knd-10k_20171231.htm

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment of this Annual Report on Form 10-K. ☑

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

Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the shares of the registrant held by non-affiliates of the registrant, based on the closing price of such stock on the New York Stock Exchange on June 30, 2017, was approximately $974,300,000. For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

As of January 31, 2018, there were 91,413,775 shares of the registrant’s common stock, $0.25 par value, outstanding.

All references in this Annual Report on Form 10-K to “Kindred,” “Company,” “we,” “us,” or “our” mean Kindred Healthcare, Inc. and, unless the context otherwise requires, our consolidated subsidiaries.

This Annual Report on Form 10-K and the documents we incorporate by reference herein include 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, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited to, all statements regarding our ability to complete the Merger (as defined below) and the expected timing of such Merger, as well as our ability to realize the anticipated benefits from the Merger, all statements regarding our 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,” “hope,” “may,” “potential,” “upside,” “seek,” “continue,” and other similar expressions. Statements in this report concerning our 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 our best judgment 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 our 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 we are unable to predict or control, that may cause our actual results, performance, or plans to differ materially from any future results, performance, or plans expressed or implied by such forward-looking statements. Risks and uncertainties related to the Merger include, but are not limited to, the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (as defined below); the failure of the parties to satisfy conditions to completion of the Merger, including the failure of our stockholders to approve the Merger or the failure of the parties to obtain required regulatory approvals; the risk that regulatory or other approvals are delayed or are subject to terms and conditions that are not anticipated; changes in our business or in our or our businesses’ operating prospects; changes in health care and other laws and regulations; the impact of the announcement of, or failure to complete, the Merger on our relationships with employees, customers, vendors and other business partners; and litigation related to the Merger. These statements involve risks, uncertainties, and other factors discussed below and detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).

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

Many of these factors are beyond our control. We caution investors that any forward-looking statements made by us are not guarantees of future performance. We disclaim 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.

We are a healthcare services company that through our subsidiaries operates a home health, hospice and community care business, TC hospitals, IRFs, and a contract rehabilitation services business across the United States. We are organized into three operating divisions: the Kindred at Home division, the hospital division, and the Kindred Rehabilitation Services division. At December 31, 2017, our (1) Kindred at Home division primarily provided home health, hospice, and community care services from 608 sites of service in 40 states, (2) hospital division operated 75 TC hospitals (certified as LTAC hospitals under the Medicare program) in 17 states, and (3) Kindred Rehabilitation Services division operated 19 IRFs and 99 hospital-based acute rehabilitation units (“ARUs”) (certified as IRFs), and provided rehabilitation services primarily in hospitals and long-term care settings in 45 states.

All financial and statistical information presented in this Annual Report on Form 10-K reflects the continuing operations of our businesses for all periods presented unless otherwise indicated.

Merger Agreement. On December 19, 2017, we announced that our Board of Directors (the “Board”) had approved a definitive agreement under which we will be acquired by a consortium of three companies: TPG Capital (“TPG”), Welsh, Carson, Anderson & Stowe (“WCAS”) and Humana Inc. (“Humana”). Subject to the terms and conditions of an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Kentucky Hospital Holdings, LLC (“HospitalCo Parent”), Kentucky Homecare Holdings, Inc. (“Parent”) and Kentucky Homecare Merger Sub, Inc. (“Merger Sub”), Merger Sub will be merged with and into Kindred (the “Merger”), with Kindred continuing as the surviving company in the Merger (the “Surviving Entity”).

At the effective time of the Merger, each share of our common stock, par value $0.25 per share (“Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (other than shares held by Parent, HospitalCo Parent, Merger Sub or Kindred and their respective wholly owned subsidiaries (which will be cancelled) and shares that are owned by stockholders who have properly exercised and perfected a demand for appraisal rights under Delaware law), will be cancelled and converted into the right to receive $9.00 in cash, without interest (the “Merger Consideration”).

The Merger Agreement contains customary representations, warranties and covenants for a transaction of this nature. The Merger Agreement also contains customary covenants, including, among others, covenants (i) providing for us and our respective subsidiaries to conduct business in all material respects in the ordinary course and not to take certain actions without Merger Sub’s consent and (ii) for each of the parties to use reasonable best efforts to cause the transactions contemplated by the Merger Agreement to be consummated. Additionally, the Merger Agreement provides for customary pre-closing covenants, including covenants not to solicit proposals relating to alternative transactions or, subject to certain exceptions, enter into discussions concerning or provide information in connection with alternative transactions, covenants to call and hold a meeting of our stockholders and a covenant to recommend that our stockholders adopt the Merger Agreement, subject to certain exceptions to permit our directors to satisfy their applicable fiduciary duties.

Consummation of the Merger is subject to various conditions, including, among others, adoption of the Merger Agreement by the requisite vote of our stockholders, the receipt of certain licensure and regulatory approvals, the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (this condition was satisfied on February 20, 2018), the consummation of the purchase of the two remaining skilled nursing facilities from Ventas and payment of corresponding expense reimbursements to Ventas (this condition was satisfied on December 21, 2017), the satisfaction of the closing conditions to the Separation Agreement (as defined below) and certain related entity conversions, the absence of any material adverse effect on each of us, our home health, hospice and community care business, and our TC hospitals, IRFs and contract rehabilitation services business, and certain other customary closing conditions.

The Merger Agreement also contains certain termination rights for us and Merger Sub (including if the Merger is not consummated by August 17, 2018 (the “End Date”)) and provides that upon termination of the Merger Agreement under specified circumstances, including, among others, following a change in recommendation of our Board or our termination of the Merger Agreement to enter into a written definitive agreement for a “superior proposal,” we will be required to pay Merger Sub a termination fee of $29 million and reimburse the documented out-of-pocket expenses of Parent, HospitalCo Parent and certain of their affiliates in connection with the Merger Agreement (the “Parent Expenses”) up to $10 million.

If the Merger Agreement is submitted to a vote of our stockholders and approval of the Merger Agreement is not obtained, we will be required to reimburse Merger Sub for the amount of the Parent Expenses, up to $7.5 million.

Parent will be required to pay us a reverse termination fee of $61.5 million, and to reimburse certain of our expenses, including the reasonable and documented out-of-pocket expenses we incurred in connection with the implementation of the Separation Transactions (as defined in the Separation Agreement), up to $13.5 million, in the event the Merger Agreement is terminated (i) by us, subject to certain limitations set forth in the Merger Agreement, if (A) there has been a breach of a representation, warranty or covenant of Parent or Merger Sub that would cause the related closing condition to be incapable of being satisfied or cured by the End Date or, if curable, is not cured by Parent or Merger Sub by the earlier of 30 days after receipt of written notice of such breach and the End Date, (B) the conditions to Parent, HospitalCo Parent and Merger Sub’s obligations to consummate the closing have been satisfied (other than those conditions that by their terms are to be satisfied at or immediately prior to the closing, provided that such conditions are then capable of being satisfied at the closing), we have irrevocably confirmed to Parent in writing that we are prepared and able to consummate the closing, and Parent and Merger Sub fail to consummate the Merger by the later of the date the closing should have occurred and three business days following the date of the notice from us described above, or (ii) by us or Parent if the Merger has not occurred by the End Date and at the time of termination all of the conditions to Parent, HospitalCo Parent and Merger Sub’s obligations to consummate the closing have been satisfied (other than those conditions that by their terms are to be satisfied by actions taken at the closing, provided that such conditions are then capable of being satisfied at the closing) other than those relating to obtaining specified licensure and regulatory approvals and/or there being any injunction or other order by a governmental entity charged with jurisdiction over the granting of such approvals.

In connection with the Merger Agreement, Parent and HospitalCo Parent have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement and the Separation Agreement, the aggregate proceeds of which will be sufficient to consummate the transactions contemplated by the Merger Agreement and the Separation Agreement on the closing date, including the payment of any amounts required to be paid by Parent pursuant to the Merger Agreement on the closing date, the repayment of our existing indebtedness, and the payment of all fees and expenses reasonably expected to be incurred in connection therewith. Pursuant to equity commitment letters executed and delivered concurrently with the Merger Agreement, subject to the terms and conditions set forth therein, Humana, TPG, WCAS and Port-aux-Choix Private Investments Inc. (“PSP”), have committed to, severally but not jointly, capitalize Parent, and TPG, WCAS and PSP have committed, severally but not jointly, to capitalize HospitalCo Parent, with the aggregate amount of the equity financing. In addition, each of Humana, TPG, WCAS and PSP have provided us limited guarantees, guaranteeing Parent’s obligation to pay the reverse termination fee and certain other reimbursement obligations of the Parent and Merger Sub pursuant to the Merger Agreement.

Separation Agreement. Concurrently with the execution and delivery of the Merger Agreement, on December 19, 2017, Kindred, Parent, HospitalCo Parent, and Kentucky Hospital Merger Sub, Inc., entered into a Separation Agreement (the “Separation Agreement”), pursuant to which, promptly following the effective time of the Merger, the Surviving Entity will be separated from our home health, hospice and community care services business and acquired by HospitalCo Parent.

The Separation Agreement relates to, among other things (i) certain restructuring transactions that are to take place with respect to us and our subsidiaries, (ii) procedures concerning the transfer of certain assets and employees used or employed in our respective businesses and (iii) the allocation of costs and expenses related to the separation of the Surviving Entity from the Homecare Business (as defined in the Separation Agreement). The Separation Agreement requires, among other things, us to take certain actions and expend certain efforts prior to the closing of the Merger in preparation for such separation transactions.

Ventas Lease Amendment. Concurrently with the execution and delivery of the Merger Agreement, on December 19, 2017, we and Ventas entered into Amendment No. 2 (the “Ventas Lease Amendment”) to the Second Amended and Restated Master Lease Agreement No. 5 (the “Master Lease Agreement”) pursuant to which, among other things, (i) Ventas agreed that the transactions contemplated by the Merger Agreement and the Separation Agreement comply with the Master Lease Agreement, subject to the satisfaction of the remaining requirements in the Master Lease Agreement related thereto, including payment to Ventas of a transaction fee equal to 10% of annual base rent under the Master Lease Agreement upon closing of the transactions, (ii) we agreed to pay to Ventas an additional $5 million fee within one business day of the signing of the Merger Agreement in exchange for Ventas’ approval of and agreement not to challenge the transaction structure (this condition was satisfied on December 20, 2017), (iii) we agreed to complete the purchase of the two remaining skilled nursing facilities under the Master Lease Agreement and our former Second Amended and Restated Master Lease No. 2 from Ventas, and pay corresponding expense reimbursements to Ventas, on or before December 31, 2017 (this condition was satisfied on December 21, 2017), and (iv) we agreed to make certain minimum expenditures for the leased facilities remaining under the Master Lease Agreement going forward.

Skilled nursing facility business exit. On June 30, 2017, we entered into a definitive agreement with BM Eagle Holdings, LLC, a joint venture led by affiliates of BlueMountain Capital Management, LLC (“BlueMountain”), under which we agreed to sell our skilled nursing facility business for $700 million in cash (the “SNF Divestiture”). The SNF Divestiture included 89 nursing centers with 11,308 licensed beds and seven assisted living facilities with 380 licensed beds in 18 states. During 2017, we completed the sale of 81 skilled nursing facilities and five assisted living facilities on various dates for total sales proceeds of approximately $664 million. The completion of the remainder of the sales is subject to customary conditions to closing, including the receipt of all licensure, regulatory and other approvals.

Thirty-six of these skilled nursing facilities were previously leased from Ventas (the “Ventas Properties”). We had an option to acquire the real estate of the Ventas Properties for aggregate consideration of $700 million, which we exercised as we closed on the sale of the Ventas Properties in connection with the SNF Divestiture during 2017. On each respective closing date, we paid Ventas the allocable portion of the $700 million purchase price for the Ventas Properties and Ventas conveyed the real estate for the applicable Ventas Property to BlueMountain or its designee. We paid Ventas approximately $647 million for 34 of the Ventas Properties in connection with closings that occurred during 2017. Additionally, as required under the Merger Agreement, we paid Ventas approximately $53 million to purchase the two remaining Ventas Properties that had yet to be sold in the SNF Divestiture at the end of 2017.

In accordance with authoritative guidance for assets held for sale and discontinued operations accounting, the skilled nursing facility business is reported as assets held for sale and was moved to discontinued operations for all periods presented.

Gentiva Merger. On October 9, 2014, we entered into an Agreement and Plan of Merger (the “Gentiva Merger Agreement”) with Gentiva Health Services, Inc. (“Gentiva”), providing for our acquisition of Gentiva. On February 2, 2015, we consummated the acquisition with one of our subsidiaries merging with and into Gentiva (the “Gentiva Merger”), with Gentiva continuing as the surviving company and our 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 us, 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 (i) $14.50 in cash (the “Gentiva Cash Consideration”), without interest, and (ii) 0.257 of a share of our Common Stock (the “Gentiva Stock Consideration” and, together with the Gentiva Cash Consideration, the “Gentiva Merger Consideration”).

Centerre Acquisition. On November 11, 2014, we entered into an agreement to acquire Centerre Healthcare Corporation (“Centerre”), a company dedicated to operating IRFs (the “Centerre Acquisition”). On January 1, 2015, we completed the Centerre Acquisition for a purchase price of approximately $195 million in cash. At the time of the Centerre Acquisition, Centerre operated 11 IRFs with 614 beds in partnership with some of the nation’s leading acute care hospital systems. Centerre had two additional hospitals with a total of 90 beds under construction that were opened in 2015, and a pipeline of additional potential hospitals in various stages of development.

Spin-off from Ventas. On May 1, 1998, Ventas completed the spin-off of its healthcare operations to its stockholders through the distribution of our former common stock. Ventas retained ownership of substantially all of its real property and leases a portion of such real property to us. In anticipation of the spin-off from Ventas we were incorporated on March 27, 1998 as a Delaware corporation.

We have completed several strategic divestitures to improve our future operating results. For accounting purposes, the operating results of these businesses and the gains, losses or impairments associated with these transactions have been classified as discontinued operations in the accompanying 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 our operations and financial results. In connection with the SNF Divestiture, the results of operations of the skilled nursing facility business, which previously were reported in the nursing center division, and the losses or impairments associated with the SNF Divestiture, have been classified as discontinued operations for all periods presented. In addition, direct overhead and the profits from applicable RehabCare contracts servicing our skilled nursing facility business that were not retained by new operators were moved to discontinued operations for all periods presented. We have reclassified certain retained businesses and expenses previously reported in the nursing center division to other business segments, including hospital-based sub-acute units and a skilled nursing facility to the hospital division and a small therapy business to the Kindred Hospital Rehabilitation Services operating segment for all periods presented. See notes 6 and 7 of the notes to consolidated financial statements.

We are organized into three operating divisions: the Kindred at Home division, the hospital division, and the Kindred Rehabilitation Services division.

The Kindred at Home division primarily provides home health, hospice, and community care services to patients in a variety of settings, including their homes, nursing centers, and other residential settings. The hospital division operates TC hospitals. The

Kindred Rehabilitation Services division operates IRFs and ARUs and provides rehabilitation services primarily in hospitals and long-term care settings.

Based upon the authoritative guidance for business segments, our operating divisions represent five reportable operating segments, including (1) home health services, (2) hospice services, (3) hospitals, (4) Kindred Hospital Rehabilitation Services, and (5) RehabCare. The home health services and hospice services operating segments are contained within the Kindred at Home division while the Kindred Hospital Rehabilitation Services and RehabCare operating segments are both contained within the Kindred Rehabilitation Services division.

Our Kindred at Home division primarily provides home health, hospice, and community care services for patients in a variety of settings, including their homes, nursing centers, and other residential settings. Kindred at Home provides services from 608 sites of service in 40 states, making us one of the largest and geographically diversified home health and hospice companies in the United States as of December 31, 2017.

Our home health operations offer medical care and other services for patients in their homes or other residential settings. Experienced nurses, therapists, and home health aides work with the patient and his or her family members to maximize the patient’s ability to handle a wide variety of daily activities and to educate the patient regarding medications and management of their medical conditions. Our services include nursing, physical, occupational and speech therapies, and medical social work.

Our hospice operations provide family-oriented care designed to meet the spiritual, emotional, and physical needs of terminally ill patients and their families. We provide hospice services in the home or other settings such as nursing centers, assisted living facilities, hospitals, and inpatient hospice units. Working in conjunction with a patient’s attending physician and/or the hospice medical director, our team of hospice professionals develops a plan of care designed to support the patient’s individual needs, which may include pain and symptom management, emotional and spiritual counseling, homemaking, and dietary services.

Our community care services include personal care (bathing and grooming), meal preparation, companionship, light housekeeping, shopping, respite care, and transportation.

In key markets, we also provide physician services focused on delivering primary and urgent care for patients in home-based settings such as assisted living facilities, independent living facilities, and patients’ homes, as well as care-transition managers to follow patients with specific diagnoses and/or risk factors through the entire care continuum.

