total liabilities and equity			6,515,223
Adjustment
Condensed Balance Sheet Statements Captions [Line Items]
Other long-term assets			(46,964)
Total assets			(46,964)
Long-term debt			(46,964)
Total liabilities and equity			$ (46,964)

[1] The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements

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Gentiva Merger - Additional Information (Details) $ / shares in Units, $ in Thousands			3 Months Ended		9 Months Ended
	Feb. 02, 2015 USD ($) shares	Oct. 09, 2014 USD ($) $ / shares	Sep. 30, 2016 USD ($) $ / shares	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) $ / shares	Sep. 30, 2015 USD ($)	Dec. 31, 2015 USD ($) $ / shares
Business Acquisition [Line Items]
Common stock, par value | $ / shares			$ 0.25		$ 0.25		$ 0.25
Issuance of common stock in Gentiva Merger (see Note 2)				$ 15		$ 177,456
Business Acquisition transaction costs			$ 1,200	1,100	$ 3,800	35,200
Payment for early termination of lease			300		300	800
Business acquisition retention and severance costs				1,900	700	58,800
Business Acquisition financing costs						23,400
Proceeds from note receivable				25,000		25,000
Gross contractual accounts receivable			278,900		278,900
Contractual accounts receivable estimated to be uncollectable			13,900		$ 13,900
Weighted average life (in years)					3 years
Goodwill			$ 2,422,473		$ 2,422,473		$ 2,669,810
General and Administrative Expenses
Business Acquisition [Line Items]
Business Acquisition financing costs					6,000
Interest Expense
Business Acquisition [Line Items]
Business Acquisition financing costs					$ 17,400
Gentiva Health Services Inc
Business Acquisition [Line Items]
Merger agreement, date of agreement and plan					Oct. 09, 2014
Merger agreement, latest consummation date					Feb. 02, 2015
Common stock, par value | $ / shares		$ 0.10	$ 0.25		$ 0.25
Merger agreement, cash consideration per share of common stock | $ / shares		$ 14.50
Merger agreement, conversion ratio of common stock issuable		0.257
Purchase price, cash consideration		$ 544,800
Issuance of common stock in Gentiva Merger (see Note 2)		177,500
long-term debt assumed and paid		1,200,000
Equity offerings, net of costs (in shares) | shares	15,000,000
Common stock shares issued | shares	9,700,000
Tangible equity units shares issued | shares	172,500
Business acquisition, purchase price		$ 722,300
Goodwill			$ 1,392,271		$ 1,392,271
Transaction financing and severance costs excludes in unaudited pro forma financial data			135,200		135,200
Revenues associated with merger			559,700	525,000	1,600,000	1,400,000
Earnings before interest, income taxes, transaction, integration, retention and severance costs associated with merger			77,600	$ 67,500	211,800	$ 168,700
Gentiva Health Services Inc | Home Health
Business Acquisition [Line Items]
Goodwill			612,200		612,200
Gentiva Health Services Inc | Hospice
Business Acquisition [Line Items]
Goodwill			614,000		614,000
Gentiva Health Services Inc | Community Care
Business Acquisition [Line Items]
Goodwill			$ 166,100		$ 166,100
Gentiva Health Services Inc | Senior Notes
Business Acquisition [Line Items]
Aggregate principal amount of private placement	$ 1,350,000

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Gentiva Merger Purchase Price Allocation (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Business Acquisition [Line Items]
Goodwill	$ 2,422,473	$ 2,669,810
Gentiva Health Services Inc
Business Acquisition [Line Items]
Cash and cash equivalents	64,695
Accounts receivable	265,034
Other current assets	123,428
Property and equipment	46,732
Total identifiable intangible assets	392,480
Deferred tax assets	37,429
Other assets	74,407
Current portion of long-term debt	(53,075)
Accounts payable and other current liabilities	(319,004)
Long-term debt, less current portion	(1,124,288)
Deferred tax liabilities	(47,748)
Other liabilities	(126,088)
Noncontrolling interests	(3,992)
Total identifiable net assets	(669,990)
Goodwill	1,392,271
Net assets	722,281
Gentiva Health Services Inc | Certificates Of Need Indefinite Life
Business Acquisition [Line Items]
Total identifiable intangible assets	256,921
Gentiva Health Services Inc | Medicare Certifications Indefinite Life
Business Acquisition [Line Items]
Total identifiable intangible assets	94,500
Gentiva Health Services Inc | Trade Names Indefinite Life
Business Acquisition [Line Items]
Total identifiable intangible assets	22,200
Gentiva Health Services Inc | Trade Names
Business Acquisition [Line Items]
Total identifiable intangible assets	15,600
Gentiva Health Services Inc | Noncompete Agreements
Business Acquisition [Line Items]
Total identifiable intangible assets	1,820
Gentiva Health Services Inc | Leasehold Interest
Business Acquisition [Line Items]
Total identifiable intangible assets	$ 1,439

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Unaudited Pro Forma Net Effect of Gentiva Merger (Details) - Gentiva Health Services Inc - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2015
Business Acquisition [Line Items]
Revenues	$ 1,764,516	$ 5,435,657
Loss from continuing operations attributable to Kindred	(14,501)	(56,221)
Loss attributable to Kindred	$ (12,231)	$ (56,950)
Basic:
Loss from continuing operations	$ (0.17)	$ (0.66)
Net loss	(0.14)	(0.67)
Diluted:
Loss from continuing operations	(0.17)	(0.66)
Net loss	$ (0.14)	$ (0.67)

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Other Acquisitions - Additional Information (Details) $ in Millions	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) Hospital Property	Sep. 30, 2015 USD ($) Property	Dec. 31, 2014 USD ($)	Jun. 30, 2016 Hospital Bed	Jan. 01, 2015 Hospital Bed
Business Acquisition [Line Items]
Number of LTAC hospitals acquired | Hospital						5
Number of LTAC hospitals licensed beds | Bed						233
Select Medical Holdings Corporation
Business Acquisition [Line Items]
Number of LTAC hospitals licensed beds | Bed						255
Number of LTAC hospitals sold | Hospital			3
Cash paid in lieu of selling another LTAC hospital	$ 6.0
Gain loss on facility swap			$ 0.9
Gain loss on facility swap net of income tax			0.5
Acquired From Home Health Operations
Business Acquisition [Line Items]
Purchase price, cash consideration	39.0
Home Health and Hospice Business
Business Acquisition [Line Items]
Purchase price, cash consideration	4.3		$ 26.3
Number of business acquired | Property			4
Accounts receivable	$ 9.0		$ 9.0
Acquisition Centerre
Business Acquisition [Line Items]
Purchase price, cash consideration					$ 195.0
Number of inpatient rehabilitation hospitals | Hospital							11
Number of beds in hospital | Bed							614
Home Based Primary Care Practices
Business Acquisition [Line Items]
Number of business acquired | Property				2
Business acquisition, purchase price		$ 2.0		$ 12.1

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Impairment Charges - Additional Information (Details)		3 Months Ended		9 Months Ended
	Oct. 01, 2016 Hospital	Sep. 30, 2016 USD ($) Hospital	Mar. 31, 2016 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)	Dec. 31, 2015 USD ($)
Impairment Charges [Line Items]
Property and equipment impairment charge		$ 21,700,000
Impairment charges		324,289,000		$ 338,208,000	$ 6,726,000
Goodwill		2,422,473,000		2,422,473,000		$ 2,669,810,000
Certificates of Need
Impairment Charges [Line Items]
Property and equipment impairment charge				3,500,000
Indefinite-lived intangible assets impairment				3,500,000
LTAC Hospitals
Impairment Charges [Line Items]
Property and equipment impairment charge		19,700,000	$ 7,800,000
Impairment charges		33,000,000
Goodwill and intangible asset impairment charge		$ 13,300,000		0
Medical Office Building
Impairment Charges [Line Items]
Property and equipment impairment charge				2,600,000
Previously Acquired Home Health and Hospice Trade Names
Impairment Charges [Line Items]
Property and equipment impairment charge					6,700,000
Intangible Asset Impairment charge					$ 6,700,000
Hospital Division
Impairment Charges [Line Items]
Number of LTAC hospitals closed | Hospital		3
Goodwill impairment charge		$ 261,100,000
Property and equipment impairment charge		3,200,000
Hospital Division | Medical Office Building
Impairment Charges [Line Items]
Property and equipment impairment charge				2,600,000
Nursing Center Division
Impairment Charges [Line Items]
Property and equipment impairment charge		21,700,000
Goodwill		0		$ 0
Nursing Centers
Impairment Charges [Line Items]
Property and equipment impairment charge		$ 5,300,000
Subsequent Event | LTAC Hospitals
Impairment Charges [Line Items]
Number of hospitals sold | Hospital	12

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Discontinued Operations - Additional Information (Details) $ in Millions		1 Months Ended	9 Months Ended
	Dec. 27, 2014 Centre	Jan. 31, 2015 USD ($)	Sep. 30, 2016 Hospital Centre
Assets Held for Sale
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Number of owned facilities nursing center			1
Number of hospitals | Hospital			12
Ventas
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Number of owned facilities nursing center	9
Payment to compromise early termination of leases contract | $		$ 40

