knd-10q_20160930.htm

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.

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.

	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

	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

	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			-

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.

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.

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.

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.

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.

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.

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

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.

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.

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):

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.

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.

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

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:

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.

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

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.

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.

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).

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):

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.

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.

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.

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.

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.

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.

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

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):

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.

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

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):

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.

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):

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):

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):

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.

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.

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

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.

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.

	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	)

	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

	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

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.

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):

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.

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

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.

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).

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.

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.

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 of sufficient consents to approve the proposed amendments (the “Amendments”), the Company, the 2022 Guarantors, and Wells Fargo Bank, National Association, as trustee, entered into the first supplemental indenture (the “2022 Notes Supplemental Indenture”) to the 2022 Indenture. The 2022 Notes Supplemental Indenture conforms certain covenants, definitions, and other terms in the 2022 Indenture to the covenants, definitions, and terms contained in the indentures governing the Notes (as defined in Note 15). The Amendments became operative following the consummation of the Gentiva Merger.

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.

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.

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:

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	$	-	$	-		$	-		$	-		$	-

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.

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.

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 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.

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.

	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	)

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	)

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	)

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	)

	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

	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

	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

	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

	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

	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

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.

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.

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.

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.

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.

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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):

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

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.

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.

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 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.

	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	)

	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

	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

	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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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 of sufficient consents to approve the Amendments, the Company, the 2022 Guarantors, and Wells Fargo Bank, National Association, as trustee, entered into the 2022 Notes Supplemental Indenture. The 2022 Notes Supplemental Indenture conforms certain covenants, definitions, and other terms in the 2022 Indenture to the covenants, definitions, and terms contained in the indentures governing the Notes. The Amendments became operative following the consummation of the Gentiva Merger.

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.

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 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.

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.

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.

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.

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.

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.

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”).

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.

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.

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.

On October 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.

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.

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.

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.

	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

	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	)

	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

	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

	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

	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

	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

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.

	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

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.

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.

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.

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.

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)

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

		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

	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

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

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

	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

	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

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.

		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