The following table sets forth certain operating and financial data for the Kindred at Home division (dollars in thousands, except statistics):

	Year ended December 31,
	2017		2016		2015
Kindred at Home:
Home health:
Revenues (1)	$	1,822,357	$	1,762,622	$	1,578,500
Segment adjusted operating income (1)	$	276,218	$	279,531	$	256,173
Sites of service (at end of period)		375		390		373
Episodic revenues	$	1,314,175	$	1,313,974	$	1,194,536
Total admissions		358,908		349,689		331,135
Total episodic admissions		278,575		278,358		249,805
Medicare episodic admissions		234,580		242,104		218,850
Total episodes		451,442		451,585		406,313
Episodes per admission		1.62		1.62		1.63
Revenue per episode	$	2,911	$	2,910	$	2,940
Assets at end of period (1)	$	1,540,010	$	1,540,370	$	1,435,176
Routine capital expenditures (1)	$	4,323	$	6,401	$	4,201
Hospice:
Revenues	$	743,443	$	736,803	$	656,527
Segment adjusted operating income	$	129,273	$	116,326	$	109,120
Sites of service (at end of period)		178		183		175
Admissions		50,720		51,959		45,657
Average length of stay		96		95		97
Patient days		4,891,348		4,945,769		4,373,044
Average daily census		13,401		13,513		11,981
Revenue per patient day	$	152	$	149	$	150
Assets at end of period	$	913,230	$	929,774	$	922,710
Routine capital expenditures	$	2,379	$	2,342	$	1,215

The term “segment adjusted operating income” is defined as earnings before interest, income taxes, depreciation, amortization, and total rent reported for each of our operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead. A reconciliation of “segment adjusted operating income” to our consolidated results of operations is included in note 10 of the notes to consolidated financial statements. The term “episodes” refers to healthcare services provided to a patient over a base period of 60 days. “Average length of stay” is computed by dividing each facility’s patient days by the number of admissions in the respective period. “Patient days” refers to the total number of days of patient care provided for the periods indicated. “Average daily census” is computed by dividing each facility’s patient days by the number of calendar days in the respective period. Routine capital expenditures include expenditures at existing facilities that generally do not result in the expansion of services.

Kindred at Home division revenues are derived principally from the Medicare and Medicaid programs, private insurers, and private pay patients. Medicare reimburses both home health and hospice services under prospective payment systems, which are subject to numerous qualifications, standards, and adjustments. Medicaid reimburses home health and hospice service providers using a number of state-specific systems. We often negotiate contract rates of reimbursement with private insurers.

The following table sets forth the approximate percentages of home health (including community care and home-based physician services) revenues derived from the payor sources indicated:

The following table sets forth the approximate percentages of hospice revenues derived from the payor sources indicated:

For the year ended December 31, 2017, revenues of the Kindred at Home division totaled approximately $2.6 billion or 42% of our total revenues (before eliminations). For more information regarding the reimbursement of our Kindred at Home division, see “—Governmental Regulation—Kindred at Home Division—Overview of Kindred at Home Division Reimbursement.”

At December 31, 2017, the Kindred at Home division was headed by a president, overseeing a chief operating, and clinical, financial, and administrative officers, and a senior vice president of sales. A president for each of the five geographic regions and a sixth president over the community care operations, report to the chief operating officer of the division. In addition, the Kindred at Home division has division-level sales, clinical services, finance, and operations executives.

We provide our Kindred at Home division with centralized administrative support in the areas of information systems, regulatory compliance, reimbursement guidance, licensing support as well as legal, finance, accounting, purchasing, marketing, and human resources management. The centralization of these services improves operating efficiencies, promotes standardization of processes, and enables our healthcare professionals to focus on delivering quality care to our patients.

Our Kindred at Home division operates in a highly competitive and significantly fragmented industry. Our competitors include large providers of home health and hospice services, both for-profit and nonprofit and smaller independent local operators. There often are no significant barriers to entry in many of the markets in which our Kindred at Home division operates and new providers of home health and/or hospice services may enter into our current and future markets. Many of our competitors may have greater financial and other resources than we do.

Although there is limited, if any, price competition with respect to Medicare and Medicaid patients (since revenues received for services provided to these patients are based generally on fixed rates), there is substantial price competition for private payment patients. We believe our Kindred at Home division competes based upon its reputation for providing quality services, charging competitive prices, and being consistently responsive to the needs of our patients and their families and physicians.

Our hospital division provides long-term acute care services to post-intensive care and medically complex patients through the operation of a national network of 75 TC hospitals with 5,553 licensed beds in 17 states as of December 31, 2017. We operate one of the largest networks of TC hospitals in the United States based upon revenues. Our TC hospitals are certified as LTAC hospitals under the Medicare program.

As a result of our commitment to the hospital business, we have developed a comprehensive program of care for post-intensive care and medically complex patients that allows us to deliver high-quality care in a cost-effective manner. A number of our hospitals also provide skilled nursing, sub-acute, and outpatient services. Outpatient services may include diagnostic services, outpatient wound care, rehabilitation therapy, CT scanning, one-day surgery, and laboratory tests.

In our TC hospitals, we treat post-intensive care and medically complex patients, including the critically ill, suffering from multiple organ system failures, most commonly of the cardiovascular, pulmonary, kidney, gastro-intestinal, and cutaneous (skin) systems. In particular, we have a core competency in treating patients with cardio-pulmonary disorders, skin and wound conditions, and life-threatening infections. Prior to being admitted to one of our TC hospitals, many of our patients have undergone a major surgical procedure or developed a neurological disorder following head and spinal cord injury, cerebrovascular incident, or metabolic instability. Our expertise lies in the ability to simultaneously deliver comprehensive and coordinated medical interventions directed at all affected organ systems, while maintaining a patient-centered, integrated care plan. Post-intensive care and medically complex patients are characteristically dependent on technology for continued life support, including mechanical ventilation, total parenteral nutrition, respiratory or cardiac monitors, and kidney dialysis machines.

Our TC hospital patients generally have conditions that require a high level of monitoring and specialized care, yet may not need all of the services of a traditional intensive care unit. These patients are not clinically appropriate for admission to other post-

acute settings because their severe medical conditions are periodically or chronically unstable. By providing a range of services required for the care of post-intensive care and medically complex patients, we believe that our TC hospitals provide our patients with high quality, cost-effective care.

Our TC hospitals employ a comprehensive program of care for their patients that draws upon the talents of interdisciplinary teams, including physician specialists. The teams evaluate patients upon admission to determine treatment programs. Our hospital division has developed specialized treatment programs focused on the needs of post-intensive care and medically complex patients. In addition to traditional medical services, our TC hospital patients receive individualized treatment plans, which may include rehabilitation, skin integrity management, and clinical pharmacology services. Where appropriate, the treatment programs may involve several disciplines, such as pulmonary medicine, infectious disease, and physical medicine.

The following table sets forth certain operating and financial data for the hospital division (dollars in thousands, except statistics):

The term “licensed beds” refers to the maximum number of beds permitted in a facility under its license regardless of whether the beds are actually available for patient care. “Medicare case mix index” is the sum of the individual patient diagnostic related group weights for the period divided by the sum of the discharges for the same period. “Occupancy %” is computed by dividing average daily census by the number of operational licensed beds, adjusted for the length of time each facility was in operation during each respective period. Routine capital expenditures include expenditures at existing facilities that generally do not result in the expansion of services.

The hospital division receives payment for its services from third party payors, including government reimbursement programs such as Medicare and Medicaid, and nongovernment sources such as Medicare Advantage, Medicaid Managed, commercial insurance companies, health maintenance organizations, preferred provider organizations, and contracted providers. Patients covered by nongovernment payors generally are more profitable to the hospital division than those covered by the Medicare and Medicaid programs. The following table sets forth the approximate percentages of our hospital division revenues, admissions, and patient days derived from the payor sources indicated:

	Year ended December 31,
	2017		2016		2015
Revenue mix %:
Medicare		50.6		55.1		56.2
Medicaid		5.0		4.7		5.7
Medicare Advantage		12.5		11.6		11.4
Medicaid Managed		9.4		6.6		5.5
Commercial insurance and other		22.5		22.0		21.2

Admissions mix % (1):
Medicare		62.1		65.6		65.6
Medicaid		3.3		3.1		4.5
Medicare Advantage		11.9		10.9		10.7
Medicaid Managed		8.3		6.4		5.1
Commercial insurance and other		14.4		14.0		14.1

Patient days mix % (1):
Medicare		55.0		58.5		58.7
Medicaid		4.3		4.8		6.7
Medicare Advantage		13.2		12.2		11.8
Medicaid Managed		10.6		7.7		6.5
Commercial insurance and other		16.9		16.8		16.3

For the year ended December 31, 2017, revenues of the hospital division totaled approximately $2.1 billion or 34% of our total revenues (before eliminations). For more information regarding the reimbursement for our hospital services, see “—Governmental Regulation—Hospital Division—Overview of Hospital Division Reimbursement.”

The following table lists by state the number of TC hospitals and licensed beds we operated as of December 31, 2017:

			Number of facilities
State	Licensed beds		Owned by us		Leased from Ventas (2)		Leased from other parties		Total
California		1,028		4		5		4		13
Colorado		133		-		1		2		3
Florida (1)		742		3		6		1		10
Georgia (1)		45		-		-		1		1
Illinois (1)		575		-		4		2		6
Indiana		206		-		1		3		4
Kentucky (1)		414		-		1		1		2
Missouri (1)		133		-		1		2		3
Nevada		254		1		1		1		3
New Jersey (1)		117		-		-		3		3
New Mexico		61		-		1		-		1
North Carolina (1)		124		-		1		-		1
Ohio		93		1		-		1		2
Pennsylvania		167		1		1		1		3
Tennessee (1)		49		-		1		-		1
Texas		1,332		2		5		10		17
Washington (1)		80		2		-		-		2
Totals		5,553		14		29		32		75

The hospital division maintains a clinical outcomes and customer service program that includes a review of its patient population measured against utilization and quality standards, clinical outcomes data collection, and patient/family, employee, and physician satisfaction surveys. In addition, our hospitals have integrated quality assurance and improvement programs administered by a director of quality management, which encompass quality improvement, infection control, and risk management. The programs seek to ensure that patients are managed appropriately in our hospitals and that quality healthcare is provided in a cost-effective manner.

The hospital division has implemented a program whereby internal quality auditors review our TC hospitals for compliance with standards of The Joint Commission (“TJC”). The purposes of this internal review process are to: (1) ensure ongoing compliance with industry-recognized standards for hospitals, (2) assist management in analyzing each hospital’s operations, and (3) provide consulting and educational programs for each hospital to identify opportunities to improve patient care.

Each of our TC hospitals has a fully credentialed, multi-specialty medical staff to meet the needs of post-intensive care and medically complex patients. Our TC hospitals offer a broad range of physician services including pulmonology, internal medicine, infectious diseases, neurology, nephrology, cardiology, radiology, and pathology. In addition, our TC hospitals have multi-disciplinary teams of healthcare professionals, including a professional nursing staff trained to care for long-term acute patients, respiratory, physical, occupational, and speech therapists, pharmacists, registered dietitians, and social workers, to address the needs of post-intensive care and medically complex patients.

Each TC hospital utilizes a pre-admission assessment system to evaluate clinical needs and other information in determining the appropriateness of each potential patient admission. After admission, the TC hospital’s interdisciplinary team reviews each patient’s case to determine a care plan. Typically, and where appropriate, the care plan involves the services of several disciplines, such as pulmonary medicine, infectious disease, and physical medicine.

A hospital chief executive officer or administrator supervises and is responsible for the day-to-day operations at each of our hospitals. Each hospital (or network of hospitals) also employs a chief financial or accounting officer who monitors the financial matters of such hospital or network. In addition, each hospital (or network of hospitals) employs a chief clinical officer to oversee the clinical operations and a director of quality management to oversee our quality assurance programs.

We provide centralized administrative services in the areas of information systems, clinical operations, regulatory compliance, reimbursement guidance, state licensing, and Medicare and Medicaid certification and maintenance support, as well as legal, finance, accounting, purchasing, human resources management, and facilities management support to each of our hospitals. We believe that this centralization improves efficiency, promotes the standardization of certain processes, and allows staff in our hospitals to focus more attention on providing quality patient care.

A division president, chief operating officer, and a chief financial officer manage the hospital division. The operations of the hospital division are divided into eight operational districts, each headed by a vice president, a divisional vice president or executive director who reports directly to the division’s chief operating officer. The division’s chief medical officer and senior vice president of clinical operations manage clinical issues and quality concerns of the hospital division. The sales and marketing efforts for the division are led by district sales leaders, who in turn report to our hospital division senior vice president of sales and business development.

In each geographic market that we serve, there are generally several competitors that provide similar services to those provided by our hospital division. In addition, several of the markets in which the hospital division operates have other LTAC hospitals and healthcare facilities that provide services comparable to those offered by our hospitals. Certain competing hospitals and healthcare facilities are operated by not-for-profit, non-taxpaying, or governmental agencies, which can finance capital expenditures on a tax-exempt basis and receive funds and charitable contributions that are unavailable to our hospital division.

Competition for patients covered by nongovernment reimbursement sources is intense. The primary competitive factors in the LTAC hospital business include quality of services, charges for services, and responsiveness to the needs of patients, families, payors, and physicians. The competitive position of any LTAC hospital also is affected by the ability of its management to negotiate contracts with purchasers of, and to receive referrals from, group healthcare services, including managed care companies, preferred provider organizations, and health maintenance organizations. Such organizations attempt to obtain discounts from established charges, as well as to limit their overall expenditures by compressing average lengths of stay. The importance of obtaining contracts with preferred provider organizations, health maintenance organizations, and other organizations that finance healthcare varies from market to market, depending on the number and market strength of such organizations.

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 is not appropriate from a clinical perspective. Conveners may suggest that patients select alternate care settings to our TC hospitals, IRFs, or home health locations or otherwise suggest shorter lengths of stay in such settings. Efforts by conveners to avoid our care settings or suggest shorter lengths of stay in our care settings could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Our Kindred Rehabilitation Services division operates IRFs, manages ARUs, and provides rehabilitation services, including physical and occupational therapies and speech pathology services, to residents and patients of nursing centers, hospitals, outpatient clinics, home health agencies, and assisted living facilities. Within our Kindred Rehabilitation Services division, we are organized into two reportable operating segments: Kindred Hospital Rehabilitation Services and RehabCare. We are one of the largest providers of rehabilitation services in the United States based upon fiscal 2017 revenues of approximately $1.4 billion.

Our Kindred Hospital Rehabilitation Services segment operates IRFs, manages ARUs, and provides program management and therapy services on an inpatient basis in LTAC hospitals, sub-acute (or skilled nursing) units, as well as on an outpatient basis to hospital-based and other satellite programs. As of December 31, 2017, our Kindred Hospital Rehabilitation Services segment operated 19 IRFs (which includes 17 joint ventures) and 99 ARUs and provided rehabilitation services in 104 LTAC hospitals, four sub-acute (or skilled nursing) units and 123 outpatient clinics.

Inpatient rehabilitation hospitals. Our IRFs provide services to patients who require intensive inpatient rehabilitative care. Our IRF patients typically have significant physical disability due to various medical and physical conditions, such as brain injuries, spinal cord injuries, stroke, hip fractures, certain orthopedic problems, and neuromuscular disease, which require medical and rehabilitative healthcare services in an inpatient setting. Our nurses and physical, occupational, and speech therapists work with physicians in a multi-disciplinary environment to get patients home and to work. Nursing and therapy staff provide patient care as directed by physician orders. Our IRFs use an interdisciplinary approach to treatment that leads to better care and superior outcomes. The medical,

nursing, therapy, and ancillary services provided by our IRFs comply with local, state, and federal regulations, as well as other accreditation standards. The majority of our IRFs are owned and operated through joint ventures with other health systems.

Hospital-based inpatient rehabilitation units. We are a leading provider of contract-based ARU management services. The ARUs we manage provide high acuity rehabilitation for patients recovering from strokes, medically complex and orthopedic conditions, traumatic brain injuries, and other neurological disease. We assist in the development of ARUs in acute care hospitals that have vacant space and/or unmet rehabilitation needs in their markets. We also work with acute care hospitals that currently operate ARUs to improve the delivery of clinical services to patients by implementing our scheduling, clinical protocol, and outcome systems, as well as time-management training for existing staff. In the case of acute care hospitals that do not operate ARUs, we review their historical and existing hospital population, as well as the demographics of the geographic region, to determine the optimal size of the proposed ARUs and the potential of the new facility under our management to attract patients and generate revenues sufficient to cover anticipated expenses. Our relationships with these hospitals are customarily in the form of contracts for management services, which typically have a term of three to five years.

An ARU within a hospital allows the hospital to offer rehabilitation services to patients who might otherwise be discharged to a setting outside the acute care hospital, thus improving the hospital’s ability to provide a full continuum of care and consistency in clinical services and outcomes. An ARU within a hospital typically consists of about 20 beds and is staffed with a program director, a rehabilitation physician that usually serves as the medical director, and clinical staff, which may include psychologists, physical and occupational therapists, speech/language pathologists, a social worker, a case manager, and other appropriate support personnel. Additionally, compliance, clinical education, and clinical programming are supported by our clinical compliance experts in an effort to ensure that clinical practices support the provision of quality rehabilitation services.

LTAC hospitals. We provide rehabilitation and program management services, including physical and occupational therapies and speech pathology services, to LTAC hospitals. We provide specialized care programs that support patients with complex medical needs, such as wound care, pain management, and cognitive deficits, in addition to programs for neurologic, orthopedic, cardiac, and pulmonary recovery. As of December 31, 2017, we operated therapy programs in 104 LTAC hospitals, of which approximately one-third are owned by third parties. We also provide LTAC hospitals with clinical education and programming supported by our clinical experts in an effort to ensure that clinical practices support the provision of effective and efficient quality rehabilitation services in addition to enhancing overall prevention programs in accordance with applicable standards of care.