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Discontinued Operations - Discontinued Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Discontinued Operations And Disposal Groups [Abstract]
Revenues	$ 756	$ 12,935	$ 5,921	$ 36,934
Salaries, wages and benefits	2	5,306	1,781	17,877
Supplies		595	133	1,995
Rent	469	1,951	1,690	6,608
Other operating expenses	29	2,001	567	7,008
General and administrative expenses (income)	271	(920)	(2,496)	5,699
Depreciation		266	237	632
Interest expense	5	2	16	3
Investment income		(7)	(1)	(12)
Disposal Group, Including Discontinued Operation, Operating Expense (Income), Total	776	9,194	1,927	39,810
Income (loss) from operations before income taxes	(20)	3,741	3,994	(2,876)
Provision (benefit) for income taxes	(8)	1,472	1,572	(1,132)
Income (loss) from operations	(12)	2,269	2,422	(1,744)
Gain (loss) on divestiture of operations			179	983
Income (loss) from discontinued operations	(12)	2,269	2,601	(761)
(Earnings) loss attributable to noncontrolling interests	(1)	1	(6)	32
Income (loss) attributable to Kindred	$ (13)	$ 2,270	$ 2,595	$ (729)

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Discontinued Operations - Discontinued Operations Data by Business Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Revenues	$ 756	$ 12,935	$ 5,921	$ 36,934
Segment EBITDAR	454	5,953	5,936	4,355
Rent	469	1,951	1,690	6,608
Depreciation		266	237	632
Hospital Division
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Revenues	511	158	1,393	1,747
Segment EBITDAR	580	(14)	1,476	408
Rent	468	477	1,395	1,514
Nursing Center Division
Income Statement Balance Sheet And Additional Disclosures By Disposal Groups Including Discontinued Operations [Line Items]
Revenues	245	12,777	4,528	35,187
Segment EBITDAR	(126)	5,967	4,460	3,947
Rent	$ 1	1,474	295	5,094
Depreciation		$ 266	$ 237	$ 632

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Discontinued Operations - Net Assets Held for Sale (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Discontinued Operations And Disposal Groups [Abstract]
Current assets	$ 34,207
Long-term assets:
Property and equipment, net	4,499	$ 571
Other		42
Assets held for sale	4,499	613
Current liabilities	(13,182)
Net Assets Held For Sale, Total	$ 25,524	$ 613

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Restructuring Charges Incurred by Business Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Restructuring Cost And Reserve [Line Items]
Restructuring charges	$ 81,463	$ 3,349	$ 88,223	$ 8,793
Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	81,463	3,349	88,223	8,793
Corporate Non Segment
Restructuring Cost And Reserve [Line Items]
Restructuring charges	492		1,577
Hospital Division | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	78,476	332	78,743	897
Home Health | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	1,240	2,597	1,976	4,853
Hospice | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	541	420	1,203	2,691
Home Health And Hospice | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	1,781	$ 3,017	3,179	7,544
Kindred Hospital Rehabilitation Services | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	128		128
RehabCare | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	586		586
Kindred Hospital Rehabilitation Services and RehabCare | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges	$ 714		714
Nursing Center Division | Operating Segments
Restructuring Cost And Reserve [Line Items]
Restructuring charges			$ 4,010	$ 352

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Restructuring Charges - Additional Information (Details) - LTAC Portfolio Repositioning Plan $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2016 Hospital	Sep. 30, 2016 USD ($)
Restructuring Cost And Reserve [Line Items]
Number of LTAC hospitals closed | Hospital	3
Non-cash charges | $		$ 13.8

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Restructuring Charges Incurred for LTAC Portfolio Repositioning Strategy (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Restructuring Cost And Reserve [Line Items]
Transaction costs	$ 2,982	$ 3,846	$ 6,513	$ 103,764
LTAC Portfolio Repositioning Plan
Restructuring Cost And Reserve [Line Items]
Lease termination cost	56,869	207	56,869	207
Facility closure, loss on disposal and other costs	20,212		19,109	167
Severance	1,395	125	2,765	523
Transaction costs	492		1,577
Restructuring costs	$ 78,968	$ 332	$ 80,320	$ 897

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Summary of Company LTAC Portfolio Repositioning Liability Activity (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Restructuring Cost And Reserve [Line Items]
Expense	$ 81,463	$ 3,349	$ 88,223	$ 8,793
LTAC Portfolio Repositioning Plan
Restructuring Cost And Reserve [Line Items]
Expense			66,532
Payments			(7,100)
Liability balance at September 30, 2016	59,432		59,432
Lease Termination Costs | LTAC Portfolio Repositioning Plan
Restructuring Cost And Reserve [Line Items]
Expense			62,190
Payments			(3,500)
Liability balance at September 30, 2016	58,690		58,690
Severance and Transaction Costs | LTAC Portfolio Repositioning Plan
Restructuring Cost And Reserve [Line Items]
Expense			4,342
Payments			(3,600)
Liability balance at September 30, 2016	$ 742		$ 742

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Restructuring Costs Incurred for Consolidations (Details) - Home Health And Hospice - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Restructuring Cost And Reserve [Line Items]
Lease termination cost	$ 1,781	$ 601	$ 2,494	$ 1,272
Facility closure and other costs		2,416	685	6,272
Restructuring costs	$ 1,781	$ 3,017	$ 3,179	$ 7,544

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Summary of Restructuring Liability Activity Included in Other Accrued Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Restructuring Cost And Reserve [Line Items]
Expense	$ 81,463	$ 3,349	$ 88,223	$ 8,793
Home Health And Hospice | Severance Costs
Restructuring Cost And Reserve [Line Items]
Liability balance at January 1, 2016			1,863
Expense			2,494
Payments			(1,771)
Adjustments			(60)
Liability balance at September 30, 2016	$ 2,526		$ 2,526

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Restructuring Costs Incurred for Division Reorganizations (Details) - Nursing Center Division - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Sep. 30, 2015
Restructuring Cost And Reserve [Line Items]
Severance	$ 714	$ 2,284
Facility closure and other costs		2,440
Lease termination cost			$ 352
Restructuring costs	$ 714	$ 4,724	$ 352

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Summary of Revenues by Payor Type (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	$ 1,793,527	$ 1,764,516	$ 5,473,568	$ 5,273,958
Medicare
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	921,911	915,778	2,859,760	2,673,753
Medicaid
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	209,640	210,688	610,119	610,911
Medicare Advantage
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	140,774	127,905	423,117	401,199
Medicaid Managed
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	66,903	52,736	191,837	147,137
Other Payor
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	506,385	517,047	1,548,966	1,626,264
Amount Before Eliminations
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	1,845,613	1,824,154	5,633,799	5,459,264
Eliminations
Health Care Organization Receivable And Revenue Disclosures [Line Items]
Revenues	$ (52,086)	$ (59,638)	$ (160,231)	$ (185,306)