Sub-acute units. As of December 31, 2017, we managed therapy programs in four sub-acute (or skilled nursing) units. These hospital-based units provide lower intensity rehabilitation for medically complex patients. Patients’ diagnoses cover a wide range of medical conditions, including stroke, post-surgical conditions, pulmonary disease, cancer, congestive heart failure, burns, and wounds. These sub-acute units enable patients to remain in a hospital setting where emergency medical needs can be met quickly as opposed to having to be transported from a nursing center. These types of units are typically located within the acute care hospital and are either separately licensed or under the hospital’s license as permitted by applicable laws. The hospital benefits by retaining patients who otherwise would be discharged to another setting and by utilizing idle space.

Outpatient therapy programs. We manage outpatient therapy programs that provide therapy services to patients with a variety of medical, orthopedic, and neurological conditions that may be related to work or sports injuries. As of December 31, 2017, we managed 123 hospital-based and satellite outpatient therapy programs. An outpatient therapy program complements the hospital’s occupational medicine initiatives and allows therapy to be continued for patients discharged from inpatient rehabilitation facilities and medical/surgical beds. An outpatient therapy program also attracts patients into the hospital and is operated either on the hospital’s campus or in satellite locations controlled by the hospital.

We believe our management of outpatient therapy programs enables the efficient delivery of therapy services through our scheduling, clinical protocol, and outcome systems, as well as through time-management training for our therapy personnel. We also provide our customers with guidance on compliance and quality assurance objectives.

Our RehabCare segment provides therapy management services primarily to nursing centers, assisted living facilities, independent living communities, home health agencies, and hospice providers, allowing our customers to fulfill their continuing need for therapists on a full-time or part-time basis without the need to hire, train, and retain their own staff. As of December 31, 2017, our RehabCare segment provided rehabilitative services in 1,616 sites of service in 42 states.

RehabCare provides specialized rehabilitation programs designed to meet the individual needs of the residents and patients we serve. Our specialized care programs address complex medical needs, such as wound care, pain management, and cognitive retraining, in addition to programs for fractures, neurologic, orthopedic, cardiac, and pulmonary conditions. We also provide clinical education and programming that is developed and supported by our clinical experts. These programs are implemented in an effort to ensure that clinical practices support the provision of quality rehabilitation services in accordance with applicable standards of care.

RehabCare recruits and retains qualified professionals with the clinical expertise to provide quality patient care and measurable rehabilitation outcomes. RehabCare also provides quality-assurance training for all clinicians to maintain compliance with regulatory requirements.

The following table sets forth certain operating and financial data for the Kindred Rehabilitation Services division (dollars in thousands, except statistics):

	Year ended December 31,
	2017		2016		2015
Kindred Hospital Rehabilitation Services:
Revenues	$	703,915	$	679,800	$	614,321
Segment adjusted operating income	$	203,392	$	198,335	$	177,340
Assets at the end of period	$	828,310	$	815,804	$	803,831
Capital expenditures:
Routine	$	2,743	$	1,389	$	948
Development	$	547	$	20,773	$	4,701
Freestanding IRFs:
End of period data:
Number of IRFs		19		19		18
Number of licensed beds		995		995		919
Discharges (1)		19,307		18,409		15,991
Occupancy % (1)		70.4		69.1		70.2
Average length of stay (1)		12.7		12.8		13.2
Revenue per discharge (1)	$	20,134	$	19,531	$	19,104
Contract services:
Sites of service (at end of period):
ARUs		99		102		100
LTAC hospitals		104		119		119
Sub-acute units		4		5		7
Outpatient units		123		132		130
		330		358		356
Revenue per site	$	904,057	$	858,758	$	837,606
Revenue mix %:
Company-operated		25		28		30
Non-affiliated		75		72		70

In the Kindred Hospital Rehabilitation Services segment, our IRFs derive a significant portion of their revenues from Medicare, Medicaid, and other payors that received discounts from their established billing rates. The Medicare and Medicaid regulations and various managed care contracts under which these discounts are calculated are complex and are subject to interpretation and adjustment. IRFs estimate the allowance for contractual discounts on a patient-specific basis given their interpretation of the applicable regulations or contract terms. These interpretations sometimes result in payments that differ from the IRFs’ estimates. Additionally, updated regulations and contract renegotiations occur frequently, necessitating regular review and assessment of the estimation process by management.

Regarding the rehabilitation and program management services we provide to residents, patients, and customers, the basis for payment varies depending upon the type of service provided. In the Kindred Hospital Rehabilitation Services segment, our (1) ARU customers generally pay us on the basis of a negotiated fee per discharge, a flat monthly management fee, or a combination of the two, (2) LTAC hospital customers generally pay based upon a negotiated per patient day rate, (3) sub-acute rehabilitation customers generally pay based upon a flat monthly fee or a negotiated fee per patient day, and (4) outpatient therapy clients typically pay us on the basis of a negotiated fee per unit of service. In the RehabCare segment, our customers generally pay us on the basis of a negotiated patient per diem rate or a negotiated fee schedule based upon the type of service rendered.

For the year ended December 31, 2017, revenues of the Kindred Rehabilitation Services division totaled approximately $1.4 billion or 24% of our total revenues (before eliminations). Approximately 6% of our Kindred Rehabilitation Services division revenues (before eliminations) in 2017 were generated from services provided to hospitals and care management functions that we operated.

As a provider of services to healthcare providers, trends and developments in healthcare reimbursement will impact our revenues and growth. Changes in the reimbursement provided by Medicare or Medicaid to our customers can impact the demand and pricing for our services. For more information regarding the reimbursement for our rehabilitation services, see “—Governmental Regulation—Kindred Rehabilitation Services Division—Overview of Kindred Rehabilitation Services Division Reimbursement.”

The following table lists by state the number of sites of service of our Kindred Hospital Rehabilitation Services operating segment as of December 31, 2017:

			Contract services
State	IRFs		ARUs		LTAC hospitals		Sub-acute units		Outpatient units		Total
Alabama		-		2		-		-		-		2
Arizona		1		1		2		-		-		3
Arkansas		-		5		-		1		9		15
California		-		11		17		1		5		34
Colorado		-		-		3		-		1		4
Delaware		-		1		-		-		-		1
District of Columbia		-		-		2		-		-		2
Florida		-		-		10		-		5		15
Georgia		-		2		1		-		-		3
Illinois		-		7		6		-		19		32
Indiana		1		6		6		-		11		23
Iowa		-		3		-		-		2		5
Kansas		-		6		-		-		5		11
Kentucky		-		2		2		-		1		5
Louisiana		-		4		2		1		15		22
Massachusetts		-		1		3		-		2		6
Michigan		-		6		2		-		2		10
Minnesota		-		1		-		-		-		1
Mississippi		-		3		-		1		2		6
Missouri (1)		3		6		3		-		5		14
Montana		-		2		-		-		-		2
Nevada		-		-		3		-		-		3
New Jersey		-		-		2		-		9		11
New Mexico		-		-		1		-		-		1
North Carolina		-		-		1		-		4		5
North Dakota		-		1		2		-		-		3
Ohio		2		6		5		-		4		15
Oklahoma		1		4		2		-		1		7
Pennsylvania		2		4		5		-		3		12
Puerto Rico		-		1		-		-		-		1
Rhode Island		-		1		-		-		4		5
South Carolina		-		2		1		-		2		5
Tennessee (1)		1		2		1		-		-		3
Texas		6		7		19		-		10		36
Virginia		-		-		1		-		-		1
Washington		-		1		2		-		-		3
West Virginia		-		-		-		-		2		2
Wisconsin		2		-		-		-		-		-
Wyoming		-		1		-		-		-		1
Totals		19		99		104		4		123		330

The following table lists by state the number of sites of service of our RehabCare operating segment as of December 31, 2017:

State	Company- operated		Non-affiliated		Total
Alabama		1		2		3
Arizona		1		11		12
Arkansas		2		7		9
California		1		118		119
Colorado		5		38		43
Connecticut		-		5		5
District of Columbia		-		3		3
Florida		26		53		79
Georgia		-		4		4
Idaho		-		10		10
Illinois		3		251		254
Indiana		2		43		45
Iowa		-		14		14
Kansas		2		46		48
Kentucky		6		42		48
Louisiana		-		6		6
Maine		-		26		26
Maryland		4		48		52
Massachusetts		5		31		36
Michigan		-		21		21
Minnesota		-		49		49
Missouri		2		137		139
Montana		-		7		7
Nebraska		1		6		7
Nevada		2		1		3
New Hampshire		-		3		3
New Jersey		-		2		2
New Mexico		-		1		1
New York		-		14		14
North Carolina		9		67		76
North Dakota		-		2		2
Ohio		2		65		67
Oklahoma		-		15		15
Oregon		-		1		1
Pennsylvania		1		36		37
Rhode Island		-		2		2
South Carolina		-		4		4
Tennessee		9		39		48
Texas		27		162		189
Vermont		1		1		2
Virginia		1		19		20
Washington		-		9		9
West Virginia		-		2		2
Wisconsin		-		80		80
Totals		113		1,503		1,616

The Kindred Rehabilitation Services division’s sales and marketing efforts are tailored to each of its operating segments. Kindred Hospital Rehabilitation Services focuses on the provision of therapy services and therapy program management for IRFs and hospitals, while RehabCare primarily focuses on the outsourcing needs of freestanding skilled nursing facilities. Both the Kindred Hospital Rehabilitation Services and RehabCare segments emphasize the broad range of rehabilitation programs, clinical expertise, and competitive pricing for the services that we provide. Kindred Hospital Rehabilitation Services’ new business efforts are led by a

vice president of business development and three directors of business development in geographically defined regions. RehabCare’s new business efforts are led by nine directors of business development in geographically defined regions.

At December 31, 2017, our Kindred Rehabilitation Services division was managed by a president, overseeing a chief operating, financial, medical, quality and other administrative officers. Our operations are further divided between the Kindred Hospital Rehabilitation Services and RehabCare operating segments.

The Kindred Hospital Rehabilitation Services segment is led by two vice presidents of operations who report to the division president, one in charge of IRF operations and the other in charge of ARU, LTAC hospital, sub-acute unit and outpatient therapy operations. With respect to our IRFs, a vice president of operations oversees the chief executive officers of our IRFs who are responsible for the day-to-day operations at each of our IRFs. Each IRF (or network of IRFs) also employs a controller to monitor financial matters, a chief clinical officer to oversee clinical operations, and a director of quality management to oversee quality assurance programs. With respect to our hospital-based contract rehabilitation services and program management, our operations are led by a vice president who manages five regional vice presidents.

The RehabCare segment is led by a chief operating officer, who reports to the division president. The chief operating officer has five division vice presidents reporting to her with six regional vice presidents reporting to the divisional vice presidents.

In both the Kindred Hospital Rehabilitation Services and RehabCare segments, area directors of operations report to the regional vice presidents. Each area director of operations is responsible for the overall management of 15 to 30 on-site program directors. Many of our rehabilitation customers have on-site program directors responsible for managing the therapy operations at such facility. There are two division vice presidents of clinical operations that manage clinical education for our therapists and implement quality care initiatives.

We provide our Kindred Rehabilitation Services division with centralized administrative services in the areas of information systems, clinical operations, regulatory compliance, reimbursement guidance, professional licensing support, as well as legal, finance, accounting, purchasing, recruiting, and human resources management support. The centralization of these services improves operating efficiencies, promotes the standardization of certain processes, and permits program staff to focus on the delivery of quality, medically necessary rehabilitation services.

The IRF industry is highly fragmented, and there are generally several competitors in each geographic market that we serve that provide similar services to those provided by our IRFs. In addition, several of the markets in which our IRFs operate have other IRFs that provide comparable services. Other providers of acute-care services may attempt to become competitors in the future. Also, other acute-care hospital operators may choose to expand their IRF services in our markets. Certain competing IRFs are operated by nonprofit, non-taxpaying, or governmental agencies, which can finance capital expenditures on a tax-exempt basis and receive funds and charitable contributions that are unavailable to us. Similarly, nursing facilities may market themselves as offering certain rehabilitation services even though they may not be required to offer the same level of care.

Competition for IRF patients covered by nongovernment reimbursement sources is intense. The primary competitive factors in the IRF business include quality of care and services, treatment outcomes achieved, charges for services, and responsiveness to the needs of patients, families, payors, and physicians. Other companies have entered the IRF business with licensed IRFs that compete with our IRFs. The competitive position of any IRF is also affected by the ability of its management to negotiate contracts with purchasers of, and to receive referrals from, group healthcare services, including managed care companies, preferred provider organizations, and health maintenance organizations. The importance of obtaining contracts with preferred provider organizations, health maintenance organizations, and other organizations that finance healthcare varies from market to market, depending on the number and market strength of such organizations.

With respect to our program management and therapy services operations, there are national, regional, and local rehabilitation services providers that offer rehabilitation services comparable to ours. A number of our competitors may have greater financial and other resources than we do, may be more established in the markets in which we compete, and may be willing to provide services at lower prices. In addition, a number of nursing centers and hospitals may elect not to outsource rehabilitation services, thereby reducing our potential customer base. While there are several large rehabilitation providers, the market generally is highly fragmented and is primarily composed of smaller independent providers.

We believe our Kindred Rehabilitation Services division generally competes based upon its reputation for providing quality rehabilitation services, state of the art therapy programs, qualified and well-trained nurses and therapists, competitive pricing, outcome management, and technology systems.

A substantial portion of our revenues are derived from patients covered by the Medicare and Medicaid programs. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and certain disabled persons. Medicaid is a medical assistance program administered by each state, funded with federal and state funds pursuant to which healthcare benefits are available to certain indigent or disabled patients. Within the Medicare and Medicaid statutory framework, there are substantial areas subject to administrative rulings, interpretations, and discretion that may affect payments made under those programs.

We have 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. We cannot assure you 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, 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, recommends payment policies to Congress for a variety of Medicare payment systems. Congress is not obligated to adopt MedPAC recommendations and based on previous years, there can be no assurance that Congress will adopt MedPAC’s recommendations in any given year. Generally, these rates are adjusted annually for inflation. However, those adjustments may not reflect actual increases of the cost 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. Moreover, we cannot assure you that the facilities operated by us, or the provision of goods and services offered by us, will meet the requirements for participation in such programs.

The Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act

Various healthcare reform provisions became law upon enactment of the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (previously defined as the ACA). The reforms contained in the ACA have affected each of our 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 our services, the methods of payment for our services, and the underlying regulatory environment. These reforms include 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, which 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 and IRFs, home health agencies, and hospice providers; (3) a quality reporting system for hospitals (including LTAC hospitals and IRFs); and (4) reductions in Medicare payments to hospitals (including LTAC hospitals and IRFs) for failure to meet certain quality reporting standards or to comply with standards in new value-based purchasing demonstration project programs.

In addition, the ACA requires the Secretary of HHS to test different models for delivery of care, some of which would involve home health services. It also requires the Secretary 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 Secretary 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.

Potential efforts in the U.S. Congress to repeal, amend, modify, or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA on us and the healthcare industry.

The healthcare reforms and changes resulting from the ACA (including any repeal, amendment, modification or retraction thereof), as well as other similar healthcare reforms, including any potential change in the nature of services we provide, the methods or amount of payment we receive for such services, and the underlying regulatory environment, could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Congress, MedPAC, and CMS will continue to address reimbursement rates for a variety of healthcare settings. We 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 we provide could have a material adverse effect on our 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 our 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 our business, financial position, results of operations, and liquidity.

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

See “—Risk Factors—Risks Relating to Reimbursement and Regulation of Our Business—Healthcare reform has initiated significant changes to the United States healthcare system” and “—Risk Factors—Risks Relating to Reimbursement and Regulation of Our Business—Changes in the reimbursement rates or methods or timing of payment from third party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursement for our services and products could result in a substantial reduction in our revenues and operating margins.”

The Comprehensive Care for Joint Replacement Bundled Payment Program. CMS announced the final Comprehensive Care for Joint Replacement bundled payment program on November 16, 2015 (the “CJR Program”). The CJR Program implements a mandatory payment model in which acute care hospitals in designated metropolitan statistical areas (“MSAs”) are responsible for total spending for all inpatient care provided in connection with a lower extremity joint replacement or reattachment procedure, as well as for all spending related to care provided within a 90-day episode of care following discharge from such hospital. All providers will continue to receive fee-for-service payments under existing payment systems and total episode payments will subsequently be reconciled against a target price. The CJR Program will test this payment model over five performance periods between April 1, 2016 and December 31, 2020 to see if Medicare expenditures can be reduced while at the same time improving care coordination and preserving or enhancing the quality of care provided to Medicare beneficiaries. In November 2017, CMS reduced by half the number of MSAs where mandatory participation is required, effective January 1, 2018.

Expansion to Cardiac and Other Orthopedic Services. On November 30, 2017, CMS announced the cancellation of the expansion of the mandatory bundled payment program to cardiac and other orthopedic services. This bundled payment expansion was a mandatory payment model in which acute care hospitals in designated MSAs were responsible for total spending for all inpatient care provided in connection with acute myocardial infarction, coronary artery bypass graft, and surgical hip/femur fracture treatment, as well as for all spending related to care provided within a 90-day episode of care following discharge from such hospital. All providers would have continued to receive fee-for-service payments under existing payment systems with total episode payments subsequently reconciled against a target price.

Bundled Payments for Care Improvement Advanced Initiative. On January 9, 2018, CMS announced a new voluntary episode payment model, the Bundled Payments for Care Improvement Advanced Initiative. The program, which runs from October 1, 2018 through December 31, 2023, will include 32 clinical episodes (29 inpatient, 3 outpatient) including major joint replacement and stroke with the intention to align payment incentives, reduce expenditures and improve quality over a 90-day episode of care. Unlike prior bundled payment demonstration programs, which allowed PAC providers to be episode initiators, this program is focused on acute care hospitals and physician group practices as episode initiators. All providers will continue to receive fee-for-service payments under existing payment systems and total episode payments will subsequently be reconciled against a target price.