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Computation of Loss Per Common Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Earnings Per Share Disclosure [Line Items]
Loss from continuing operations, as reported in Statement of Operations	$ (685,600)	$ (16,869)	$ (651,418)	$ (138,329)
Income (loss) from discontinued operations, net of income taxes, as reported in Statement of Operations	(12)	2,269	2,422	(1,744)
Income (loss) attributable to Kindred	(13)	2,270	2,595	(729)
Gain on divestiture of operations			179	983
Income (loss) from discontinued operations as reported in Statement of Operations	(12)	2,269	2,601	(761)
Net loss	$ (685,613)	$ (14,599)	$ (648,823)	$ (139,058)
Weighted average shares outstanding - basic computation	86,869	86,184	86,766	83,960
Loss from continuing operations, Basic	$ (7.89)	$ (0.20)	$ (7.51)	$ (1.65)
Income (loss) from operations, Basic		0.03	0.03	(0.02)
Gain on divestiture of operations				0.01
Income (loss) from discontinued operations. Basic		0.03	0.03	(0.01)
Net loss	$ (7.89)	$ (0.17)	$ (7.48)	$ (1.66)
Adjusted weighted average shares outstanding - diluted computation	86,869	86,184	86,766	83,960
Loss from continuing operations, Diluted	$ (7.89)	$ (0.20)	$ (7.51)	$ (1.65)
Income (Loss) from operations, Diluted		0.03	0.03	(0.02)
Gain on divestiture of operations				0.01
Income (loss) from discontinued operations, Diluted		0.03	0.03	(0.01)
Net loss	$ (7.89)	$ (0.17)	$ (7.48)	$ (1.66)
Earnings Per Share, Basic
Earnings Per Share Disclosure [Line Items]
Loss from continuing operations, as reported in Statement of Operations	$ (685,600)	$ (16,869)	$ (651,418)	$ (138,329)
Loss from continuing operations, available to common stockholders	(685,600)	(16,869)	(651,418)	(138,329)
Income (loss) from discontinued operations, net of income taxes, as reported in Statement of Operations	(13)	2,270	2,416	(1,712)
Income (loss) attributable to Kindred	(13)	2,270	2,416	(1,712)
Gain on divestiture of operations			179	983
Gain on divestiture of operations, available to common stockholders			179	983
Income (loss) from discontinued operations as reported in Statement of Operations	(13)	2,270	2,595	(729)
Income (loss) from discontinued operations, available to common stockholders	(13)	2,270	2,595	(729)
Net loss	(685,613)	(14,599)	(648,823)	(139,058)
Net loss, available to common stockholders, Basic	$ (685,613)	$ (14,599)	$ (648,823)	$ (139,058)
Weighted average shares outstanding - basic computation	86,869	86,184	86,766	83,960
Loss from continuing operations, Basic	$ (7.89)	$ (0.20)	$ (7.51)	$ (1.65)
Income (loss) from operations, Basic		0.03	0.03	(0.02)
Gain on divestiture of operations				0.01
Income (loss) from discontinued operations. Basic		0.03	0.03	(0.01)
Net loss	$ (7.89)	$ (0.17)	$ (7.48)	$ (1.66)
Earnings Per Share, Diluted
Earnings Per Share Disclosure [Line Items]
Loss from continuing operations, as reported in Statement of Operations	$ (685,600)	$ (16,869)	$ (651,418)	$ (138,329)
Loss from continuing operations, available to common stockholders	(685,600)	(16,869)	(651,418)	(138,329)
Income (loss) from discontinued operations, net of income taxes, as reported in Statement of Operations	(13)	2,270	2,416	(1,712)
Income (loss) attributable to Kindred	(13)	2,270	2,416	(1,712)
Gain on divestiture of operations			179	983
Gain on divestiture of operations, available to common stockholders			179	983
Income (loss) from discontinued operations as reported in Statement of Operations	(13)	2,270	2,595	(729)
Income (loss) from discontinued operations, available to common stockholders	(13)	2,270	2,595	(729)
Net loss	(685,613)	(14,599)	(648,823)	(139,058)
Net loss, available to common stockholders, Basic	$ (685,613)	$ (14,599)	$ (648,823)	$ (139,058)
Weighted average shares outstanding - basic computation	86,869	86,184	86,766	83,960
Adjusted weighted average shares outstanding - diluted computation	86,869	86,184	86,766	83,960
Loss from continuing operations, Diluted	$ (7.89)	$ (0.20)	$ (7.51)	$ (1.65)
Income (Loss) from operations, Diluted		0.03	0.03	(0.02)
Gain on divestiture of operations				0.01
Income (loss) from discontinued operations, Diluted		0.03	0.03	(0.01)
Net loss	$ (7.89)	$ (0.17)	$ (7.48)	$ (1.66)
Number of antidilutive stock options and tangible equity units excluded from shares used in the diluted loss per common share computation	1,743	1,548	1,744	2,572

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Loss Per Share and Dividends - Additional information (Details) - $ / shares					3 Months Ended	9 Months Ended
	Jun. 01, 2016	Mar. 01, 2016	Sep. 01, 2015	Jun. 01, 2015	Dec. 31, 2015	Sep. 30, 2016	Sep. 30, 2015
Capital Unit [Line Items]
Cash dividend per share to be paid						$ 0.12	$ 0.12
Cash dividends payable date						Sep. 02, 2016	Sep. 04, 2015
Cash dividends payable date of record						Aug. 18, 2016	Aug. 19, 2015
Cash dividends declared and paid per common share						$ 0.12	$ 0.12
Installment payment on unit payable date to be paid day month and year	Jun. 01, 2016	Mar. 01, 2016	Sep. 01, 2015	Jun. 01, 2015	Dec. 01, 2015	Sep. 01, 2016
Installment payment on unit, quarterly installment payment	$ 18.76	$ 18.75	$ 18.75	$ 18.75	$ 18.75	$ 18.75
Installment payment on unit, one-time incremental payment						1.25
Installment payment on unit, total installment payment						$ 20.00
Mandatorily Redeemable Preferred Stock
Capital Unit [Line Items]
Preferred stock, dividend percentage						7.25%
Preferred stock, initial liquidation preference per share						$ 201.58
Installment 1 FY 2016
Capital Unit [Line Items]
Cash dividends payable date						Apr. 01, 2016
Installment 2 FY 2016
Capital Unit [Line Items]
Cash dividends payable date						Jun. 10, 2016
Installment 1 FY 2015
Capital Unit [Line Items]
Cash dividends payable date							Apr. 01, 2015
Installment 2 FY 2015
Capital Unit [Line Items]
Cash dividends payable date							Jun. 10, 2015

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Business Segment Data - Additional Information (Details)	9 Months Ended
	Sep. 30, 2016 Segment
Segment Reporting [Abstract]
Number of operating divisions	4
Number of reportable operating segments	6

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Data by Business Segment (Details) - USD ($)		3 Months Ended				9 Months Ended
		Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Mar. 31, 2015	Sep. 30, 2016	Sep. 30, 2015
Segment Reporting Information [Line Items]
Revenues		$ 1,793,527,000		$ 1,764,516,000		$ 5,473,568,000	$ 5,273,958,000
EBITDAR		(134,044,000)		197,135,000		349,957,000	476,936,000
Litigation contingency expense			$ (2,000,000)	(31,462,000)	$ (95,000,000)	(2,840,000)	(130,387,000)
Impairment charges		(324,289,000)				(338,208,000)	(6,726,000)
Restructuring charges		(22,813,000)		(2,541,000)		(28,860,000)	(6,962,000)
Transaction costs		(2,982,000)		(3,846,000)		(6,513,000)	(103,764,000)
Rent		98,415,000		95,436,000		296,025,000	282,955,000
Restructuring charges - rent		(58,650,000)		(808,000)		(59,363,000)	(1,831,000)
Depreciation and amortization		40,382,000		39,329,000		121,320,000	116,889,000
Interest, net		(58,052,000)		(56,008,000)		(172,856,000)	(173,925,000)
Income (loss) from continuing operations before income taxes		(389,543,000)		5,554,000		(299,607,000)	(98,664,000)
Provision for income taxes		281,752,000		12,523,000		311,470,000	9,183,000
Income (loss) from continuing operations		(671,295,000)		(6,969,000)		(611,077,000)	(107,847,000)
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		21,873,000		35,422,000		68,703,000	80,691,000
Capital expenditures, excluding acquisitions (including discontinued operations), Development		8,386,000		5,760,000		27,112,000	12,066,000
Assets at end of period	[1]	6,227,340,000	6,468,259,000			6,227,340,000
Goodwill		2,422,473,000	2,669,810,000			2,422,473,000
Operating Segments
Segment Reporting Information [Line Items]
Revenues		1,845,613,000		1,824,154,000		5,633,799,000	5,459,264,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		21,873,000		35,422,000		68,703,000	80,691,000
Capital expenditures, excluding acquisitions (including discontinued operations), Development		8,386,000		5,760,000		27,112,000	12,066,000
Capital expenditures, excluding acquisitions (including discontinued operations)		30,259,000		41,182,000		95,815,000	92,757,000
Eliminations
Segment Reporting Information [Line Items]
Revenues		(52,086,000)		(59,638,000)		(160,231,000)	(185,306,000)
Corporate Non Segment
Segment Reporting Information [Line Items]
EBITDAR		(61,751,000)		(55,439,000)		(199,363,000)	(192,213,000)
Rent		572,000		569,000		1,630,000	2,576,000
Depreciation and amortization		9,253,000		7,905,000		27,197,000	21,631,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		10,551,000		25,492,000		34,602,000	43,879,000
Capital expenditures, excluding acquisitions (including discontinued operations), Development		2,828,000		2,394,000		5,845,000	2,394,000
Assets at end of period		775,765,000	832,082,000			775,765,000
Corporate Non Segment | Information systems
Segment Reporting Information [Line Items]
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		7,031,000		22,765,000		24,744,000	40,335,000
Corporate Non Segment | Other
Segment Reporting Information [Line Items]
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		692,000		333,000		4,013,000	1,150,000
Hospital Division | Operating Segments
Segment Reporting Information [Line Items]
Revenues		575,323,000		579,497,000		1,852,317,000	1,847,186,000
EBITDAR		82,752,000		96,108,000		344,179,000	361,751,000
Rent		52,555,000		51,726,000		158,259,000	154,584,000
Depreciation and amortization		12,627,000		12,956,000		38,896,000	40,963,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		5,649,000		5,127,000		17,499,000	20,017,000
Capital expenditures, excluding acquisitions (including discontinued operations)		5,649,000		5,127,000		17,499,000	20,017,000
Assets at end of period		1,335,743,000	1,633,801,000			1,335,743,000
Goodwill		361,310,000	628,519,000			361,310,000
Home Health | Operating Segments
Segment Reporting Information [Line Items]
Revenues		449,958,000		424,054,000		1,318,549,000	1,152,741,000
EBITDAR		75,073,000		67,682,000		218,044,000	187,397,000
Rent		8,472,000		8,675,000		25,730,000	24,149,000
Depreciation and amortization		3,803,000		4,653,000		11,916,000	12,519,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		1,300,000		1,225,000		5,009,000	2,336,000
Capital expenditures, excluding acquisitions (including discontinued operations)		1,300,000		1,225,000		5,009,000	2,336,000
Assets at end of period		1,527,366,000	1,435,176,000			1,527,366,000
Goodwill		913,703,000	905,989,000			913,703,000
Hospice | Operating Segments
Segment Reporting Information [Line Items]
Revenues		188,575,000		181,140,000		550,642,000	478,202,000
EBITDAR		31,326,000		34,025,000		87,521,000	78,908,000
Rent		4,342,000		4,428,000		13,047,000	12,188,000
Depreciation and amortization		1,563,000		1,821,000		4,688,000	4,759,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		637,000		352,000		1,928,000	834,000
Capital expenditures, excluding acquisitions (including discontinued operations)		637,000		352,000		1,928,000	834,000
Assets at end of period		949,726,000	922,710,000			949,726,000
Goodwill		647,507,000	639,006,000			647,507,000
Home Health And Hospice | Operating Segments
Segment Reporting Information [Line Items]
Revenues		638,533,000		605,194,000		1,869,191,000	1,630,943,000
EBITDAR		106,399,000		101,707,000		305,565,000	266,305,000
Rent		12,814,000		13,103,000		38,777,000	36,337,000
Depreciation and amortization		5,366,000		6,474,000		16,604,000	17,278,000
Assets at end of period		2,477,092,000	2,357,886,000			2,477,092,000
Goodwill		1,561,210,000	1,544,995,000			1,561,210,000
Kindred Hospital Rehabilitation Services | Operating Segments
Segment Reporting Information [Line Items]
Revenues		169,018,000		149,435,000		504,607,000	453,543,000
EBITDAR		49,470,000		42,141,000		147,809,000	131,236,000
Rent		8,852,000		7,591,000		26,511,000	22,473,000
Depreciation and amortization		3,573,000		3,344,000		10,620,000	10,076,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		380,000		350,000		1,058,000	625,000
Capital expenditures, excluding acquisitions (including discontinued operations), Development		4,973,000		1,281,000		15,344,000	1,342,000
Capital expenditures, excluding acquisitions (including discontinued operations)		5,353,000		1,631,000		16,402,000	1,967,000
Assets at end of period		819,995,000	802,686,000			819,995,000
Goodwill		499,953,000	496,296,000			499,953,000
Kindred Hospital Rehabilitation Services | Eliminations
Segment Reporting Information [Line Items]
Revenues		(22,330,000)		(22,081,000)		(69,515,000)	(69,284,000)
RehabCare | Operating Segments
Segment Reporting Information [Line Items]
Revenues		192,480,000		219,518,000		592,803,000	708,904,000
EBITDAR		9,248,000		14,544,000		34,504,000	44,933,000
Rent		925,000		937,000		2,697,000	2,946,000
Depreciation and amortization		2,011,000		1,955,000		5,983,000	5,790,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		698,000		532,000		1,205,000	1,248,000
Capital expenditures, excluding acquisitions (including discontinued operations)		698,000		532,000		1,205,000	1,248,000
Assets at end of period		333,564,000	347,738,000			333,564,000
RehabCare | Eliminations
Segment Reporting Information [Line Items]
Revenues		(28,075,000)		(35,943,000)		(85,708,000)	(111,994,000)
Kindred Hospital Rehabilitation Services and RehabCare | Operating Segments
Segment Reporting Information [Line Items]
Revenues		361,498,000		368,953,000		1,097,410,000	1,162,447,000
EBITDAR		58,718,000		56,685,000		182,313,000	176,169,000
Rent		9,777,000		8,528,000		29,208,000	25,419,000
Depreciation and amortization		5,584,000		5,299,000		16,603,000	15,866,000
Assets at end of period		1,153,559,000	1,150,424,000			1,153,559,000
Goodwill		499,953,000	496,296,000			499,953,000
Nursing Center Division
Segment Reporting Information [Line Items]
Goodwill		0				0
Nursing Center Division | Operating Segments
Segment Reporting Information [Line Items]
Revenues		270,259,000		270,510,000		814,881,000	818,688,000
EBITDAR		29,922,000		35,923,000		93,684,000	112,763,000
Rent		22,697,000		21,510,000		68,151,000	64,039,000
Depreciation and amortization		7,552,000		6,695,000		22,020,000	21,151,000
Capital expenditures, excluding acquisitions (including discontinued operations), Routine		5,486,000		4,738,000		13,247,000	14,146,000
Capital expenditures, excluding acquisitions (including discontinued operations), Development		585,000		2,085,000		5,923,000	8,330,000
Capital expenditures, excluding acquisitions (including discontinued operations)		6,071,000		6,823,000		19,170,000	22,476,000
Assets at end of period		485,181,000	$ 494,066,000			485,181,000
Nursing Centers | Eliminations
Segment Reporting Information [Line Items]
Revenues		$ (1,681,000)		$ (1,614,000)		$ (5,008,000)	$ (4,028,000)

[1] The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements

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Income Taxes - Additional Information (Details) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2016 USD ($)	Sep. 30, 2016 USD ($)
Income Taxes [Line Items]
Property and equipment impairment charge	$ 21.7
Deferred tax assets valuation allowance	366.5	$ 366.5
Deferred tax liabilities, indefinite lived intangibles	$ 200.3	200.3
Transitional Care Hospitals
Income Taxes [Line Items]
Goodwill impairment charge		286.0
Property and equipment impairment charge		$ 286.0

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Provision for Loss for Insurance Risks (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Professional Malpractice Liability Insurance
Malpractice Insurance [Line Items]
Continuing operations	$ 19,486	$ 19,778	$ 64,614	$ 51,067
Discontinued operations	84	(1,741)	(2,940)	(2,408)
Workers compensation
Malpractice Insurance [Line Items]
Continuing operations	16,792	11,165	45,797	40,021
Discontinued operations	$ 163	$ (2,219)	$ (512)	$ (2,225)

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Assets and Liabilities Related to Insurance Risks (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Insurance subsidiary investments	$ 105,346	$ 106,638
Reinsurance and other recoverables	11,486	10,302
Other	50	100
Insurance Risks Assets Current, Total	116,882	117,040
Non-current asset:
Insurance subsidiary investments	195,517	204,498
Reinsurance and other recoverables	194,158	177,330
Deposits	28,286	8,317
Other		38
Insurance Risks Assets Non Current, Total	417,961	390,183
Insurance Risks Assets, Total	534,843	507,223
Liabilities:
Current	111,333	112,869
Non-current	496,687	469,352
Allowance For Insurance Risks, Total	608,020	582,221
Professional Malpractice Liability Insurance
Current assets:
Insurance subsidiary investments	59,268	61,889
Reinsurance and other recoverables	10,184	9,282
Insurance Risks Assets Current, Total	69,452	71,171
Non-current asset:
Insurance subsidiary investments	94,860	82,207
Reinsurance and other recoverables	98,886	90,387
Deposits	4,225	3,980
Insurance Risks Assets Non Current, Total	197,971	176,574
Insurance Risks Assets, Total	267,423	247,745
Liabilities:
Current	61,036	64,099
Non-current	283,048	263,273
Allowance For Insurance Risks, Total	344,084	327,372
Workers compensation
Current assets:
Insurance subsidiary investments	46,078	44,749
Reinsurance and other recoverables	1,302	1,020
Other	50	100
Insurance Risks Assets Current, Total	47,430	45,869
Non-current asset:
Insurance subsidiary investments	100,657	122,291
Reinsurance and other recoverables	95,272	86,943
Deposits	24,061	4,337
Other		38
Insurance Risks Assets Non Current, Total	219,990	213,609
Insurance Risks Assets, Total	267,420	259,478
Liabilities:
Current	50,297	48,770
Non-current	213,639	206,079
Allowance For Insurance Risks, Total	$ 263,936	$ 254,849

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Insurance Risks - Additional Information (Details) - Professional Malpractice Liability Insurance - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Malpractice Insurance [Line Items]
Discount rate of professional liability risks	1.00%
Undiscounted allowances for professional liability risks	$ 346.5	$ 329.9