The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) was signed into law on April 16, 2015. Among other items, MACRA: (1) permanently replaced the sustainable growth rate (“SGR”) formula previously used to determine updates to Medicare physician reimbursement, replacing these updates with quality and value measurements and participation in alternate payment models; (2) extended the Medicare Part B outpatient therapy cap exception process until December 31, 2017; (3) extended the 3% add-on payment for home health services delivered to residents in rural areas until December 31, 2017; and (4) set payment updates for post-acute providers at 1% after other adjustments required by the ACA for 2018.

The Improving Medicare Post-Acute Care Transformation Act of 2014 (the “IMPACT Act”), passed on October 6, 2014, requires standardized assessment data for quality improvement, payment, and discharge planning purposes across the spectrum of PACs, including LTAC hospitals, IRFs, and home health agencies.

The IMPACT Act will require PACs to begin reporting (1) standardized patient assessment data at admission and discharge by October 1, 2018 for LTAC hospitals and IRFs and by January 1, 2019 for home health agencies, (2) new quality measures, including functional status, skin integrity, medication reconciliation, incidence of major falls, and patient preference regarding treatment and discharge at various intervals between October 1, 2016 and January 1, 2019, and (3) resource use measures, including Medicare spending per beneficiary, discharge to community, and hospitalization rates of potentially preventable readmissions. The Secretary of HHS will provide confidential feedback to PACs one year after this data is provided and public reports two years thereafter. Failure to report such data when required would subject a facility to a two percent reduction in market basket prices then in effect. The Secretary of HHS also plans to promulgate regulations requiring PACs to take certain of these quality, resource use, and other measures into account in the discharge planning process.

The IMPACT Act further requires HHS and MedPAC to study alternative PAC payment models, including payment based upon individual patient characteristics and not care setting, with corresponding Congressional reports required based on such analysis. MedPAC must provide a final report to Congress by June 30, 2022. The Secretary of HHS must also submit a final report no later than two years after it has collected two years of data.

The IMPACT Act also included provisions impacting Medicare-certified hospices, including (1) increasing survey frequency for Medicare-certified hospices to once every 36 months, (2) imposing a medical review process for facilities with a high percentage of stays in excess of 180 days, and (3) updating the annual aggregate Medicare payment cap.

The Bipartisan Budget Act of 2018 (the “BBA”), enacted on February 9, 2018, includes several provisions impacting Medicare reimbursement to home health, hospice, LTAC hospital and rehabilitation therapy services providers.

With respect to home health providers, the BBA (1) will base payment on a 30-day episode of care (beginning January 1, 2020), coupled with annual determinations by CMS to ensure budget neutrality (including taking into account provider behavior), (2) will eliminate retroactive payment adjustments based upon the level of therapy services required (beginning January 1, 2020), (3) extends the 3% add-on payment for home health services provided to residents in rural areas (beginning January 1, 2018), coupled with a reduction and phase out of such add-on payment over the following four fiscal years, and (4) will establish a market basket update of 1.5% for the federal fiscal year beginning January 1, 2020.

With respect to hospice providers, the BBA establishes a new payment policy related to early discharges to hospice care from hospitals. This policy will impose a financial penalty on hospitals for each early discharge to hospice care, beginning October 1, 2018.

With respect to LTAC hospital providers, the BBA extends the initial two-year phase-in period of the new LTAC patient criteria under the LTAC Legislation (as defined below) for an additional two-year period, and will impose a mandatory 4.6% reduction in payments for services provided to site-neutral patients over a nine-year period beginning October 1, 2018.

With respect to rehabilitation therapy services providers, the BBA (1) permanently repeals the Medicare Part B outpatient therapy cap (effective January 1, 2018), (2) continues the targeted medical review process, while reducing the applicable threshold triggering such review to $3,000 (effective January 1, 2018), and (3) reduces payment for services provided by a physical or occupational therapy assistant to 85% of the amount currently payable under Medicare for such services (effective January 1, 2022).

The extensive federal, state, and local regulations affecting the healthcare industry include, but are not limited to, regulations relating to licensure, billing, conduct of operations, ownership of facilities, addition of facilities, allowable costs, services and prices for services, facility staffing requirements, and the privacy and security of health-related information. In addition, various anti-fraud and abuse laws, including physician self-referral laws, anti-kickback laws, and laws regarding filing of false claims, codified under the Social Security Act and other statutes, prohibit certain business practices and relationships in connection with healthcare services for patients whose care will be paid by Medicare, Medicaid, or other governmental programs. Sanctions for violating these anti-fraud and abuse laws include criminal penalties, civil penalties, and possible exclusion from government programs such as Medicare and Medicaid.

In the ordinary course of our business, we are regularly subject to inquiries, investigations, and audits by federal and state agencies that oversee applicable healthcare program participation and payment regulations. Audits may include enhanced medical

necessity reviews pursuant to the Medicare, Medicaid, and the SCHIP Extension Act of 2007 and audits under the CMS Recovery Audit Contractor (“RAC”) program and other similar programs.

We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense. Federal and state governments continue to impose intensive enforcement policies that result in a significant number of inspections, citations of regulatory deficiencies, and other regulatory penalties. This includes demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, and civil monetary penalties. These enforcement policies, along with the costs incurred to respond to and defend reviews, audits, and investigations, could have a material adverse effect on our business, financial position, results of operations, and liquidity. We vigorously contest such penalties where appropriate; however, these cases can involve significant legal and other expenses and consume our resources.

Section 1877 of the Social Security Act, commonly known as the “Stark Law,” provides that a physician may not refer a Medicare or Medicaid patient for a “designated health service” to an entity with which the physician or an immediate family member has a financial relationship unless the financial arrangement meets an exception under the Stark Law or its regulations. Designated health services include inpatient and outpatient hospital services, physical, occupational, and speech therapy, durable medical equipment, prosthetics, orthotics and supplies, diagnostic imaging, enteral and parenteral feeding and supplies, home health services, and clinical laboratory services. Under the Stark Law, a “financial relationship” is defined as an ownership or investment interest or a compensation arrangement. If such a financial relationship exists and does not meet a Stark Law exception, the entity may not submit or claim payment under the Medicare or Medicaid programs or collect from the patient or other payor. Many of the compensation arrangement exceptions permit referrals if, among other things, the arrangement is set forth in a written agreement signed by the parties, the compensation to be paid is set in advance, is consistent with fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. Exceptions may have other requirements. Any funds collected for an item or service resulting from a referral that violates the Stark Law must be repaid to Medicare or Medicaid, any other third party payor, and the patient. In addition, a civil monetary penalty of up to approximately $25,000 for each service may be imposed for presenting or causing to be presented, a claim for a service rendered in violation of the Stark Law. Many states have enacted healthcare provider referral laws that go beyond physician self-referrals or apply to a greater range of services than just the health services designated under the Stark Law.

The Anti-Kickback Statute, Section 1128B of the Social Security Act (the “Anti-Kickback Statute”), prohibits the knowing and willful offer, payment, solicitation, or receipt of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce the referral of an individual in return for recommending or arranging for the referral of an individual for any item or service payable under any federal healthcare program, including Medicare or Medicaid. The OIG has issued regulations that create “safe harbors” for certain conduct and business relationships that are deemed protected under the Anti-Kickback Statute. In order to receive safe harbor protection, all of the requirements of a safe harbor must be met. The fact that a given business arrangement does not fall within one of these safe harbors, however, does not render the arrangement per se illegal. Business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria, if investigated, will be evaluated based upon all facts and circumstances and risk increased scrutiny and possible sanctions by enforcement authorities. The Anti-Kickback Statute is a criminal statute, with penalties of up to $25,000, up to five years in prison, or both. The OIG can pursue a civil claim for violation of the Anti-Kickback Statute under the Civil Monetary Penalty Statute of up to approximately $75,000 per claim and up to three times the amount received from the government for the items or services. We believe that business practices of providers and financial relationships between providers have become subject to increased scrutiny as healthcare reform efforts continue on the federal and state levels. State Medicaid programs are required to enact an anti-kickback statute. Many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients regardless of the source of payment for the care.

The U.S. Department of Justice (the “DOJ”) may bring an action under the federal False Claims Act (the “FCA”) alleging that a healthcare provider has defrauded the government by submitting a claim for items or services not rendered as claimed, which may include coding errors, billing for services not provided, and submitting false or erroneous cost reports. The Fraud Enforcement and Recovery Act of 2009 expanded the scope of the FCA by, among other things, creating liability for knowingly and improperly avoiding repayment of an overpayment received from the government and broadening protections for whistleblowers. The ACA clarifies that if an item or service is provided in violation of the Anti-Kickback Statute, the claim submitted for those items or services is a false claim that may be prosecuted under the FCA as a false claim. Civil penalties under the FCA range from approximately $10,000 to $25,000 for each claim and up to three times of the amount claimed. Under the qui tam or “whistleblower” provisions of the FCA, a private individual with knowledge of fraud may bring a claim on behalf of the federal government and receive a percentage of the federal government’s recovery. Due to these whistleblower incentives, lawsuits have become more frequent.

In addition to the penalties described above, if we violate any of these laws, we may be excluded from participation in federal and/or state healthcare programs. These fraud and abuse laws and regulations are complex, and we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. While we do not believe we are in violation of these prohibitions, we cannot assure you that governmental officials charged with the responsibility for enforcing these prohibitions will not assert that we are violating the provisions of such laws and regulations.

The Balanced Budget Act of 1997 (the “Balanced Budget Act”) also includes a number of anti-fraud and abuse provisions. The Balanced Budget Act contains additional civil monetary penalties for violations of the Anti-Kickback Statute discussed above and imposes an affirmative duty on healthcare providers to ensure that they do not employ or contract with persons excluded from the Medicare program. The Balanced Budget Act also provides a minimum ten-year period for exclusion from participation in federal healthcare programs for persons or entities convicted of a prior healthcare offense.

Various states in which we operate hospitals and IRFs have established minimum staffing requirements or may establish minimum staffing requirements in the future. Our ability to satisfy such staffing requirements depends upon our ability to attract and retain qualified healthcare professionals, including nurses, certified nurse’s assistants, therapists, and other staff. Failure to comply with such minimum staffing requirements may result in the imposition of fines or other sanctions. If states do not appropriate sufficient additional funds to pay for any additional operating costs resulting from such minimum staffing requirements, our profitability may be materially adversely affected.

The International Classification of Diseases (“ICD”) is a classification system for diseases and signs, symptoms, abnormal findings, complaints, social circumstances, and external causes of injury or diseases promulgated by the World Health Organization. We, like all healthcare providers, payors, and vendors are required to report medical diagnoses under ICD-10 diagnosis codes. If claims are not reported properly under ICD-10, there can be a delay in the processing and payment of such claims or a denial of such claims, which can have a material adverse effect on our business, financial position, results of operations, and liquidity.

HIPAA Privacy and Security Laws and Regulations. The federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), among other things, broadened the scope of existing fraud and abuse laws. It also mandated the adoption of administrative simplification regulations aimed at standardizing transaction formats and billing codes for documenting medical services, handling claims submissions, and protecting the privacy and security of individually identifiable health information. HIPAA regulations that standardize transactions and code sets require standard formatting for healthcare providers, like us, that submit claims electronically. We are now required to use ICD-10 code sets for diagnoses and procedures on electronic claims forms, necessitating greater specificity in our coding and documentation practices.

Many federal and state laws regulate how we handle certain patient health information and restrict the use and disclosure of that information, including medical and billing records. The HIPAA regulations apply to “protected health information,” defined generally as individually identifiable health information transmitted or maintained in any form or medium. The HIPAA privacy regulations provide individuals with the right to access, amend, and obtain an accounting of their own health information and restrict how and for what purposes we use and disclose that information. We are required to limit our disclosures to only the minimum amount information reasonably necessary to accomplish the intended purpose.

HIPAA’s security regulations require us to safeguard the confidentiality, integrity, and availability of electronic protected health information that we create, receive, maintain, or transmit. We must protect against reasonably anticipated threats or hazards to the security of such information and against the unauthorized use or disclosure of such information. HIPAA provides for the imposition of civil and criminal penalties if protected health information is improperly used or disclosed.

The Health Information Technology for Economic and Clinical Health Act of 2009 (the “HITECH Act”) strengthened HIPAA enforcement provisions and authorized state attorneys general to bring civil actions for HIPAA violations. It permits HHS to impose penalties even if we did not know or reasonably could not have known about the violation and increases civil monetary penalty amounts up to $50,000 per violation with a maximum of $1.5 million in a calendar year for violations of the same requirement. The HITECH Act also authorizes HHS to conduct audits of HIPAA compliance. On January 25, 2013, HHS published a final omnibus regulation implementing the HITECH Act changes (the “Omnibus Rule”). The Omnibus Rule extended certain privacy and security regulations to business associates and their subcontractors that handle protected health information and imposed new requirements on HIPAA business associate contracts. The Omnibus Rule also clarified a covered entity’s notification and reporting requirements in the event of a breach of unsecured protected health information. This reporting obligation supplements state laws that also may require notification in the event of a breach of personal information.

In operating our business, we may be regulated either as a covered entity or a business associate under HIPAA depending on the circumstances. We are also subject to state laws that are more restrictive than the HIPAA regulations and tort claims based on violations of privacy or failure to protect data security. We expect continued active enforcement of state and federal privacy and security laws and significant costs on our business to comply with these laws. We cannot assure you that our potential noncompliance with HIPAA, the HITECH Act, the Omnibus Rule or any other privacy and security regulations will not have a material adverse effect on our business, financial position, results of operations, and liquidity.

Certificates of need and state licensing. CON regulations control the development and expansion of healthcare services and facilities in certain states. Certain states also require regulatory approval prior to certain changes in ownership. Certain states that do not have CON programs may have other laws or regulations that limit or restrict the development or expansion of healthcare facilities. We operate hospitals in nine states, IRFs in two states, home health agencies in 12 states, and hospice agencies in seven states that require prior approval under CON programs for the development or expansion of our facilities and services. To the extent that CONs or other similar approvals are required for development or expansion of the operations of our services, either through facility development, acquisitions, expansion, or provision of new services or other changes, such development or expansion could be adversely affected by the failure or inability to obtain the necessary approvals, changes in the standards applicable to such approvals, or possible delays and expenses associated with obtaining such approvals.

We are required to obtain state licenses to operate each of our hospitals and IRFs and to ensure their participation in government programs. Several states require similar licenses for home health and hospice operations. Once a hospital or an IRF becomes licensed and operational, it must continue to comply with federal, state, and local licensing requirements in addition to local building and life-safety codes. All of our hospitals, IRFs and home health and hospice operations have the necessary licenses. Failure of our hospitals, IRFs and home health and hospice operations to satisfy applicable licensure and certification requirements could have a material adverse effect on our business, financial position, results of operations, and liquidity.

General regulations. The activities of the Kindred at Home division primarily consist of the provision of home health and hospice services. The home health and hospice activities conducted through the Kindred at Home division are subject to various federal and state regulations. Many states require the entity through which the Kindred at Home division’s home health and hospice services are provided to obtain a license or certification from one or more state agencies. In addition, a substantial majority of our home health and hospice agencies achieved and/or maintain certification through one of the three private accreditation bodies: TJC, the Accreditation Commission for Health Care, and the Community Health Accreditation Program. The physicians, therapists, and other healthcare professionals employed by the Kindred at Home division are required to be individually licensed or certified pursuant to applicable state and federal laws. We have processes in place in an effort to ensure that our Kindred at Home division providers are licensed or certified in accordance with applicable federal and state laws. In addition, we require our physicians, therapists, and other employees to participate in continuing education programs. The failure to obtain, maintain, or renew required licenses or certifications by our home health and hospice agencies or the physicians, therapists, or other healthcare professionals employed through the Kindred at Home division could have a material adverse effect on our business, financial position, results of operations, and liquidity.

As noted above, the Kindred at Home division also is subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws prohibit, among other things, certain direct and indirect payments for the referral of patients, certain referrals by physicians if they or their immediate family members have a financial relationship with a home health or hospice agency or other provider, or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products or services. Such laws include the Anti-Kickback Statute, the Stark Law, the FCA, and various state anti-kickback laws and physician self-referral prohibitions. In addition, some states restrict certain business relationships between physicians and ancillary service providers, and some states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in Medicare, Medicaid, and other reimbursement programs, as well as civil and criminal penalties. These laws vary considerably from state to state.

Home health. To be eligible to receive Medicare payments for home health services, a patient must be “homebound” (generally unable to leave home without considerable or taxing effort), require intermittent skilled nursing or physical or speech therapy services, and receive treatment under a plan of care established and periodically reviewed by a physician based upon a face-to-face encounter between the patient and the physician.

We currently receive a standard prospective payment for home health services provided over a 60-day base period, or “episode,” of care. There is no limit to the number of episodes of care a patient may receive as long as he or she remains Medicare eligible. The base episode payment is a flat rate subject to adjustment based on differences in the expected needs of each patient and upon the geographic location of the services provided. The adjustment is determined by each patient’s categorization into one of 153 payment groups, known as home health resource groups, and the cost of care for patients in each group relative to the average patient. Payment is further adjusted for differences in local prices using the home health wage index. The payment also is subject to retroactive adjustment in certain circumstances, including: (1) an outlier adjustment if the patient’s care was unusually costly; (2) a utilization adjustment if the number of visits to the patient was less than five; (3) a partial payment adjustment if the patient transferred to another provider during an episode; (4) an adjustment based upon the level of required therapy services; and (5) an adjustment based upon the number of episodes of care, with certain episodes of three or more receiving an increased rate.