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Cost of Equities, Amortized Cost of Debt Securities and Estimated Fair Value of Insurance Subsidiary Investments (Details) - USD ($) $ in Thousands		9 Months Ended	12 Months Ended
		Sep. 30, 2016	Dec. 31, 2015
Schedule Of Available For Sale Securities [Line Items]
Cost		$ 300,982	$ 311,514
Unrealized gains		257	536
Unrealized losses		(376)	(914)
Fair value		300,863	311,136
Debt securities
Schedule Of Available For Sale Securities [Line Items]
Cost		101,024	102,823
Unrealized gains		171	5
Unrealized losses		(11)	(220)
Fair value		101,184	102,608
Equity by industry
Schedule Of Available For Sale Securities [Line Items]
Cost		9,958	14,412
Unrealized gains		80	531
Unrealized losses		(365)	(692)
Fair value		9,673	14,251
Equity by industry | Technology
Schedule Of Available For Sale Securities [Line Items]
Cost		1,721	1,533
Unrealized gains		51	66
Unrealized losses		(16)	(98)
Fair value		1,756	1,501
Equity by industry | Consumer
Schedule Of Available For Sale Securities [Line Items]
Cost		1,687	2,271
Unrealized gains		11	182
Unrealized losses		(73)	(36)
Fair value		1,625	2,417
Equity by industry | Healthcare
Schedule Of Available For Sale Securities [Line Items]
Cost		1,230	1,896
Unrealized gains		16	116
Unrealized losses		(56)	(37)
Fair value		1,190	1,975
Equity by industry | Financial Services
Schedule Of Available For Sale Securities [Line Items]
Cost		1,262	1,854
Unrealized gains			55
Unrealized losses		(113)	(81)
Fair value		1,149	1,828
Equity by industry | Industrial
Schedule Of Available For Sale Securities [Line Items]
Cost		998	1,994
Unrealized gains		1	86
Unrealized losses		(65)	(157)
Fair value		934	1,923
Equity by industry | Energy
Schedule Of Available For Sale Securities [Line Items]
Cost			1,015
Unrealized losses			(15)
Fair value			1,000
Equity by industry | Other
Schedule Of Available For Sale Securities [Line Items]
Cost		3,060	3,849
Unrealized gains		1	26
Unrealized losses		(42)	(268)
Fair value		3,019	3,607
Cash and cash equivalents
Schedule Of Available For Sale Securities [Line Items]
Cost	[1]	177,550	186,029
Fair value	[1]	177,550	186,029
Corporate bonds | Debt securities
Schedule Of Available For Sale Securities [Line Items]
Cost		56,934	46,940
Unrealized gains		108	5
Unrealized losses		(10)	(122)
Fair value		57,032	46,823
U.S. Treasury notes | Debt securities
Schedule Of Available For Sale Securities [Line Items]
Cost		26,447	33,386
Unrealized gains		36
Unrealized losses			(55)
Fair value		26,483	33,331
Debt securities issued by US government agencies | Debt securities
Schedule Of Available For Sale Securities [Line Items]
Cost		17,643	22,497
Unrealized gains		27
Unrealized losses		(1)	(43)
Fair value		17,669	22,454
Certificates of deposit
Schedule Of Available For Sale Securities [Line Items]
Cost		12,450	8,250
Unrealized gains		6
Unrealized losses			(2)
Fair value		$ 12,456	$ 8,248

[1] Includes $19.9 million and $29.6 million of money market funds at September 30, 2016 and December 31, 2015, respectively.

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Cost of Equities, Amortized Cost of Debt Securities and Estimated Fair Value of Insurance Subsidiary Investments (Parenthetical) (Details) - USD ($) $ in Millions	Sep. 30, 2016	Dec. 31, 2015
Investments Debt And Equity Securities [Abstract]
Money market funds	$ 19.9	$ 29.6

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Insurance Subsidiary Investments - Additional Information (Details) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Investments Debt And Equity Securities [Abstract]
Pretax other-than-temporary impairments for investments	$ 200,000	$ 0

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Long-Term Debt - Additional Information (Details) - USD ($) $ in Millions	Jun. 14, 2016	Mar. 10, 2015	Apr. 09, 2014	Nov. 25, 2014	Oct. 31, 2014
Amended ABL Facility
Debt Instrument [Line Items]
Size of basket for asset sales percentage of consolidated total assets	25.00%				15.00%
Term Loan
Debt Instrument [Line Items]
Size of basket for asset sales percentage of consolidated total assets	25.00%			15.00%
Maximum total leverage ratio	6.00%
Debt instrument, prepayment premium	1.00%
Aggregate principal amount of private placement	$ 200
Term Loan Facility
Debt Instrument [Line Items]
Applicable margin	0.95%	0.50%
Incremental term loan	$ 1,180	$ 200
6.375% Senior Notes due 2022
Debt Instrument [Line Items]
Aggregate principal amount of private placement			$ 500
Annual interest rate			6.375%
Debt Instrument Maturity Year			2022

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Fair Value of Assets and Liabilities Measured on Recurring and Non-Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	$ 1,033,198
Assets
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	(338,208)
Certificates of Need
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	641
Certificates of Need | Assets
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	(3,559)
Fair Value, Measurements, Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	160,889	$ 160,516
Recurring liabilities at fair value	(13,117)	(10,909)
Fair Value, Measurements, Recurring | Interest Rate Swap
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring liabilities at fair value	(8,234)	(4,472)
Fair Value, Measurements, Recurring | Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	21,549	31,429
Fair Value, Measurements, Recurring | Certificates of deposit
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	12,456	8,248
Fair Value, Measurements, Recurring | Deposits Held In Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	16,027	3,980
Fair Value, Measurements, Recurring | Available For Sale Debt Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	101,184	102,608
Fair Value, Measurements, Recurring | Available For Sale Debt Securities | Corporate bonds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	57,032	46,823
Fair Value, Measurements, Recurring | Available For Sale Debt Securities | U.S. Treasury notes
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	26,483	33,331
Fair Value, Measurements, Recurring | Available For Sale Debt Securities | Debt securities issued by US government agencies
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	17,669	22,454
Fair Value, Measurements, Recurring | Available for sale equity securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	9,673	14,251
Fair Value, Measurements, Recurring | Available-for-sale investments
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	144,862	156,536
Fair Value, Measurements, Recurring | Series of Individually Immaterial Business Acquisitions
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring liabilities at fair value	(4,883)	(6,437)
Fair Value, Measurements, Nonrecurring | Property And Equipment
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	645,723
Fair Value, Measurements, Nonrecurring | Assets | Property And Equipment
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	(24,902)
Fair Value, Measurements, Nonrecurring | Trade Names
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value		98,774
Fair Value, Measurements, Nonrecurring | Trade Names | Assets
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value		(24,757)
Fair Value, Measurements, Nonrecurring | Goodwill
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	361,310
Fair Value, Measurements, Nonrecurring | Goodwill | Assets
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	(261,129)
Fair Value, Measurements, Nonrecurring | Hospitals Available for Sale
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	21,025
Fair Value, Measurements, Nonrecurring | Hospitals Available for Sale | Assets
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	(43,308)
Fair Value, Measurements, Nonrecurring | Nursing Center Available for Sale
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	4,499
Fair Value, Measurements, Nonrecurring | Nursing Center Available for Sale | Assets
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	(5,310)
Level 1 | Fair Value, Measurements, Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	69,606	79,111
Level 1 | Fair Value, Measurements, Recurring | Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	21,549	31,429
Level 1 | Fair Value, Measurements, Recurring | Deposits Held In Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	11,901	100
Level 1 | Fair Value, Measurements, Recurring | Available For Sale Debt Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	26,483	33,331
Level 1 | Fair Value, Measurements, Recurring | Available For Sale Debt Securities | U.S. Treasury notes
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	26,483	33,331
Level 1 | Fair Value, Measurements, Recurring | Available for sale equity securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	9,673	14,251
Level 1 | Fair Value, Measurements, Recurring | Available-for-sale investments
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	57,705	79,011
Level 2 | Fair Value, Measurements, Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	91,283	81,405
Recurring liabilities at fair value	(8,234)	(4,472)
Level 2 | Fair Value, Measurements, Recurring | Interest Rate Swap
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring liabilities at fair value	(8,234)	(4,472)
Level 2 | Fair Value, Measurements, Recurring | Certificates of deposit
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	12,456	8,248
Level 2 | Fair Value, Measurements, Recurring | Deposits Held In Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	4,126	3,880
Level 2 | Fair Value, Measurements, Recurring | Available For Sale Debt Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	74,701	69,277
Level 2 | Fair Value, Measurements, Recurring | Available For Sale Debt Securities | Corporate bonds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	57,032	46,823
Level 2 | Fair Value, Measurements, Recurring | Available For Sale Debt Securities | Debt securities issued by US government agencies
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	17,669	22,454
Level 2 | Fair Value, Measurements, Recurring | Available-for-sale investments
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring assets at fair value	87,157	77,525
Level 3
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	1,033,198
Level 3 | Certificates of Need
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	641
Level 3 | Fair Value, Measurements, Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring liabilities at fair value	(4,883)	(6,437)
Level 3 | Fair Value, Measurements, Recurring | Series of Individually Immaterial Business Acquisitions
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Recurring liabilities at fair value	(4,883)	(6,437)
Level 3 | Fair Value, Measurements, Nonrecurring | Property And Equipment
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	645,723
Level 3 | Fair Value, Measurements, Nonrecurring | Trade Names
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value		$ 98,774
Level 3 | Fair Value, Measurements, Nonrecurring | Goodwill
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	361,310
Level 3 | Fair Value, Measurements, Nonrecurring | Hospitals Available for Sale
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	21,025
Level 3 | Fair Value, Measurements, Nonrecurring | Nursing Center Available for Sale
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Non-recurring assets at fair value	$ 4,499

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Financial Instruments and Fair Value Measurements - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended	9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Available-for-sale investment related to deferred compensation plan		$ 1.7		$ 1.8
Asset impairment charges	$ 21.7
Certificates of Need
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges		3.5
Medical Office Building
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges		2.6
Previously Acquired Home Health and Hospice Trade Names
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges			$ 6.7
Nursing Centers
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges	5.3
Goodwill
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges	261.1
Property And Equipment
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges	3.2
Gentiva Health Services Inc
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Estimated fair value of contingent liability	7.9	7.9
Change in fair value of contingent liability attributable to accrued interest	0.1
Possible increase in fair value of contingent liability due to one percent change in discount rate	0.1	0.1
Gentiva Health Services Inc | Level 2
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Estimated fair value of contingent liability	4.9	4.9
Gentiva Health Services Inc | Level 3
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Estimated fair value of contingent liability	4.9	4.9
Curahealth, LLC
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges	33.0	7.8
Goodwill and intangible asset impairment charge	13.3
Curahealth, LLC | Property And Equipment
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Asset impairment charges	19.7
Insurance Subsidiary
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Cash and cash equivalents held by subsidiaries	$ 157.7	$ 157.7		$ 156.4

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Carrying Amount and Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Jun. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Dec. 31, 2014
Fair Value Disclosures [Abstract]
Cash and cash equivalents, Carrying value	$ 139,430	$ 100,056	$ 98,758	$ 120,891	$ 119,536	$ 164,188
Insurance subsidiary investments, Carrying value	300,863		311,136
Long-term debt, including amounts due within one year, carrying value	3,343,416		3,110,130
Cash and cash equivalents, Fair value	139,430		98,758
Insurance subsidiary investments, Fair value	300,863		311,136
Long-term debt, including amounts due within one year, Fair value	$ 3,389,569		$ 2,978,890

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Carrying Amount and Fair Value of Financial Instruments (Parenthetical) (Details) - USD ($) $ in Millions	Sep. 30, 2016	Dec. 31, 2015
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Abstract]
Excluding capital lease obligations totaling	$ 0.6	$ 0.8

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Condensed Consolidating Financial Information - Additional Information (Detail) $ in Millions	9 Months Ended
	Sep. 30, 2016 USD ($)
8.00% Notes due 2020
Condensed Financial Statements Captions [Line Items]
Aggregate principal amount of private placement	$ 750
Annual interest rate	8.00%
Debt Instrument Maturity Year	2020
8.75% Notes due 2023
Condensed Financial Statements Captions [Line Items]
Aggregate principal amount of private placement	$ 600
Annual interest rate	8.75%
Debt Instrument Maturity Year	2023
Senior Notes Through Private Placement
Condensed Financial Statements Captions [Line Items]
Equity method investment ownership percentage	100.00%

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Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended				9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Mar. 31, 2015	Sep. 30, 2016	Sep. 30, 2015
Condensed Financial Statements Captions [Line Items]
Revenues	$ 1,793,527		$ 1,764,516		$ 5,473,568	$ 5,273,958
Salaries, wages and benefits	957,644		922,140		2,812,812	2,704,920
Supplies	95,500		96,551		294,326	288,059
Rent	98,415		95,436		296,025	282,955
Other operating expenses	217,364		207,837		649,915	617,681
General and administrative expenses	310,407		307,500		998,559	1,043,986
Other (income) expense	(446)		(650)		(1,909)	(1,699)
Litigation contingency expense		$ 2,000	31,462	$ 95,000	2,840	130,387
Impairment charges	324,289				338,208	6,726
Restructuring charges	81,463		3,349		88,223	8,793
Depreciation and amortization	40,382		39,329		121,320	116,889
Interest expense (income)	59,862		56,440		175,417	176,128
Investment income	(1,810)		(432)		(2,561)	(2,203)
Operating expenses	2,183,070		1,758,962		5,773,175	5,372,622
Income (loss) from continuing operations before income taxes	(389,543)		5,554		(299,607)	(98,664)
Provision (benefit) for income taxes	281,752		12,523		311,470	9,183
Loss from continuing operations	(671,295)		(6,969)		(611,077)	(107,847)
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations, net of income taxes, as reported in Statement of Operations	(12)		2,269		2,422	(1,744)
Gain (loss) on divestiture of operations					179	983
Income (loss) from discontinued operations	(12)		2,269		2,601	(761)
Net loss	(671,307)		(4,700)		(608,476)	(108,608)
Earnings attributable to noncontrolling interests:
Continuing operations	(14,305)		(9,900)		(40,341)	(30,482)
Discontinued operations	(1)		1		(6)	32
(Earnings) loss attributable to noncontrolling interests	(14,306)		(9,899)		(40,347)	(30,450)
Income (loss) attributable to Kindred	(685,613)		(14,599)		(648,823)	(139,058)
Comprehensive loss	(670,749)		(5,817)		(610,178)	(110,385)
Comprehensive loss attributable to Kindred	(685,055)		(15,716)		(650,525)	(140,835)
Parent company/issuer
Condensed Financial Statements Captions [Line Items]
Intercompany interest (income) expense from affiliates	(56,169)		(51,099)		(166,673)	(154,140)
Interest expense (income)	59,859		56,350		175,372	172,534
Equity in net loss of consolidating affiliates	683,376		11,415		643,548	127,902
Operating expenses	687,066		16,666		652,247	146,296
Income (loss) from continuing operations before income taxes	(687,066)		(16,666)		(652,247)	(146,296)
Provision (benefit) for income taxes	(1,453)		(2,067)		(3,424)	(7,238)
Loss from continuing operations	(685,613)		(14,599)		(648,823)	(139,058)
Discontinued operations, net of income taxes:
Net loss	(685,613)		(14,599)		(648,823)	(139,058)
Earnings attributable to noncontrolling interests:
Income (loss) attributable to Kindred	(685,613)		(14,599)		(648,823)	(139,058)
Comprehensive loss	(685,055)		(15,716)		(650,525)	(140,835)
Comprehensive loss attributable to Kindred	(685,055)		(15,716)		(650,525)	(140,835)
Guarantor subsidiaries
Condensed Financial Statements Captions [Line Items]
Revenues	1,559,255		1,553,814		4,769,100	4,626,164
Salaries, wages and benefits	895,394		869,689		2,627,827	2,534,133
Supplies	82,509		83,840		254,818	249,995
Rent	77,529		76,275		233,264	226,417
Other operating expenses	190,299		186,036		567,203	542,682
General and administrative expenses	230,612		226,402		762,273	815,833
Other (income) expense	246		35		550	355
Litigation contingency expense			31,462		2,840	130,387
Impairment charges	202,617				213,964	6,726
Restructuring charges	80,268		3,349		87,028	8,793
Depreciation and amortization	37,883		36,920		113,542	109,571
Management fees	(2,277)		(5,170)		(7,003)	(14,766)
Intercompany interest (income) expense from affiliates	44,514		39,769		131,499	120,173
Interest expense (income)	(17)		27		(34)	3,371
Investment income	(90)		(177)		(305)	(1,525)
Operating expenses	1,839,487		1,548,457		4,987,466	4,732,145
Income (loss) from continuing operations before income taxes	(280,232)		5,357		(218,366)	(105,981)
Provision (benefit) for income taxes	282,602		14,411		313,569	15,956
Loss from continuing operations	(562,834)		(9,054)		(531,935)	(121,937)
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations, net of income taxes, as reported in Statement of Operations	(73)				2,336	(793)
Gain (loss) on divestiture of operations					179	983
Income (loss) from discontinued operations	(73)		2,311		2,515	190
Net loss	(562,907)		(6,743)		(529,420)	(121,747)
Earnings attributable to noncontrolling interests:
Income (loss) attributable to Kindred	(562,907)		(6,743)		(529,420)	(121,747)
Comprehensive loss	(562,907)		(6,743)		(529,420)	(121,747)
Comprehensive loss attributable to Kindred	(562,907)		(6,743)		(529,420)	(121,747)
Non-guarantor subsidiaries
Condensed Financial Statements Captions [Line Items]
Revenues	259,800		236,783		781,053	724,586
Salaries, wages and benefits	62,250		52,451		184,985	170,787
Supplies	12,991		12,711		39,508	38,064
Rent	20,886		19,161		62,761	56,538
Other operating expenses	27,065		21,801		82,712	74,999
General and administrative expenses	105,323		107,179		312,871	304,945
Other (income) expense	(692)		(685)		(2,459)	(2,054)
Impairment charges	121,672				124,244
Restructuring charges	1,195				1,195
Depreciation and amortization	2,499		2,409		7,778	7,318
Management fees	2,277		5,170		7,003	14,766
Intercompany interest (income) expense from affiliates	11,655		11,330		35,174	33,967
Interest expense (income)	20		63		79	223
Investment income	(1,720)		(255)		(2,256)	(678)
Operating expenses	365,421		231,335		853,595	698,875
Income (loss) from continuing operations before income taxes	(105,621)		5,448		(72,542)	25,711
Provision (benefit) for income taxes	603		179		1,325	465
Loss from continuing operations	(106,224)		5,269		(73,867)	25,246
Discontinued operations, net of income taxes:
Income (loss) from discontinued operations, net of income taxes, as reported in Statement of Operations	61				86	(951)
Income (loss) from discontinued operations	61		(42)		86	(951)
Net loss	(106,163)		5,227		(73,781)	24,295
Earnings attributable to noncontrolling interests:
Continuing operations	(14,305)		(9,900)		(40,341)	(30,482)
Discontinued operations	(1)		1		(6)	32
(Earnings) loss attributable to noncontrolling interests	(14,306)		(9,899)		(40,347)	(30,450)
Income (loss) attributable to Kindred	(120,469)		(4,672)		(114,128)	(6,155)
Comprehensive loss	(106,849)		4,591		(73,613)	23,748
Comprehensive loss attributable to Kindred	(121,155)		(5,308)		(113,960)	(6,702)
Consolidating and eliminating adjustments
Condensed Financial Statements Captions [Line Items]
Revenues	(25,528)		(26,081)		(76,585)	(76,792)
General and administrative expenses	(25,528)		(26,081)		(76,585)	(76,792)
Equity in net loss of consolidating affiliates	(683,376)		(11,415)		(643,548)	(127,902)
Operating expenses	(708,904)		(37,496)		(720,133)	(204,694)
Income (loss) from continuing operations before income taxes	683,376		11,415		643,548	127,902
Loss from continuing operations	683,376		11,415		643,548	127,902
Discontinued operations, net of income taxes:
Net loss	683,376		11,415		643,548	127,902
Earnings attributable to noncontrolling interests:
Income (loss) attributable to Kindred	683,376		11,415		643,548	127,902
Comprehensive loss	684,062		12,051		643,380	128,449
Comprehensive loss attributable to Kindred	$ 684,062		$ 12,051		$ 643,380	$ 128,449