The ACA mandates changes to home health benefits under Medicare, including creation of a value-based purchasing program, development of quality measures, a decrease in home health reimbursement that began in federal fiscal year 2014 and was phased-in over a four-year period, and a reduction in the outlier cap. In addition, the ACA requires the Secretary of HHS to test different models for delivery of care, some of which would involve home health services. It also requires the Secretary 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 Secretary 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.

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 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 November 1, 2017, CMS issued final regulations regarding Medicare payment rates for home health agencies effective January 1, 2018. Included in the final regulations is a net 0.4% reduction, consisting of a market basket update of 1.0% as required by MACRA, less (1) a 0.9% reduction adjustment to account for industry wide case mix growth, and (2) an additional 0.5% reduction for the elimination of the rural add-on provision.

CMS proposed a new payment methodology known as the home health grouping model (“HHGM”) in July 2017 (the “HHGM Proposal”). Under the HHGM Proposal, Medicare payments for home health services would have been based upon HHGM, utilizing a 30-day (rather than a 60-day) episode of care, comorbidities (rather than therapy service-use thresholds), and other criteria to set payments. In November 2017, CMS announced that it was not finalizing the HHGM Proposal and that it would instead take additional time to further engage with stakeholders to move towards a system that shifted the focus from volume of services to a more patient-centered model. If CMS decided to implement the HHGM Proposal or other payment reform for home health care providers, it could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The BBA, enacted on February 9, 2018, will implement several changes to Medicare home health reimbursement, including (1) basing payment on a 30-day episode of care (beginning January 1, 2020), coupled with annual determinations by CMS to ensure budget neutrality (including taking into account provider behavior), (2) eliminating the retroactive payment adjustment based upon the level of therapy services required (beginning January 1, 2020), (3) extending the 3% add-on payment for home health services provided to residents in rural areas (beginning January 1, 2018), coupled with a reduction and phase out of such add-on payment over the following four years, and (4) establishing a market basket update of 1.5% for the federal fiscal year beginning January 1, 2020.

Hospice. To be eligible to receive hospice care under the Medicare program, a patient must have a certified terminal condition with a life expectancy of six months or less if the illness runs it normal course. The patient must affirmatively elect hospice treatment to the exclusion of other Medicare benefits related to his or her terminal condition.

We receive payment for our hospice services under Medicare through a prospective payment system that pays an established payment rate for each day that we provide hospice services to a Medicare eligible patient. The rates we receive from Medicare are subject to annual adjustments for inflation and vary based upon the geographic location of the services provided. The rate also varies depending upon which of four established levels of care we provide to the Medicare patient: (1) “routine home care,” which is the default level paid for each day a patient is in the hospice program and does not receive one of the higher levels of care; (2) “general inpatient care,” which is paid for a brief period when a patient needs inpatient services for pain or symptom management; (3) “continuous home care,” which is home care provided during a crisis period when the patient requires intensive monitoring and nursing care; and (4) “respite care,” which allows a patient to receive inpatient care for up to five consecutive days to provide relief for the patient’s family and other caregivers from the demands of providing care. We receive a higher routine home care rate for services provided within the first 60 days of an episode of care, and also may receive a service intensity add-on payment for routine home care services provided in person during the last seven days of a patient’s life.

The Medicare payments we receive for hospice care are subject to two caps. First, the “80-20 Rule” provides that if the number of inpatient care days furnished to Medicare patients exceeds 20% of the total days of hospice care (measured during a 12-month period ending October 31 of each year) provided to Medicare patients, the excess is only eligible for the “routine home care” rate.

Second, there is a cap based upon an overall average payment per Medicare beneficiary. Any payments exceeding these caps must be refunded to Medicare.

For hospice patients who receive nursing home care under certain state Medicaid programs and who elect hospice care under Medicare or Medicaid, the state must pay, in addition to the applicable Medicare or Medicaid hospice per diem rate, an amount equal to at least 95% of the Medicaid per diem skilled nursing facility rate for “room and board” furnished to the patient by the skilled nursing facility. The reduction or elimination of Medicare payments for hospice patients residing in skilled nursing facilities would significantly reduce our hospice revenues and profitability. In addition, changes in the way skilled nursing facilities are reimbursed for “room and board” services provided to hospice patients residing in skilled nursing facilities could affect our ability to obtain referrals from skilled nursing facilities. A reduction in referrals from skilled nursing facilities would adversely affect our hospice revenues and profitability.

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 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 August 1, 2017, CMS issued final regulations for Medicare reimbursement for hospice providers effective October 1, 2017. These final regulations implement a net market basket increase to the standard federal payment rate of 1.0%, as required by MACRA.

The BBA, enacted on February 9, 2018, establishes a new payment policy related to early discharges to hospice care from hospitals. The policy will impose a financial penalty on hospitals for each early discharge to hospice care, beginning October 1, 2018.

Medicaid—Medicaid reimburses home health and hospice providers, physicians, and certain other healthcare providers for care provided to certain low-income patients. Reimbursement varies from state to state and is based upon a number of different systems, including cost-based, prospective payment, and negotiated rate systems. Rates are subject to multiple adjustments in different circumstances and are subject to statutory and regulatory changes and interpretations and rulings by individual state agencies. Medicaid is also the primary source of funding for the community care services provided by the Kindred at Home division.

Nongovernment payments—The Kindred at Home division seeks to maximize the number of its nongovernment payment patients, including those covered under private insurance and managed care health plans. Nongovernment payment patients typically have financial resources (including insurance coverage) to pay for their services and do not rely upon government programs for support. We negotiate contracts with purchasers of group healthcare services, including private employers, commercial insurers, and managed care companies. Most payor organizations attempt to obtain discounts from established charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable pricing arrangements in circumstances where they otherwise may be faced with funding treatments at higher rates at other healthcare providers. The importance of obtaining contracts with commercial insurers, managed care health plans, and other private payors varies among markets, depending on such factors as the number of commercial payors and their relative market strength.

General regulations. The hospital division is subject to various federal and state regulations. In order to receive Medicare reimbursement, each hospital must meet the applicable conditions of participation set forth by HHS relating to the type of hospital, its equipment, personnel, and standard of medical care, as well as comply with state and local laws and regulations. We have developed a management system to facilitate our compliance with these various standards and requirements. Among other things, a person is responsible at each hospital for leading an ongoing quality assessment and improvement program. Hospitals undergo periodic on-site Medicare certification surveys, which are generally limited in frequency if the hospital is accredited by TJC, which is a national organization that establishes standards relating to the physical plant, administration, quality of patient care, and operation of hospital medical staffs. As of December 31, 2017, all 75 TC hospitals operated by the hospital division were certified as Medicare LTAC providers. In addition, 72 of our hospitals also were certified by their respective state Medicaid programs. Loss of certification could adversely affect a hospital’s ability to receive payments from the Medicare and Medicaid programs.

As noted above, the hospital division also is subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws prohibit, among other things, certain direct and indirect payments for the referral of patients, certain referrals by physicians if they or their immediate family members have a financial relationship with the hospital, or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products or services. Such laws include the Anti-Kickback Statute, the Stark Law, and the FCA. In addition, some states restrict certain business relationships between physicians and ancillary service providers, and some states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violating any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs, as well as civil and criminal penalties. These laws vary considerably from state to state.

Six of our TC hospitals are owned in part by physician investors. Under amendments to the Stark Law passed in the ACA, the physician ownership percentage in a hospital to which the physician investors refer Medicare or Medicaid patients may not increase, and these hospitals may not expand their bed capacity or number of operating rooms or procedure rooms except for certain hospitals that meet stated requirements and receive permission from CMS.

Accreditation by TJC. Hospitals may also receive accreditation from TJC. Hospitals and certain other healthcare facilities generally must have been in operation at least four months to be eligible for accreditation. After conducting on-site surveys, TJC awards accreditation for up to three years to hospitals found to be in substantial compliance with TJC standards. Accredited hospitals also are periodically resurveyed, at the option of TJC, upon a major change in facilities or organization and after a merger or consolidation. As of December 31, 2017, all of the TC hospitals operated by the hospital division were accredited by TJC.

Peer review. Federal regulations provide that admission to and utilization of hospitals by Medicare and Medicaid patients must be reviewed by peer-review organizations or quality-improvement organizations in order to ensure efficient utilization of hospitals and services. A quality-improvement organization may conduct such review either prospectively or retrospectively and may, as appropriate, recommend denial of payments for services provided to a patient. The review is subject to administrative and judicial appeals. Each of the hospitals operated by our hospital division employs a clinical professional to administer the hospital’s integrated quality assurance and improvement program. Although intensifying, denials by third party utilization review organizations historically have not had a material adverse effect on the hospital division’s operating results.

Medicare reimbursement of short-term acute care hospitals—Medicare reimburses general short-term acute care hospitals under a prospective payment system (“IPPS”). Under IPPS, Medicare inpatient costs are reimbursed based upon a fixed payment amount per discharge using various diagnostic categories. Payment under IPPS is based upon the national average cost of treating a Medicare patient’s condition, adjusted for regional wage variations. Although the average length of stay varies for each diagnostic category, we believe that the average stay for all Medicare patients subject to IPPS is approximately five days. An additional outlier payment is made for patients with higher treatment costs but these payments are designed only to cover marginal costs. Hospitals that are certified by Medicare as LTAC hospitals are excluded from IPPS.

Medicare reimbursement of LTAC hospitals—Since October 2002, the Medicare payment system for LTAC hospitals has been based upon LTAC PPS, a prospective payment system specifically for LTAC hospitals. LTAC PPS maintains LTAC hospitals as a distinct provider type, separate from short-term acute care hospitals. Only providers certified as LTAC hospitals may be paid under this system. As of December 31, 2017, all of our TC hospitals were certified as LTAC hospitals. To maintain certification under LTAC PPS, the average length of stay of Medicare patients must be greater than 25 days, except for patients receiving a site-neutral rate under Medicare or to Medicare Advantage patients.

In 2007, CMS issued final regulations adopting a new Medicare severity diagnostic related group system for LTAC hospitals (“MS-LTC-DRG”). LTAC PPS is based upon discharged-based MS-LTC-DRGs similar to IPPS.

While the clinical system, which groups procedures and diagnoses, is identical to IPPS, LTAC PPS utilizes different rates and formulas. Three types of payments are used in this system: (1) short-stay outlier payment, which provides for patients whose length of stay is less than 5/6th of the geometric mean length of stay for that MS-LTC-DRG, based upon a lesser-of methodology, of which the first three of four calculations are (a) a per diem based upon the average payment for that MS-LTC-DRG, (b) the estimated costs, or (c) the full MS-LTC-DRG payment. If the length of stay is less than an IPPS-comparable threshold for that MS-LTC-DRG, then the fourth payment calculation is an amount comparable to an IPPS per diem for that same diagnostic related group (“DRG”), capped at the full IPPS DRG amount. If the length of stay is above the IPPS-comparable threshold but below the 5/6th geometric length of stay for that MS-LTC-DRG, then the fourth payment calculation is a blend of an amount comparable to what would otherwise be paid under IPPS computed as a per diem, capped at the full IPPS DRG comparable payment amount and a per diem based upon the average payment for that MS-LTC-DRG under LTAC PPS; (2) MS-LTC-DRG fixed payment, which provides a single payment for all patients with a given MS-LTC-DRG, regardless of length of stay, cost of care, or place of discharge; and (3) high cost outlier payment which provides a partial coverage of costs for patients whose cost of care far exceeds the MS-LTC-DRG reimbursement. For patients

in the high cost outlier category, Medicare will reimburse 80% of the costs incurred above a threshold, defined as the MS-LTC-DRG reimbursement plus a fixed loss amount per discharge.

LTAC PPS provides for an adjustment for differences in area wages resulting from salary and benefit variations. There also are additional rules for payment for patients who are transferred from an LTAC hospital to another healthcare setting and are subsequently readmitted to the LTAC hospital. The LTAC PPS payment rates also are subject to annual adjustments.

LTAC Legislation—As part of the SGR Reform Act enacted in 2013, Congress adopted various legislative changes impacting LTAC hospitals (the “LTAC Legislation”). The LTAC Legislation creates new Medicare criteria and payment rules for LTAC hospitals.

Medicare payments to LTAC hospitals are now based upon one of two methods: (1) LTAC PPS, or (2) a site-neutral formula based upon the lesser of what a short-term acute care hospital would be paid, or estimated cost. As noted above, CMS regulations classify LTAC hospital patients into diagnostic categories called MS-LTC-DRGs. LTAC PPS is based upon discharged-based MS-LTC-DRGs similar to 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. We expect the majority of these site-neutral payments will be materially less than the payments provided under LTAC PPS. The BBA imposes a mandatory 4.6% reduction in payments for services provided to site-neutral patients over a nine-year period beginning October 1, 2018.

The majority of our TC hospitals (all of 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 our TC hospitals until September 1, 2016, and, with the enactment of the BBA, full implementation of the new criteria will not occur until September 1, 2020. We expect that the full implementation of the new criteria on September 1, 2020 will have a further negative impact on Medicare payments to our TC hospitals.

Beginning in 2020, the LTAC Legislation requires that at least 50% of a hospital’s patients must be paid under the new LTAC PPS system to maintain Medicare certification as a LTAC hospital. The failure of one or more of our TC hospitals to maintain its Medicare certification as a LTAC hospital could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The new patient criteria imposed by the LTAC Legislation reduces the population of patients eligible for reimbursement under LTAC PPS and changes the basis upon which we are 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 has had, and will continue to have, an adverse effect on our business, financial position, results of operations, and liquidity.

See “—Risk Factors—Risks Relating to Reimbursement and Regulation of Our Business—The implementation of patient criteria for LTAC hospitals under the LTAC Legislation reduces the population of patients eligible for reimbursement under LTAC PPS and changes the basis upon which we are paid for other patients, which has had, and will continue to have, an adverse affect on our business, revenues and profitability.”

Satellite Facilities. Medicare regulations require that when two or more hospital facilities share the same provider number and are considered to be a single hospital, the “remote” or “satellite” facility must meet certain criteria with respect to the “main” facility. These criteria relate largely to demonstrating a high level of integration between the two facilities. If the criteria are not met, each facility would need to meet all Medicare requirements independently, including, for example, the minimum average length of patient stay for LTAC hospital qualification. It is advantageous for certain satellite facilities that may not independently be able to meet these Medicare requirements to maintain provider-based status so that they will be reimbursed under LTAC PPS. If CMS determines that facilities claiming to be provider-based (and being reimbursed accordingly) do not meet the integration requirements of the regulations, CMS may recover the amount of any excess reimbursements based upon that claimed status. We have 33 hospitals that share a Medicare provider number, and the failure of any one or more of them to meet the provider-based status regulations could materially and adversely affect our business, financial position, results of operations, and liquidity.

25 Percent Rule. CMS has regulations governing payments to a LTAC hospital that is co-located with another hospital (a “HIH”). The rules generally limit Medicare payments to the HIH if the Medicare admissions to the HIH from its co-located hospital exceed 25% of the total Medicare discharges for the HIH’s cost reporting period (the “25 Percent Rule”). There are limited exceptions for admissions from rural, urban single, or a “MSA Dominant hospital” that generates more than 25% of the Medicare discharges in a MSA. Patients transferred after they have reached the short-term acute care outlier payment status are not counted toward the admission threshold. Patients admitted prior to meeting the admission threshold, as well as Medicare patients admitted from a non co-located hospital, are eligible for the full payment under LTAC PPS. If the HIH’s admissions from the co-located hospital exceed the limit in a cost reporting period, Medicare will pay the lesser of: (1) the amount payable under LTAC PPS; or (2) the amount payable under IPPS, which will likely reduce our revenues for such admissions. At December 31, 2017, we operated 13 HIHs with 494 licensed beds.

In 2007, CMS expanded the 25 Percent Rule to all LTAC hospitals, regardless of whether they are a HIH. Under these regulations, all LTAC hospitals were to be paid LTAC PPS rates for admissions from a single referral source up to 25% of aggregate Medicare admissions. Patients reaching high cost outlier status in the short-term hospital were not to be counted when computing the 25% limit. Admissions beyond the 25% threshold were to be paid at lower IPPS rates. Since 2007, various legislative enactments have created moratoriums on the expansion of the 25 Percent Rule to freestanding LTAC hospitals. The 21st Century Cures Act further extended the moratorium on the application of the 25 Percent Rule until October 1, 2017, which was later extended to October 1, 2018 pursuant to regulations issued by CMS during 2017. Generally, until October 1, 2018: (1) LTAC hospitals may admit up to 50% of their patients from a co-located hospital and still be paid according to LTAC PPS; and (2) LTAC hospitals that are co-located with an urban single hospital or a MSA Dominant hospital may admit up to 75% of their patients from such urban single or MSA Dominant hospital and still be paid according to LTAC PPS. The LTAC Legislation further provides that co-located LTAC hospitals certified on or before September 30, 1995 are exempt from the provisions of the 25 Percent Rule. The Secretary of HHS has issued a report to Congress indicating that it will continue to consider whether to further modify or extend the 25 Percent Rule.

Development Moratorium. The LTAC Legislation imposed a moratorium between April 1, 2014 and September 30, 2017 on the establishment and classification of new LTAC hospitals, LTAC satellite facilities, and LTAC beds in existing LTAC hospitals or satellite hospitals, subject to certain exceptions. LTAC hospitals or satellite facilities were exempt if, as of April 1, 2014, such facility had: (1) begun its qualifying period for payment as a LTAC hospital; (2) a binding written contract with an outside, unrelated party for the development of a LTAC hospital or satellite facility and has expended at least 10% of the estimated cost of the project or, if less, $2.5 million; or (3) obtained an approved CON. This moratorium limited our ability to increase LTAC bed capacity, expand into new areas, or increase bed capacity in existing markets that we serve.

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 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.

On August 2, 2017, CMS issued final regulations regarding Medicare reimbursement for LTAC hospitals for the federal fiscal year beginning October 1, 2017. Included in the final regulations are: (1) a net market basket increase to the standard federal payment rate of 1.0%, as required by MACRA; (2) a wage level budget neutrality factor of 1.0006434 applied to the standard federal payment rate; (3) an additional budget neutrality adjustment for impact of changes in short stay outliers; (4) adjustments to area wage indexes; and (5) an increase in the high cost outlier threshold per discharge to $27,382. This final rule also extends the moratorium on the full implementation of the 25 Percent Rule until October 1, 2018.

The ACA requires a quality reporting system for LTAC hospitals under which any market basket update would be reduced by 2% for any LTAC hospital that does not meet the quality reporting standards. CMS has issued final regulations that require LTAC hospitals to report quality measures related to, among other things, catheter-associated urinary tract infections, central line associated blood stream infections, new or worsening pressure ulcers, unplanned readmissions, and falls with major injury.

Medicaid reimbursement of LTAC hospitals — The Medicaid program is designed to provide medical assistance to individuals unable to afford care. Medicaid payments are made under a number of different systems, which include cost-based

reimbursement, prospective payment systems, or programs that negotiate payment levels with individual hospitals. Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by state agencies, and certain government funding limitations, all of which may increase or decrease the level of payments to our hospitals.

Nongovernment payments — The hospital division seeks to maximize the number of nongovernment payment patients admitted to its hospitals, including those covered under commercial insurance and managed care health plans. Nongovernment payment patients typically have financial resources (including insurance coverage) to pay for their services and do not rely on government programs for support. It is important to our business to establish relationships with commercial insurers, managed care health plans, and other private payors and to maintain our reputation with such payors as a provider of quality patient care. We negotiate contracts with purchasers of group healthcare services, including private employers, commercial insurers, and managed care companies. Some payor organizations attempt to obtain discounts from established charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable pricing arrangements in circumstances where they may otherwise be faced with funding treatment at higher rates at other healthcare providers. The importance of obtaining contracts with commercial insurers, managed care health plans, and other private payors varies among markets, depending on factors such as the number of commercial payors and their relative market strength. Failure to obtain contracts with certain commercial insurers and managed care health plans or reductions in the lengths of stay or payments for our services provided to individuals covered by commercial insurance could have a material adverse effect on our 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 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 our TC hospitals, IRFs, or home health locations or otherwise suggest shorter lengths of stay in such settings. Efforts by conveners to avoid our care settings or suggest shorter lengths of stay in our care settings could have a material adverse effect on our business, financial position, results of operations, and liquidity.

General regulations. The Kindred Rehabilitation Services division is subject to various federal and state regulations. Therapists, nurses, and other healthcare professionals that we employ are required to be individually licensed or certified pursuant to applicable state and federal laws. We have processes in place in an effort to ensure that our therapists, nurses, and other healthcare professionals are licensed or certified in accordance with applicable federal and state laws. In addition, we require our clinicians and other employees to participate in continuing education programs. The failure of a therapist, nurse, or other healthcare professional to obtain, maintain, or renew required licenses or certifications could adversely affect a customer’s and our operations, including negatively impacting our financial results.

As noted above, the Kindred Rehabilitation Services division is subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws prohibit, among other things, certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products or services. Such laws include the Anti-Kickback Statute, the Stark Law, and the FCA discussed previously and various state anti-kickback laws and physician self-referral prohibitions. In addition, some states restrict certain business relationships between physicians and ancillary service providers. Some states also prohibit for-profit corporations from providing rehabilitation services through therapists who are directly employed by the corporation or otherwise providing, or holding themselves out as a provider of, clinical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of eligibility to contract with nursing centers, hospitals, and other providers participating in Medicare, Medicaid, and other federal healthcare programs, as well as civil and criminal penalties. These laws vary considerably from state to state.

Our IRFs are subject to additional federal and state regulations. In order to receive Medicare reimbursement, each IRF must meet the applicable conditions of participation set forth by HHS relating to the type of hospital, its equipment, personnel, and standard of medical care, as well as comply with state and local laws and regulations. We have developed a management system to facilitate compliance with these various standards and requirements. Among other things, each IRF has an individual who is responsible for leading an ongoing quality assessment and improvement program. As of December 31, 2017, all 19 IRFs operated by the Kindred Rehabilitation Services division were certified by Medicare as an IRF provider. In addition, 15 of our IRFs also were certified by their respective state Medicaid programs. Loss of certification could adversely affect an IRF’s ability to receive payments from the Medicare and Medicaid programs.

Accreditation by TJC and the Commission on Accreditation of Rehabilitation Facilities. IRFs may receive accreditation from TJC. IRFs generally must have been in operation at least four months to be eligible for accreditation by TJC. After conducting on-site surveys, TJC awards accreditation for up to three years to IRFs found to be in substantial compliance with TJC standards. Accredited IRFs are periodically resurveyed, at the option of TJC, upon a major change in facilities or organization and after a merger or consolidation. As of December 31, 2017, all of the IRFs operated by the Kindred Rehabilitation Services division were accredited by TJC.

IRFs and other healthcare facilities are also eligible to apply for accreditation by the Commission on Accreditation of Rehabilitation Facilities (“CARF”). CARF accreditation focuses on continuous quality improvement, patient engagement with person-focused standards and an individualized approach to service and outcomes. Generally, a provider will need 9-12 months to prepare for a CARF survey. CARF accreditations are awarded as one or three-year terms. As of December 31, 2017, we have obtained 51 three-year CARF accreditations with 12 more pending in 2018.

In addition to standard accreditations, both TJC and CARF award specialty accreditation in areas such as stroke, traumatic brain injury, spinal cord injury, pulmonary, cancer, amputation, and diabetes. Several of our programs have received specialty accreditation, including 40 for stroke, seven for traumatic brain injury and four for amputation.

Peer review. Federal regulations provide that admission to and utilization of IRFs by Medicare and Medicaid patients must be reviewed by peer review organizations or quality improvement organizations in order to ensure efficient utilization of IRFs and services. Quality improvement organizations may conduct such reviews prospectively or retrospectively and may, as appropriate, recommend denial of payments for services provided to a patient. The review is subject to administrative and judicial appeals. Each IRF operated by our Kindred Rehabilitation Services division employs a clinical professional to administer the IRF’s integrated quality assurance and improvement program. Although intensifying, denials by third party utilization review organizations historically have not had a material adverse effect on the Kindred Rehabilitation Services division’s operating results.

Corporate Integrity Agreement—We entered into a five-year corporate integrity agreement with the OIG on January 11, 2016 (the “RehabCare CIA”). The RehabCare CIA imposes monitoring, auditing (including by an independent review organization), reporting, certification, oversight, screening, and training obligations with which we must comply. These obligations include:

In the event of a breach of the RehabCare CIA, we could become liable for payment of certain stipulated penalties, or our RehabCare subsidiaries could be excluded from participation in federal healthcare programs. The costs associated with compliance with the RehabCare CIA could be substantial and may be greater than we currently anticipate. Any breach or failure to comply with the RehabCare CIA, the imposition of substantial monetary penalties, or any suspension or exclusion from participation in federal healthcare programs, could have a material adverse effect on our business, financial position, results of operations, and liquidity. See “—Risk Factors—Risks Relating to Our Operations—If we fail to comply with the terms of our Corporate Integrity Agreement, we could be subject to substantial monetary penalties or suspension or exclusion from participation in the Medicare and Medicaid programs” and note 1 of the notes to consolidated financial statements.

Medicare—Our IRFs receive fixed payment reimbursement amounts per discharge under the inpatient rehabilitation facility prospective payment system (“IRF PPS”) based upon certain rehabilitation impairment categories established by HHS. Under the IRF PPS, CMS is required to adjust the payment rates based upon a market basket index, known as the rehabilitation, psychiatric, and long-term care hospital market basket. The market basket update is designed to reflect changes over time in the prices of a mix of goods and services provided by IRFs.

Over the last several years, changes in regulations governing inpatient rehabilitation reimbursement have resulted in limitations on, and in some cases, reductions in, the levels of payments to IRFs. A rule known as the “60% Rule,” stipulates that to qualify as an IRF under the Medicare program a facility must show that a certain percentage of its patients are treated for at least one of a specified and limited list of medical conditions. Under the 60% Rule, any IRF that fails to meet its requirements would be subject to prospective reclassification as an acute care hospital, with lower acute care payment rates for rehabilitative services. IRFs are allowed to use a patient’s secondary medical conditions, or “comorbidities,” to determine whether a patient qualifies for inpatient rehabilitative care under the rule.

On July 31, 2015, CMS issued final regulations for 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 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, 2017, CMS issued final regulations regarding Medicare reimbursement for IRFs for the federal fiscal year beginning October 1, 2017. These final regulations implement a net market basket increase to the standard payment conversion factor of 1.0%, as required by MACRA, less a 0.1% reduction related to recalibrating the outlier threshold.

The ACA requires a quality reporting system for IRFs in which any market basket update would be reduced by 2% for any IRF that does not meet quality reporting standards. CMS has finalized regulations that required IRFs to report measures related to, among other things, catheter-associated urinary tract infections, pressure ulcers, and unplanned readmissions.

Medicaid reimbursement of IRFs—The Medicaid program is designed to provide medical assistance to individuals unable to afford care. Medicaid payments are made under a number of different systems, which include cost-based reimbursement, prospective payment systems, or programs that negotiate payment levels with individual hospitals. Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by state agencies, and certain government funding limitations, all of which may increase or decrease the level of payments to our IRFs.

Nongovernment payments to IRFs—We seek to maximize the number of nongovernment payment patients admitted to our IRFs, including those covered under commercial insurance and managed care health plans. Nongovernment payment patients typically have financial resources (including insurance coverage) to pay for their services and do not rely on government programs for support. It is important to our business to establish relationships with commercial insurers, managed care health plans, and other private payors and to maintain our reputation with such payors as a provider of quality patient care. We negotiate contracts with purchasers of group healthcare services, including private employers, commercial insurers, and managed care companies. Some payor organizations attempt to obtain discounts from established charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable pricing arrangements in circumstances where they may otherwise be faced with funding treatment at higher rates at other healthcare providers. The importance of obtaining contracts with commercial insurers, managed care health plans, and other private payors varies among markets, depending on such factors as the number of commercial payors and their relative market strength. Failure to obtain contracts with certain commercial insurers and managed care health plans or reductions in the lengths of stay or payments for our services provided to individuals covered by commercial insurance could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The Kindred Rehabilitation Services division receives payment for the rehabilitation and program management services it provides to patients and customers. The basis for payment varies as more specifically set forth below. In the Kindred Hospital Rehabilitation Services segment, our (1) ARU customers generally pay a negotiated fee per discharge, a flat monthly management fee, or a combination of the two, (2) LTAC hospital customers generally pay a negotiated per patient day rate, (3) sub-acute rehabilitation customers generally pay a flat monthly fee or a negotiated fee per patient day, and (4) outpatient therapy clients typically pay a negotiated fee per unit of service. In the RehabCare segment, our customers generally pay a negotiated patient per diem rate or a negotiated fee schedule based upon the type of service rendered.

Various federal and state laws and regulations govern reimbursement to nursing centers, hospitals, and other healthcare providers participating in Medicare, Medicaid, and other federal and state healthcare programs. Though these laws and regulations may not directly apply to our Kindred Rehabilitation Services division, they do apply to our customers. If our customers fail to comply with these laws and regulations they could be subject to possible sanctions, including loss of licensure or eligibility to participate in reimbursement programs, as well as civil and criminal penalties, which could materially and adversely affect our business, financial position, results of operations, and liquidity. If our arrangements with our customers are found to violate the Anti-Kickback Statute or other fraud and abuse laws, we could be subject to criminal and civil penalties, as well as exclusion from participation in federal and state healthcare programs and potential indemnity claims by our customers. In addition, there continue to be legislative and regulatory proposals to contain healthcare costs by imposing further limits on government and private payments to healthcare service providers.

Medicare Part B provides reimbursement for certain physician services, limited drug coverage, and other outpatient services, such as therapy and other services, outside of a Medicare Part A covered patient stay. Payment for these services is determined according to the Medicare Physician Fee Schedule (“MPFS”). Annually since 1997, the MPFS has been subject to the SGR, which is intended to keep spending growth in line with allowable spending. MACRA permanently replaces the SGR formula previously used to

determine updates to Medicare physician reimbursement, replacing these updates with quality and value measurements and participation in alternative payment models.

Since 2006, federal legislation has provided for an annual Medicare Part B outpatient therapy cap. In years since 2006, CMS has increased the amount of the therapy cap. In addition, legislation was passed that required CMS to implement a broad process for reviewing medically necessary therapy claims, creating an exception to the cap. Legislation has annually extended the Medicare Part B outpatient therapy cap exception process. MACRA further extended the therapy cap exception process until December 31, 2017 and eliminated the manual medical review process for claims above a $3,700 threshold, replacing it with a targeted review process. This review process has had an adverse effect on the provision and billing of services for patients and can negatively impact therapist productivity. Patients whose stay is not reimbursed by Medicare Part A must seek reimbursement for their therapy under Medicare Part B and are subject to the therapy cap.

The BBA (1) permanently repeals the Medicare Part B outpatient therapy cap (effective January 1, 2018), (2) continues the targeted medical review process, while reducing the applicable threshold triggering such review to $3,000 (effective January 1, 2018), and (3) reduces payment for services provided by a physical or occupational therapy assistant to 85% of the amount currently payable under Medicare for such services (effective January 1, 2022).

Reductions in the reimbursement provided to our customers by Medicare or Medicaid could negatively impact the demand and price for our services, impair our ability to collect for our services from customers, and could have a material adverse effect on our rehabilitation revenues and growth prospects.

Although reductions or changes in reimbursement from governmental or third party payors and regulatory changes affecting our business represent one of the most significant challenges to our business, our operations are also affected by coverage rules and determinations. Medicare providers like us can be negatively affected by the adoption of coverage policies, either at the national or local level, that determine whether an item or service is covered and under what clinical circumstances it is considered to be reasonable, necessary, and appropriate. Current CMS coverage rules require inpatient rehabilitation services to be ordered by a qualified rehabilitation physician and be coordinated by an interdisciplinary team. The interdisciplinary team must meet weekly to review patient status and make any needed adjustments to the individualized plan of care. Qualified personnel provide rehabilitation nursing, physical therapy, occupational therapy, speech language pathology, social services, psychological services, and prosthetic and orthotic services, as medically necessary. CMS has also noted that it is considering specific standards governing the use of group therapies. For individual claims, Medicare contractors make coverage determinations regarding medical necessity that can reflect more restrictive interpretations of the CMS coverage rules. We cannot predict how future CMS coverage rule interpretations or any new local coverage determinations will affect us.

At December 31, 2017, we leased from Ventas and its affiliates 29 TC hospitals under one master lease agreement (as previously defined, the “Master Lease Agreement”). The Master Lease Agreement includes land, buildings, structures, and other improvements on the land, easements, and similar appurtenances to the land and improvements, and permanently affixed equipment, machinery, and other fixtures relating to the operation of the leased properties. There are one or more bundles of leased properties under the Master Lease Agreement, with each bundle containing several TC hospitals.

As part of our strategic decision to exit the skilled nursing facility business, we entered into an agreement with Ventas in 2016 which provided us with the option to acquire the real estate for all 36 skilled nursing facilities (previously defined as the “Ventas Properties”) that were leased from Ventas for an aggregate consideration of $700 million. As of December 31, 2017, we have acquired all of the Ventas Properties from Ventas.

On November 7, 2017, we and Ventas amended the Master Lease Agreement in connection with our purchase and closure of one of the TC hospitals leased thereunder. As part of such amendment, we paid Ventas $3 million for the real estate of such TC hospital, with the annual rent otherwise payable for such TC hospital of $5 million reallocated among the remaining facilities leased under the Master Lease Agreement. For accounting purposes, the reallocated rent is treated as a one-time non-cash lease termination charge. The Company recorded a $32 million lease termination charge in the fourth quarter of 2017 in connection with this transaction. The lease termination fee was recorded as a long-term liability discounted at our credit-adjusted risk-free rate through the end of 2025, which is the original lease term of the TC hospital. This lease termination fee was recorded as a restructuring charge in the accompanying consolidated statement of operations.

Concurrently with the execution and delivery of the Merger Agreement, on December 19, 2017, we and Ventas entered into the Ventas Lease Amendment to the Master Lease Agreement pursuant to which, among other things, (i) Ventas agreed that the transactions contemplated by the Merger Agreement and the Separation Agreement comply with the Master Lease Agreement, subject

to the satisfaction of the remaining requirements in the Master Lease Agreement related thereto, including payment to Ventas of a transaction fee equal to 10% of annual base rent under the Master Lease Agreement upon closing of the transactions, (ii) we agreed to pay to Ventas an additional $5 million fee within one business day of the signing of the Merger Agreement in exchange for Ventas’ approval of and agreement not to challenge the transaction structure (this condition was satisfied on December 20, 2017), (iii) we agreed to complete the purchase of the two remaining skilled nursing facilities under the Master Lease Agreement and our former Second Amended and Restated Master Lease No. 2 from Ventas, and pay corresponding expense reimbursements to Ventas, on or before December 31, 2017 (this condition was satisfied on December 21, 2017), and (iv) we agreed to make certain minimum expenditures for the leased facilities remaining under the Master Lease Agreement going forward.