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Condensed Consolidating Balance Sheet (Details) - USD ($) $ in Thousands		Sep. 30, 2016	Jun. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents		$ 139,430	$ 100,056	$ 98,758	$ 120,891	$ 119,536	$ 164,188
Insurance subsidiary investments		105,346		106,638
Accounts receivable, net		1,266,545		1,194,868
Inventories		25,262		27,791
Income taxes		12,416		11,790
Other		94,876		61,054
Current assets		1,643,875		1,500,899
Property and equipment, net		877,551		971,996
Goodwill		2,422,473		2,669,810
Intangible assets, net		804,602		755,655
Assets held for sale		4,499		613
Insurance subsidiary investments		195,517		204,498
Deferred tax assets				104,130
Acquisition deposit				18,489
Other		283,322		242,782
Total assets	[1]	6,227,340		6,468,259
Current liabilities:
Accounts payable		203,426		187,061
Salaries, wages and other compensation		390,743		404,925
Due to third party payors		57,945		36,251
Professional liability risks		61,036		64,099
Other accrued liabilities		280,305		394,246
Long-term debt due within one year		27,889		24,630
Current liabilities		1,021,344		1,111,212
Long-term debt		3,316,174		3,086,348
Professional liability risks		283,048		263,273
Deferred tax liabilities		200,334
Deferred credits and other liabilities		354,246		301,379
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		828,991		1,499,854
Noncontrolling interests		223,203		206,193
Total equity		1,052,194		1,706,047	1,650,511		1,485,972
Total liabilities and equity	[1]	6,227,340		6,468,259
Parent company/issuer
Current assets:
Intercompany		4,940,207		4,749,257
Other		11,123		11,312
Total assets		4,951,330		4,760,569
Current liabilities:
Other accrued liabilities		60,217		75,134
Long-term debt due within one year		26,186		23,524
Current liabilities		86,403		98,658
Long-term debt		3,315,573		3,085,074
Intercompany/deficiency in earnings of consolidated subsidiaries		720,363		76,983
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		828,991		1,499,854
Total equity		828,991		1,499,854
Total liabilities and equity		4,951,330		4,760,569
Guarantor subsidiaries
Current assets:
Cash and cash equivalents		32,623	24,037	18,232	44,802	53,234	129,408
Accounts receivable, net		1,101,665		1,039,761
Inventories		20,568		23,125
Income taxes		11,432		10,913
Other		85,318		53,648
Current assets		1,251,606		1,145,679
Property and equipment, net		807,137		911,611
Goodwill		1,972,402		2,098,812
Intangible assets, net		758,045		707,792
Deferred tax assets				95,721
Acquisition deposit				18,489
Other		113,557		116,692
Total assets		4,902,747		5,094,796
Current liabilities:
Accounts payable		104,206		106,253
Salaries, wages and other compensation		331,453		348,548
Due to third party payors		57,945		36,251
Professional liability risks		5,086		4,813
Other accrued liabilities		199,168		297,608
Current liabilities		697,858		793,473
Intercompany/deficiency in earnings of consolidated subsidiaries		4,344,909		4,142,653
Professional liability risks		73,117		61,472
Deferred tax liabilities		208,523
Deferred credits and other liabilities		214,438		175,173
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		(636,098)		(77,975)
Total equity		(636,098)		(77,975)
Total liabilities and equity		4,902,747		5,094,796
Non-guarantor subsidiaries
Current assets:
Cash and cash equivalents		106,807	$ 76,019	80,526	$ 76,089	$ 66,302	$ 34,780
Insurance subsidiary investments		105,346		106,638
Accounts receivable, net		164,880		155,107
Inventories		4,694		4,666
Income taxes		984		877
Other		9,558		7,406
Current assets		392,269		355,220
Property and equipment, net		70,414		60,385
Goodwill		450,071		570,998
Intangible assets, net		46,557		47,863
Insurance subsidiary investments		195,517		204,498
Deferred tax assets		8,189		8,409
Other		158,642		114,778
Total assets		1,321,659		1,362,151
Current liabilities:
Accounts payable		99,220		80,808
Salaries, wages and other compensation		59,290		56,377
Professional liability risks		55,950		59,286
Other accrued liabilities		20,920		21,504
Long-term debt due within one year		1,703		1,106
Current liabilities		237,083		219,081
Long-term debt		601		1,274
Intercompany/deficiency in earnings of consolidated subsidiaries		595,298		606,604
Professional liability risks		209,931		201,801
Deferred credits and other liabilities		139,808		126,206
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		(84,265)		992
Noncontrolling interests		223,203		206,193
Total equity		138,938		207,185
Total liabilities and equity		1,321,659		1,362,151
Consolidating and eliminating adjustments
Current assets:
Intercompany		(4,940,207)		(4,749,257)
Deferred tax assets		(8,189)
Total assets		(4,948,396)		(4,749,257)
Current liabilities:
Intercompany/deficiency in earnings of consolidated subsidiaries		(5,660,570)		(4,826,240)
Deferred tax liabilities		(8,189)
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		720,363		76,983
Total equity		720,363		76,983
Total liabilities and equity		$ (4,948,396)		$ (4,749,257)

[1] The Company’s consolidated assets as of September 30, 2016 and December 31, 2015 include total assets of variable interest entities of $405.6 million and $389.0 million, respectively, which can only be used to settle the obligations of the variable interest entities. The Company’s consolidated liabilities as of September 30, 2016 and December 31, 2015 include total liabilities of variable interest entities of $48.9 million and $39.7 million, respectively. See note 1 of the notes to unaudited condensed consolidated financial statements