The Master Lease Agreement is commonly known as a triple-net lease or an absolute-net lease. Accordingly, in addition to rent, we are required to pay the following: (1) all insurance required in connection with the leased properties and the business conducted on the leased properties, (2) certain taxes levied on or with respect to the leased properties (other than taxes on the income of Ventas), and (3) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

We paid rents to Ventas (including amounts classified within discontinued operations) approximating $154 million for the year ended December 31, 2017, $168 million for the year ended December 31, 2016, and $172 million for the year ended December 31, 2015.

The Master Lease Agreement provides for rent escalations each May 1. All annual rent escalators are payable in cash. The contingent annual rent escalator for the Master Lease Agreement is based upon annual increases in the Consumer Price Index, subject to a ceiling of 4%. In 2017, the contingent annual rent escalator was 2.74% for the Master Lease Agreement.

Pursuant to the provisions of the Master Lease Agreement, we may not (1) develop any additional TC hospitals within a ten-mile radius of each of the TC hospitals subject to the Master Lease Agreement, (2) develop any additional nursing centers within a five-mile radius of each of the nursing centers formerly subject to the Master Lease Agreement, or (3) increase the number of licensed beds at TC hospitals that are within the restricted areas and not leased to us by Ventas under the Master Lease Agreement. We are not restricted, however, from acquiring or operating TC hospitals or nursing centers within (or outside of) the restricted areas.

The Master Lease Agreement contains several restrictions and covenants related to our operation of the TC hospitals subject to the Master Lease Agreement. Upon an event of default under one of the Master Lease Agreement, Ventas may, at its option, exercise the following remedies:

(1)after at least ten days notice to us, terminate the Master Lease Agreement, repossess any leased property, relet any leased property to a third party, and require that we pay Ventas, as liquidated damages, the net present value of the rent for the balance of the term, discounted at the prime rate,

(2)without terminating the Master Lease Agreement, repossess the leased property and relet the leased property with us remaining liable for all obligations to be performed by us thereunder, including the difference, if any, between the rent under the Master Lease Agreement and the rent payable as a result of the reletting of the leased property, and

In addition to the remedies noted above, under the Master Lease Agreement, in the case of a facility-specific event of default, Ventas may terminate the Master Lease Agreement as to the leased property to which the event of default relates, and may, but need not, terminate the entire Master Lease Agreement. The Master Lease Agreement also includes special rules relative to Medicare/Medicaid events of default and a licensed bed event of default.

As of December 31, 2017, we had approximately 43,100 full-time and 42,200 part-time and per diem employees. We had approximately 2,400 unionized employees at 12 of our facilities as of December 31, 2017.

We, like other healthcare providers, have experienced difficulties in attracting and retaining qualified healthcare personnel in a highly competitive market, including nurses, therapists, home health and hospice employees, physicians, and other healthcare professionals. Our operations are particularly dependent on nurses, therapists, and home health and hospice employees for patient care. As the demand for our services continues to exceed the supply of available and qualified staff, our operators have been forced to offer more attractive wage and benefit packages to these professionals. Our difficulty in hiring and retaining qualified personnel has increased our average wage rates and may force us to increase our use of contract personnel. We expect to continue to experience increases in our labor costs primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel. Salaries, wages, and benefits were approximately 67% of our consolidated revenues for the year ended December 31, 2017. Our ability to manage labor costs will significantly affect our future operating results.

In October 2017, in connection with the review of our insurance programs as part of the SNF Divestiture, we restructured the funding and retention mechanism of recent policy years of our professional liability and workers compensation insurance programs (the “Insurance Restructuring”) provided through our wholly owned limited purpose insurance subsidiary, Cornerstone Insurance Company (“Cornerstone”). As a result of the Insurance Restructuring, on a per-claim basis we maintain a self-insured retention and Cornerstone insures all losses in excess of this retention. Cornerstone maintains commercial reinsurance through unaffiliated commercial reinsurers for these losses in excess of our retention. The Insurance Restructuring had no impact upon the financial risk transfer aspect of Cornerstone’s reinsurance agreements with its third party reinsurers. Cornerstone continues to insure claims in all states up to a per-occurrence limit without the benefit of any aggregate stop loss limit.

We believe that our insurance is adequate in amount and coverage. There can be no assurance that in the future such insurance will be available at a reasonable price or that we will be able to maintain adequate levels of professional and general liability insurance coverage.

We file annual, quarterly, and current reports, proxy statements, and other information with the SEC under the Exchange Act.

Our filings with the SEC are available to the public free of charge on the SEC website at www.sec.gov, which contains reports, proxy, and information statements and other information. You also may read or obtain copies of this information in person or by mail from the SEC’s Public Reference Room, 100 F Street, NE, Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

Our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto, are available free of charge on our website, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website is www.kindredhealthcare.com. Information made available on our website is not a part of this document.

You should carefully consider all the risks described below, together with all of the information included in this Annual Report on Form 10-K, in evaluating us and our Common Stock. To facilitate your consideration of all of the risks described below, these risks are organized under headings and subheadings for your convenience. If any of the risks described in this Annual Report on Form 10-K were to occur, it could have a material adverse effect on our business, financial position, results of operations, liquidity, and stock price.

The Merger is subject to various closing conditions and other risks which may cause the Merger to be delayed or not completed at all or have other adverse consequences.

The Merger is subject to various closing conditions that must be satisfied or waived to complete the Merger. There can be no assurance that these conditions will be satisfied or waived or that the Merger will be completed in a timely manner or at all. Failure to satisfy or obtain waivers of any closing condition may jeopardize or delay the completion of the Merger and result in additional expenditures of money and resources including, but not limited to, the adverse impact of a termination fee of $29 million and reimbursement of documented out-of-pocket expenses of up to $10 million. The Merger is also subject to approval by the Company’s

stockholders. There is no assurance that the Company’s stockholders will approve the Merger. In addition, the Merger is contingent upon the receipt of certain state healthcare and insurance regulatory clearances or approvals. There can be no assurance that the conditions to closing will be satisfied or waived or that other events will not intervene to delay or prevent the closing of the Merger. If the Merger is not completed for any reason, the price of our Common Stock may decline to the extent that the current market price reflects an assumption that the Merger will be consummated.

Legal proceedings instituted against the Company and others relating to the Merger Agreement also could delay or prevent the Merger from becoming effective within the agreed upon timeframe. In addition, we may elect to terminate the Merger Agreement in certain circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the consummation of the Merger before or after stockholder approval. Further, uncertainty among our employees about their future roles after the completion of the Merger may impair our ability to attract, retain and motivate key personnel, and the pendency of the Merger may disrupt our business relationships with our existing and potential referral sources, customers, suppliers, vendors, landlords, and other business partners, who may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. The adverse consequence of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

We have incurred, and will continue to incur, significant transaction and related costs in connection with the Merger.

We have incurred and expect to continue to incur a number of costs associated with completing the Merger and the planned separation of the Company’s businesses pursuant to the Separation Agreement. Such costs include the payment of certain fees and expenses incurred in connection with the Merger and the related separation transactions, including legal and other professional advisory fees. The substantial majority of these costs will be non-recurring expenses and will primarily consist of transaction costs related to the Merger and the separation and employment-related costs. Additional unanticipated costs also may be incurred.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, amend our organizational documents, incur indebtedness and settle litigation. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, which may as a result materially adversely affect our business, results of operations and financial condition.

Healthcare reform has initiated significant changes to the United States healthcare system.

Various healthcare reform provisions became law upon enactment of the ACA. The reforms contained in the ACA have impacted each of our businesses in some manner. Several of the reforms are very significant and could ultimately change the nature of our services, the methods of payment for our services, and the underlying regulatory environment. The reforms include the possible modifications to the conditions of qualification for payment, bundling 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, which could result in lower reimbursement than in preceding years; (2) additional annual “productivity adjustment” reductions to the annual market basket payment update as determined by CMS for LTAC hospitals and IRFs, home health agencies, and hospice providers; (3) a quality reporting system for hospitals (including LTAC hospitals and IRFs); and (4) reductions in Medicare payments to hospitals (including LTAC hospitals and IRFs) 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 that began with federal fiscal year 2014 and was phased-in over a four-year period, and a reduction in the outlier cap. In addition, the ACA requires the Secretary of HHS to test different models for delivery of care, some of which would involve home health services. It also requires the Secretary 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 Secretary 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.

In addition, a primary goal of healthcare reform is to reduce costs, which includes reductions in the reimbursement paid to us and other healthcare providers. Moreover, healthcare reform could negatively impact insurance companies, other third party payors, our customers, as well as other healthcare providers, which may in turn negatively impact our business. As such, healthcare reforms and changes resulting from the ACA (including any repeal, amendment, modification or retraction thereof), as well as other similar healthcare reforms, including any potential change in the nature of services we provide, the methods or amount of payment we receive for such services, and the underlying regulatory environment, could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The implementation of patient criteria for LTAC hospitals under the LTAC Legislation reduces the population of patients eligible for reimbursement under LTAC PPS and changes the basis upon which we are paid for other patients, which has had, and will continue to have, an adverse affect on our business, revenues and profitability.

Medicare payments to LTAC hospitals are now based upon one of two methods; (1) LTAC PPS, or (2) a site-neutral formula based upon the lesser of what a short-term acute care hospital would be paid, or estimated cost. 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 MS-LTC-DRGs. LTAC PPS is based upon discharged-based MS-LTC-DRGs, similar to IPPS.

The effective date of the new patient criteria was October 1, 2015, tied to each individual LTAC hospital’s cost reporting period, followed by an initial two-year phase-in period, which was extended by an additional two years by the BBA. During the four-year phase-in period, payment for patients receiving the site-neutral rate is based 50% on LTAC PPS and 50% on the site-neutral rate. The majority of our TC hospitals (all of 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 our TC hospitals until September 1, 2016, and, with the enactment of the BBA, full implementation of the new criteria will not occur until September 1, 2020. We expect that the full implementation of the new criteria on September 1, 2020 will have a further negative impact on Medicare payments to our TC hospitals.

The new patient criteria imposed by the LTAC Legislation reduces the population of patients eligible for reimbursement under LTAC PPS and changes the basis upon which we are paid for other patients. In addition, the LTAC Legislation is subject to additional governmental regulations and the interpretation and enforcement of those regulations. In response to the impact of the LTAC Legislation, we have sold or closed approximately 23% of our TC hospitals from 2013 through 2017. The LTAC Legislation, the implementation of new patient criteria, changes in referral patterns, and other associated elements has had, and will continue to have, an adverse effect on our business, financial position, results of operations, and liquidity.

Changes in the reimbursement rates or methods or timing of payment from third party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursement for our services and products could result in a substantial reduction in our revenues and operating margins.

We depend on reimbursement from third party payors, including the Medicare and Medicaid programs, for a substantial portion of our revenues. For the year ended December 31, 2017, we derived approximately 59% of our total revenues from continuing operations (before eliminations) from the Medicare and Medicaid programs and the balance from other third party payors, such as commercial insurance companies, health maintenance organizations, preferred provider organizations, and contracted providers. The Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes. See “Part I—Item 1—Business—Governmental Regulation.”

Congress continues to discuss 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, amend, modify, repeal or otherwise retract governmental healthcare programs, both as part of the ACA and otherwise, could

result in major changes in the healthcare delivery and reimbursement systems on both the national and state levels. Potential reforms include changes directly impacting the government and private reimbursement systems for each of our businesses. Reforms or other changes to the payment systems, including modifications to the conditions of qualification for payment, the imposition of enrollment limitations on new providers, or bundling payments to cover acute and post-acute care or services provided to dually eligible Medicare and Medicaid patients may be proposed or could be adopted by Congress or CMS in the future.

CMS introduced the HHGM Proposal in July 2017. Under the HHGM Proposal, Medicare payments for home health services would have been based upon a new payment methodology known as the home health grouping model (previously defined as HHGM), utilizing a 30-day (rather than a 60-day) episode of care, comorbidities (rather than therapy service-use thresholds), and other criteria to set payments. In November 2017, CMS announced that it was not finalizing the HHGM Proposal and that it would instead take additional time to further engage with stakeholders to move towards a system that shifted the focus from volume of services to a more patient-centered model. If CMS decided to implement the HHGM Proposal or other payment reform for home health care providers, it could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The BBA, passed on February 9, 2018, will implement several changes to Medicare home health reimbursement, including (1) basing payment on a 30-day episode of care (beginning January 1, 2020), coupled with annual determinations by CMS to ensure budget neutrality (including taking into account provider behavior), (2) eliminating the retroactive payment adjustment based upon the level of therapy services required (beginning January 1, 2020), (3) extending the 3% add-on payment for home health services provided to residents in rural areas (beginning January 1, 2018), coupled with a reduction and phase out of such add-on payment over the following four years, and (4) establishing a market basket update of 1.5% for the federal fiscal year beginning January 1, 2020.

Weak economic conditions also could adversely affect the budgets of individual states and of the federal government. This could result in attempts to reduce or eliminate payments for federal and state healthcare programs, including Medicare and Medicaid, and could result in an increase in taxes and assessments on our activities. In addition, private third party payors are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization review, and greater enrollment in managed care programs and preferred provider organizations. These private payors increasingly are demanding discounted fee structures and are requesting that healthcare providers assume more financial risk.

Though we cannot predict what reform proposals will be adopted or finally implemented, healthcare reform and regulations may have a material adverse effect on our business, financial position, results of operations, and liquidity through, among other things, decreasing funds available for our services or increasing operating costs. We could be affected adversely by the continuing efforts of governmental, private third party payors, and conveners to contain healthcare costs. We cannot assure you 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. Future changes in third party payor reimbursement rates or methods, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursement for our services and products could result in a material reduction in our revenues. Our operating margins continue to be under pressure because of reduced Medicare reimbursement, deterioration in pricing flexibility, changes in payor mix, changes in length of stay, and growth in operating expenses, particularly labor, employee benefits and professional liability costs, exceeds payment increases from third party payors. In addition, as a result of competitive pressures, our ability to maintain operating margins through price increases to private patients or commercial payors remains limited. These results could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We conduct business in a heavily regulated industry, and changes in regulations, the enforcement of these regulations, or violations of regulations may result in increased costs or sanctions that reduce our revenues and profitability.

In the ordinary course of our business, we are regularly subject to inquiries and audits by federal and state agencies that oversee applicable healthcare program participation and payment regulations. We also are subject to government investigations. We believe that the regulatory environment surrounding most segments of the healthcare industry remains intense.

The extensive federal, state, and local regulations affecting the healthcare industry include, but are not limited to, regulations relating to licensure, billing, provision of services, conduct of operations, ownership of facilities, addition of facilities, allowable costs, and prices for services, facility staffing requirements, qualifications and licensure of staff, environmental and occupational health and safety, and the confidentiality and security of health-related information. In particular, various laws, including the Anti-Kickback Statute, anti-fraud, and anti-abuse amendments codified under the Social Security Act prohibit certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare and Medicaid, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs. Sanctions for violating those anti-kickback, anti-fraud, and anti-abuse amendments include criminal penalties, civil sanctions, fines, and possible exclusion from government programs such as Medicare and Medicaid. For additional information regarding our regulatory environment, see “Part I—Item 1—Business—Governmental Regulation.”

Federal and state governments continue to pursue intensive enforcement policies resulting in a significant number of investigations, inspections, audits, citations of regulatory deficiencies, and other regulatory sanctions including demands for refund of overpayments, terminations from the Medicare and Medicaid programs, bans on Medicare and Medicaid payments for new admissions, and civil monetary penalties or criminal penalties. We expect audits under the CMS RAC program and other federal and state audits evaluating the medical necessity of services to further intensify the regulatory environment surrounding the healthcare industry as third party firms engaged by CMS and others conduct extensive reviews of claims data and medical and other records to identify improper payments to healthcare providers under the Medicare and Medicaid programs. If we fail to comply with the extensive laws, regulations, and prohibitions applicable to our businesses, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties, or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to investigations, audits, or other enforcement actions related to these laws, regulations, or prohibitions. Furthermore, should we lose the licenses for one or more of our facilities as a result of regulatory action or otherwise, we could be in default under our Master Lease Agreement, the Credit Facilities (as defined below), and the indentures governing our outstanding notes. Failure of our staff to satisfy applicable licensure requirements, or of our hospitals, home health and hospice operations, IRFs, and rehabilitation operations to satisfy applicable licensure and certification requirements could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We are unable to predict the future course of federal, state, and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or the intensity of federal and state enforcement actions. Changes in the regulatory framework, including those associated with healthcare reform, and sanctions from various enforcement actions could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We face and are currently subject to reviews, audits, and investigations under our contracts with federal and state government agencies and other payors, and these reviews, audits, and investigations could have adverse findings that may negatively impact our business.

As a result of our participation in the Medicare and Medicaid programs, we face and are currently subject to various governmental reviews, audits, and investigations to verify our compliance with these programs and applicable laws and regulations. An increasing level of governmental and private resources are being devoted to the investigation of allegations of fraud and abuse in the Medicare and Medicaid programs, and federal and state regulatory authorities are taking an increasingly strict view of the requirements imposed on healthcare providers by the Social Security Act, the Medicare and Medicaid programs, and other applicable laws. We are routinely subject to audits under various government programs, including the RAC program, in which CMS engages third party firms to 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, we, like other healthcare providers, are subject to ongoing investigations by 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. Our 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 us to refund or retroactively adjust amounts that have been paid under the relevant government program or from other payors. Further, an adverse review, audit, or investigation 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 significant fines, penalties, and other sanctions on us; (2) loss of our 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 we provide services; and (4) damage to our reputation in various markets, which could adversely affect our ability to attract patients and employees. If they were to occur, these consequences could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Significant legal actions could subject us to increased operating costs and substantial uninsured liabilities, which could materially and adversely affect our business, financial position, results of operations, and liquidity.