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Condensed Consolidating Statement of Cash Flows (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Condensed Financial Statements Captions [Line Items]
Net cash provided by (used in) operating activities	$ 36,082	$ 132,290	$ 38,048	$ 93,067
Cash flows from investing activities:
Routine capital expenditures	(21,873)	(35,422)	(68,703)	(80,691)
Development capital expenditures	(8,386)	(5,760)	(27,112)	(12,066)
Acquisitions, net of cash acquired	(49,329)	(2,002)	(77,040)	(663,757)
Acquisition deposits			18,489	195,000
Sale of assets	3,739	3,884	4,962	7,061
Proceeds from senior unsecured notes offering held in escrow				1,350,000
Interest in escrow for senior unsecured notes				23,438
Purchase of insurance subsidiary investments	(22,427)	(16,357)	(75,422)	(59,186)
Sale of insurance subsidiary investments	31,875	15,987	78,478	50,780
Net change in insurance subsidiary cash and cash equivalents	(14,680)	(2,633)	8,479	(8,396)
Proceeds from note receivable		25,000		25,000
Net change in other investments	51	176	(33,347)	375
Other	(150)	1,383	(1,277)	590
Net cash provided by (used in) investing activities	(81,180)	(15,744)	(172,493)	828,148
Cash flows from financing activities:
Proceeds from borrowings under revolving credit	489,200	259,700	1,267,200	1,414,850
Repayment of borrowings under revolving credit	(388,100)	(349,700)	(1,215,800)	(1,319,850)
Proceeds from issuance of term loan, net of discount			198,100	199,000
Repayment of Gentiva debt				(1,177,363)
Proceeds from other long-term debt			750
Repayment of term loan	(3,508)	(3,003)	(10,019)	(9,008)
Repayment of other long-term debt	(276)	(500)	(826)	(1,400)
Payment of deferred financing costs	(50)	(301)	(342)	(3,284)
Issuance of common stock in connection with employee benefit plans		329		534
Payment of dividend for mandatory redeemable preferred stock	(2,904)	(2,703)	(8,558)	(8,135)
Dividends paid	(10,224)	(10,065)	(30,517)	(30,067)
Contributions made by noncontrolling interests	4,993	1,492	11,261	1,492
Payment of costs associated with issuance of common stock and tangible equity units				(915)
Distributions to noncontrolling interests	(4,694)	(10,685)	(35,240)	(31,823)
Purchase of noncontrolling interests			(1,000)
Other	35	245	108	1,457
Net cash provided by (used in) financing activities	84,472	(115,191)	175,117	(964,512)
Change in cash and cash equivalents	39,374	1,355	40,672	(43,297)
Cash and cash equivalents at beginning of period	100,056	119,536	98,758	164,188
Cash and cash equivalents at end of period	139,430	120,891	139,430	120,891
Parent company/issuer
Condensed Financial Statements Captions [Line Items]
Net cash provided by (used in) operating activities	(22,220)	(28,117)	(20,910)	361
Cash flows from financing activities:
Proceeds from borrowings under revolving credit	489,200	259,700	1,267,200	1,414,850
Repayment of borrowings under revolving credit	(388,100)	(349,700)	(1,215,800)	(1,319,850)
Proceeds from issuance of term loan, net of discount			198,100	199,000
Proceeds from issuance of senior unsecured notes due 2020 and 2023				1,350,000
Repayment of term loan	(3,508)	(3,003)	(10,019)	(9,008)
Payment of deferred financing costs	(50)	(301)	(342)	(3,284)
Issuance of common stock in connection with employee benefit plans		329		534
Payment of dividend for mandatory redeemable preferred stock	(2,904)	(2,703)	(8,558)	(8,135)
Dividends paid	(10,224)	(10,065)	(30,517)	(30,067)
Payment of costs associated with issuance of common stock and tangible equity units				(915)
Net change in intercompany accounts	(62,194)	133,860	(179,154)	(1,593,486)
Net cash provided by (used in) financing activities	22,220	28,117	20,910	(361)
Guarantor subsidiaries
Condensed Financial Statements Captions [Line Items]
Net cash provided by (used in) operating activities	36,799	137,155	12,114	29,691
Cash flows from investing activities:
Routine capital expenditures	(19,562)	(32,663)	(63,476)	(75,033)
Development capital expenditures	(3,413)	(5,760)	(11,768)	(12,066)
Acquisitions, net of cash acquired	(49,329)	(1,577)	(77,040)	(501,875)
Acquisition deposits			18,489	195,000
Sale of assets	3,739	3,884	4,962	7,061
Proceeds from note receivable		25,000		25,000
Net change in other investments	(63)	176	(34,546)	375
Other	(150)	1,383	(1,277)	590
Net cash provided by (used in) investing activities	(68,778)	(9,557)	(164,656)	(360,948)
Cash flows from financing activities:
Repayment of Gentiva debt				(1,177,363)
Other	35	245	108	1,457
Net change in intercompany accounts	40,530	(136,275)	166,825	1,422,557
Net cash provided by (used in) financing activities	40,565	(136,030)	166,933	246,651
Change in cash and cash equivalents	8,586	(8,432)	14,391	(84,606)
Cash and cash equivalents at beginning of period	24,037	53,234	18,232	129,408
Cash and cash equivalents at end of period	32,623	44,802	32,623	44,802
Non-guarantor subsidiaries
Condensed Financial Statements Captions [Line Items]
Net cash provided by (used in) operating activities	21,503	23,252	46,844	63,015
Cash flows from investing activities:
Routine capital expenditures	(2,311)	(2,759)	(5,227)	(5,658)
Development capital expenditures	(4,973)		(15,344)
Acquisitions, net of cash acquired		(425)		(161,882)
Proceeds from senior unsecured notes offering held in escrow				1,350,000
Interest in escrow for senior unsecured notes				23,438
Purchase of insurance subsidiary investments	(22,427)	(16,357)	(75,422)	(59,186)
Sale of insurance subsidiary investments	31,875	15,987	78,478	50,780
Net change in insurance subsidiary cash and cash equivalents	(14,680)	(2,633)	8,479	(8,396)
Net change in other investments	114		1,199
Net cash provided by (used in) investing activities	(12,402)	(6,187)	(7,837)	1,189,096
Cash flows from financing activities:
Proceeds from issuance of senior unsecured notes due 2020 and 2023				(1,350,000)
Proceeds from other long-term debt			750
Repayment of other long-term debt	(276)	(500)	(826)	(1,400)
Contributions made by noncontrolling interests	4,993	1,492	11,261	1,492
Distributions to noncontrolling interests	(4,694)	(10,685)	(35,240)	(31,823)
Purchase of noncontrolling interests			(1,000)
Net change in intercompany accounts	21,664	2,415	12,329	170,929
Net cash provided by (used in) financing activities	21,687	(7,278)	(12,726)	(1,210,802)
Change in cash and cash equivalents	30,788	9,787	26,281	41,309
Cash and cash equivalents at beginning of period	76,019	66,302	80,526	34,780
Cash and cash equivalents at end of period	$ 106,807	$ 76,089	$ 106,807	$ 76,089

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Legal and Regulatory Proceedings - Additional Information (Details)	3 Months Ended					9 Months Ended
	Sep. 30, 2016 USD ($)	Mar. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)	Sep. 30, 2015 USD ($)	Mar. 31, 2015 USD ($)	Sep. 30, 2016 USD ($) Plaintiffs LegalMatter	Sep. 30, 2015 USD ($)
Loss Contingencies [Line Items]
Litigation settlement amount		$ 125,000,000
Litigation settlement interest rate		1.875%
Loss contingency reserve			$ 2,000,000	$ 31,462,000	$ 95,000,000	$ 2,840,000	$ 130,387,000
Loss contingency accrual, provision				30,000,000		5,500,000
Provision (benefit) for income taxes	$ 281,752,000			$ 12,523,000		$ 311,470,000	$ 9,183,000
Number of plaintiffs | Plaintiffs						4
Number of lawsuits | LegalMatter						143
RehabCare
Loss Contingencies [Line Items]
Loss contingency reserve						$ 4,200,000
Minimum
Loss Contingencies [Line Items]
Loss Contingency, Range of Possible Loss					95,000,000
Maximum
Loss Contingencies [Line Items]
Loss Contingency, Range of Possible Loss					$ 125,000,000
Settled Litigation
Loss Contingencies [Line Items]
Provision (benefit) for income taxes			$ 47,000,000

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Subsequent Events - Additional Information (Details) $ in Thousands		3 Months Ended		9 Months Ended
	Oct. 01, 2016 USD ($) Hospital Bed	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2015 USD ($)
Subsequent Event [Line Items]
Payments to sale of leased assets		$ 21,873	$ 35,422	$ 68,703	$ 80,691
Rent		98,415	$ 95,436	296,025	$ 282,955
Asset impairment charges		21,700
Property And Equipment
Subsequent Event [Line Items]
Asset impairment charges		3,200
Curahealth Disposal
Subsequent Event [Line Items]
Recognize of pretax loss in disposal of assets		21,400
Goodwill and intangible asset impairment charge		13,300
Curahealth Disposal | Property And Equipment
Subsequent Event [Line Items]
Asset impairment charges		$ 19,700		$ 27,500
Curahealth Disposal | Ventas
Subsequent Event [Line Items]
Leased hospitals, description				Six of the Leased Hospitals were leased under master lease agreement No. 5 and one was leased under master lease agreement No. 1. The Leased Hospitals were leased under the applicable master lease agreement until the closing of the Curahealth Disposal.
Subsequent Event | Curahealth Disposal
Subsequent Event [Line Items]
Proceeds from affiliates	$ 27,500
Number of licensed beds | Bed	783
Rent	$ 51,800
Lease termination fee gross	$ 45,300
Subsequent Event | Curahealth Disposal | Ventas
Subsequent Event [Line Items]
Number of hospitals leased | Hospital	7
Amendment fee	$ 3,500
Payments to sale of leased assets	$ 3,000
Percentage of sale proceed	50.00%
Operating leases, rent expense	$ 7,700
Lease termination fee gross	$ 6,500