We incur significant costs to investigate and defend against a variety of claims, including professional liability, wage and hour, and minimum staffing claims. In addition to large compensatory claims, plaintiffs’ attorneys are increasingly seeking, and have sometimes been successful in obtaining, significant fines, punitive damages, and attorneys’ fees. Furthermore, there are continuing efforts to limit the ability of healthcare providers to utilize arbitration as a process to resolve these claims. As a result of these factors, our legal defense costs and potential liability exposure are significant, unpredictable, and likely to increase.

We also are subject to lawsuits under the FCA and comparable state laws for submitting fraudulent bills for services to the Medicare and Medicaid programs and other federal and state healthcare programs. These lawsuits, which may be initiated by “whistleblowers,” can involve significant monetary damages, fines, attorneys’ fees, and the award of bounties to private qui tam

plaintiffs who successfully bring these suits and to the government programs. We also are subject to indemnity claims under contracts with our Kindred Rehabilitation Services division customers relating to the provision of our services.

While we are able to insure against certain of these costs and liabilities, such as our professional liability risks described below, we are not able to do so in many other cases. In the absence of insurance proceeds, we must fund these costs and liabilities from operating cash flows, which can reduce our operating margins and funds available for investment in our business, and otherwise limit our operating and financial flexibility.

Provisions for loss for our professional liability risks are based upon management’s best available information including actuarially determined estimates. 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 amounts 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. 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 our 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. Differences between the ultimate claims costs and our historical provisions for loss and actuarial assumptions and estimates could have a material adverse effect on our business, financial position, results of operations, and liquidity.

See note 24 of the notes to consolidated financial statements for a description of pending legal proceedings, governmental reviews, audits, and investigations to which we are subject.

We are subject to extensive and complex federal and state government laws and regulations that govern and restrict our relationships with physicians and other referral sources.

The Anti-Kickback Statute, the Stark Law, the FCA, and similar state laws materially restrict our relationships with physicians and other referral sources. We have a variety of financial relationships with physicians and others who either refer or influence the referral of patients to our healthcare facilities, and these laws govern those relationships. The OIG has enacted safe harbor regulations that outline practices deemed protected from prosecution under the Anti-Kickback Statute. While we endeavor to comply with the safe harbors, most of our current arrangements, including with physicians and other referral sources, may not qualify for safe harbor protection. Failure to qualify for a safe harbor does not mean the arrangement necessarily violates the Anti-Kickback Statute, but may subject the arrangement to greater scrutiny. However, we cannot offer assurance that practices outside of a safe harbor will not be found to violate the Anti-Kickback Statute.

Our financial relationships with referring physicians and their immediate family members must comply with the Stark Law by meeting an exception. We attempt to structure our relationships to meet an exception to the Stark Law, but the regulations implementing the exceptions are detailed and complex, and we cannot provide assurance that every relationship complies fully with the Stark Law. Unlike the Anti-Kickback Statute, failure to meet an exception under the Stark Law results in a violation of the Stark Law, even if such violation is technical in nature.

Additionally, if we violate the Anti-Kickback Statute or the Stark Law, or if we improperly bill for our services, we may be found to violate the FCA, either under a suit brought by the government or by a private person under a qui tam, or “whistleblower,” lawsuit.

If we fail to comply with the Anti-Kickback Statute, the Stark Law, the FCA, or other applicable laws and regulations, we could be subject to liabilities, including civil penalties (including the loss of our licenses to operate one or more facilities or healthcare activities), exclusion of one or more facilities or healthcare activities from participation in the Medicare, Medicaid, and other federal and state healthcare programs and, for violations of certain laws, regulations, and criminal penalties.

We do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs, and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial position, results of operations, and liquidity, and our business reputation could suffer significantly. In addition, other legislation or regulations at the federal or state level may be adopted that adversely affect our business.

Cost containment initiatives undertaken by third party payors, conveners, and referral sources may adversely affect our revenues and profitability.

Initiatives undertaken by major insurers and managed care companies to contain healthcare costs or to respond to healthcare reform could affect the profitability of our services. These payors attempt to control healthcare costs by contracting with providers of healthcare to obtain services on a discounted basis. We believe that this trend will continue and intensify and may further limit

reimbursements for healthcare services. If insurers or managed care companies from whom we receive substantial payments reduce the amounts they pay for services or limit access to our services, our profit margins may decline or we may lose patients if we choose not to renew our contracts with these insurers at lower rates. These results could have a material adverse effect on our 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 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 our TC hospitals, IRFs or home health locations or otherwise suggest shorter lengths of stay in such settings. Efforts by conveners to avoid our care settings or suggest shorter lengths of stay in our care settings could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We also depend on referrals from physicians, hospitals, IRFs, nursing centers, assisted living facilities, and other healthcare providers in the communities we serve. Many of our third party referral sources are becoming increasingly focused on controlling PAC costs, including as a result of bundled payment initiatives, population health management activities, and incentives placed on short-term acute care hospitals to reduce spending on Medicare fee-for-service patients over 90-day episodes of care. Our ability to attract and retain patients and customers could be adversely affected if any of our facilities fail to provide or maintain a reputation for providing cost-effective care as compared to other facilities or providers in the same geographic area.

Further consolidation of managed care organizations and other third party payors may adversely affect our profits.

Managed care organizations and other third party payors have continued to consolidate in order to enhance their ability to influence the delivery and cost structure of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a smaller number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. In addition, third party payors, including managed care payors, increasingly are demanding discounted fee structures. To the extent that these organizations terminate us as a preferred provider, engage our competitors as a preferred or exclusive provider, demand discounted fee structures, limit the patients eligible for our services, or seek our assumption of all or a portion of the financial risk through a prepaid capitation arrangement, our business, financial position, results of operations, and liquidity could be materially and adversely affected.

If our TC hospitals fail to maintain their certification as LTAC hospitals, our revenues and profitability could decline.

If our TC hospitals, satellite TC facilities, or HIHs fail to meet or maintain the standards for certification as LTAC hospitals, such as minimum average length of patient stay, they will receive payments under IPPS rather than payment under the system applicable to LTAC hospitals for qualifying patients. Payments at rates applicable to general acute care hospitals for patients that otherwise qualify for payment under LTAC PPS would result in our TC hospitals receiving less Medicare reimbursement than they currently receive for patient services, and our profitability would decline. To maintain certification under LTAC PPS, the average length of stay of Medicare patients must be greater than 25 days, except for patients receiving a site-neutral rate or Medicare Advantage patients.

Beginning in 2020, the LTAC Legislation requires that at least 50% of our patients must be paid under the new LTAC PPS system to maintain Medicare certification as a LTAC hospital. Under the new criteria, 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.

The failure of one or more of our TC hospitals to maintain its Medicare certification as a LTAC hospital could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Expiration of the moratorium imposed on certain federal regulations otherwise applicable to LTAC hospitals, including HIHs and satellite hospitals, could have an adverse effect on our future revenues and profitability.

CMS has regulations governing payments to a LTAC hospital that is co-located with another hospital, such as a HIH. The rules generally limit Medicare payments to the HIH if the Medicare admissions to the HIH from its co-located hospital exceed 25% of the total Medicare discharges for the HIH’s cost reporting period, known as the 25 Percent Rule. There are limited exceptions for admissions from rural hospitals, urban single hospitals, and MSA Dominant hospitals. Patients transferred after they have reached the short-term acute care outlier payment status are not counted toward the admission threshold. Patients admitted prior to meeting the admission threshold, as well as Medicare patients admitted from a non co-located hospital, are eligible for the full payment under LTAC PPS. If the HIH’s admissions from the co-located hospital exceed the limit in a cost reporting period, Medicare will pay the

lesser of: (1) the amount payable under LTAC PPS; or (2) the amount payable under IPPS, which likely will reduce our revenues for such admissions. At December 31, 2017, we operated 13 HIHs with 494 licensed beds.

Since 2007, various legislative enactments have created moratoriums on the expansion of the 25 Percent Rule to freestanding LTAC hospitals. The 21st Century Cares Act further extended the moratorium on the application of the 25 Percent Rule until October 1, 2017, which was later extended to October 1, 2018 pursuant to regulations issued by CMS during 2017. Generally, until October 1, 2018: (1) LTAC hospitals may admit up to 50% of their patients from a co-located hospital and still be paid according to LTAC PPS; and (2) LTAC hospitals that are co-located with an urban single hospital or a MSA Dominant hospital may admit up to 75% of their patients from such urban single or MSA Dominant hospital and still be paid according to LTAC PPS. The LTAC Legislation further provides that co-located LTAC hospitals certified on or before September 30, 1995 are exempt from the provisions of the 25 Percent Rule. The Secretary of HHS has issued a report to Congress indicating that it will continue to consider whether to further modify or extend the 25 Percent Rule.

Since these rules are complex and are based upon the volume of Medicare admissions and the source of those admissions, we cannot predict with any certainty the impact on our future revenues or operations from these regulations. If the 25 Percent Rule is fully implemented, it could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Healthcare reform and other regulations could adversely affect the liquidity of our customers, which could have an adverse effect on their ability to make timely payments to us for our products and services.

The ACA and other laws and regulations that limit or restrict Medicare and Medicaid payments to our customers could adversely impact the liquidity of our customers, resulting in their inability to pay us, or to timely pay us, for our products and services. In addition, if our customers fail to comply with applicable laws and regulations they could be subject to possible sanctions, including loss of licensure or eligibility to participate in reimbursement programs, as well as civil and criminal penalties. These developments could have a material adverse effect on our business, financial position, results of operations, and liquidity.

If we do not manage admissions in the IRFs that we operate or manage in compliance with a 60% threshold, reimbursement for services rendered by us in these facilities will be based upon less favorable rates.

IRFs are subject to a requirement that 60% or more of the patients admitted to the facilities have one or more of 13 specific conditions in order to qualify for IRF PPS. If that compliance threshold is not maintained, the IRF will be reimbursed at IPPS applicable to acute care hospitals. That likely would lead to reduced revenue in the IRFs that we operate or manage and also may lead customers of IRFs to attempt to renegotiate the terms of their contracts or terminate their contracts. Our inability to appropriately manage admissions in our IRFs in compliance with applicable thresholds could have a material adverse effect on our business, financial position, results of operations, and liquidity.

If we are found to have violated HIPAA, the HITECH Act, the Omnibus Rule or any other privacy and security regulations, we could be subject to sanctions, fines, damages and other additional civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial position, results of operation, and liquidity.

There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. The HIPAA privacy and security regulations protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend, and seek accounting of their own health information, and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. The HITECH Act strengthened HIPAA enforcement provisions and authorized state attorneys general to bring civil actions for HIPAA violations. It permits HHS to conduct audits of HIPAA compliance and impose penalties even if we did not know or reasonably could not have known about the violation and increases civil monetary penalty amounts up to$50,000 per violation with a maximum of $1.5 million in a calendar year for violations of the same requirement. The Omnibus Rule extended certain privacy and security regulations to business associates and their subcontractors that handle protected health information and imposed new requirements on HIPAA business associate contracts. The Omnibus Rule also clarified a covered entity’s notification and reporting requirements in the event of a breach of unsecured protected health information. This reporting obligation supplements state laws that also may require notification in the event of a breach of personal information.

If we are found to have violated the HIPAA privacy or security regulations or other federal or state laws protecting the confidentiality of patient health information, including but not limited to the HITECH Act and the Omnibus Rule, we could be subject to sanctions, fines, damages and other additional civil or criminal penalties, including litigation with those affected, which could

increase our liabilities, harm our reputation and have a material adverse effect on our business, financial position, results of operations, and liquidity.

Approximately 18% of our hospice revenues are derived from patients who reside in nursing centers. Changes in the laws and regulations regarding payments for hospice services and “room and board” provided to hospice patients residing in nursing centers could reduce our net patient service revenue and profitability.

For hospice patients receiving nursing center care under certain state Medicaid programs who elect hospice care under Medicare or Medicaid, the state must pay, in addition to the applicable Medicare or Medicaid hospice per diem rate, an amount equal to at least 95% of the Medicaid per diem nursing center rate for “room and board” furnished to the patient by the nursing center. The reduction or elimination of Medicare payments for hospice patients residing in nursing centers would significantly reduce our home health and hospice revenues and profitability. In addition, changes in the way nursing centers are reimbursed for “room and board” services provided to hospice patients residing in nursing centers could affect our ability to obtain referrals from nursing centers. A reduction in referrals from nursing centers would adversely affect our home health and hospice revenues and profitability.

Our indebtedness could adversely affect our cash flow and prevent us from fulfilling our obligations.

We have a substantial amount of indebtedness. As of December 31, 2017, we had total indebtedness of approximately $3.2 billion in addition to the availability of approximately $504 million under our asset-based loan revolving credit facility (the “ABL Facility”) (subject to a borrowing base and after giving effect to approximately $156 million of letters of credit outstanding on such date, including):

Our substantial amount of indebtedness could have important consequences. For example it could:

Our indebtedness may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

The terms of the Credit Facilities and the indentures governing our outstanding notes include a number of restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries, including restrictions on our and our restricted subsidiaries’ ability to, among other things:

The terms of the Credit Facilities also include certain additional restrictive covenants that impose significant operating and financial restrictions on us and our restricted subsidiaries, including restrictions on our and our restricted subsidiaries’ ability to, among other things:

In addition, the Credit Facilities require us to comply with financial covenants, including a maximum leverage ratio and a minimum fixed charge coverage ratio.

Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition, or other opportunities. The breach of any of these covenants or restrictions could result in a default under the Credit Facilities or the indentures governing our outstanding notes.

We, including our subsidiaries, have the ability to incur substantially more indebtedness, including senior secured indebtedness, which could further increase the risks associated with our leverage.

Subject to the restrictions in the Credit Facilities and the indentures governing our outstanding notes, we, including our subsidiaries, have the ability to incur significant additional indebtedness. Although the terms of the Credit Facilities and the indentures governing our outstanding notes include restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. If we incur significant additional indebtedness, the related risks that we face could increase.

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our business, financial position, results of operations, and liquidity.

Our outstanding indebtedness is collateralized by substantially all of our material assets including certain owned real property and is guaranteed by substantially all of our wholly owned, domestic material subsidiaries. The terms of the Credit Facilities and the indentures governing our outstanding notes include covenants and certain other provisions that limit acquisitions, annual capital expenditures and other activities. We were in compliance with the terms of the Credit Facilities and the indentures governing our outstanding notes at December 31, 2017. However, a downturn in operating earnings or events beyond our control could impair our ability to comply with the covenants contained within the Credit Facilities and the indentures governing our outstanding notes. If we anticipated a potential financial or other covenant violation, we would seek to amend the terms of the Credit Facilities and the indentures governing our outstanding notes or obtain relief from our lenders for the Credit Facilities and the holders of the outstanding notes, which likely would include costs to us, and such amendment or relief may not be on terms as favorable as those in the Credit Facilities or the outstanding notes, as applicable. Under those circumstances, there is also the possibility that we may not be able to amend the terms of the Credit Facilities and the indentures governing our outstanding notes and/or our lenders under the Credit Facilities or the holders of the outstanding notes would not grant relief to us.

If an event of default occurs under any of the agreements relating to our outstanding indebtedness, including the Credit Facilities and the indentures governing our outstanding notes, we may not be able to incur additional indebtedness under the Credit Facilities, and the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to become immediately due and payable. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, which could have a material adverse effect on our ability to continue to operate as a going concern. Further, if we are unable to repay, refinance, or restructure our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any declaration of acceleration or event of default under one debt instrument or under the Master Lease Agreement also could result in an event of default under one or more of our other debt instruments and the Master Lease Agreement and require us to immediately repay all amounts then outstanding under the Credit Facilities and the outstanding notes. Our inability to avoid or prevent a default under the financial or other covenants under our Credit Facilities or the indentures governing the notes could have a material adverse effect on our business, financial position, results of operations, and liquidity. Moreover, counterparties to some of our contracts material to our business may have the right to amend or terminate those contracts if we have an event of default or a declaration of acceleration under certain of our indebtedness, which could adversely affect our business, financial position, results of operations, and liquidity.

We may not be able to generate sufficient cash to pay rents related to our leased properties and service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

A substantial portion of our cash flows from operations is dedicated to the payment of rents related to our leased properties, as well as principal and interest obligations on our outstanding indebtedness. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial position, results of operations, and liquidity. Our ability to make payments on and to refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory, and other factors that are beyond our control.

If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments, or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. The terms of existing or future debt instruments may limit or prevent us from taking any of these actions.

Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial position at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial position, results of operations, and liquidity.

An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.

Borrowings under the Credit Facilities bear interest at variable rates. Interest rate changes could affect the amount of our interest payments and, accordingly, our future earnings and cash flows, assuming other factors are held constant. In addition, any refinancing of our debt could result in higher interest rates. Pursuant to the terms of the Credit Facilities, we have entered into interest rate swaps that fix a portion of our interest rate interest payments in order to reduce interest rate volatility; however, any interest rate swaps we enter into do not fully mitigate our interest rate risk. As a result, an increase in interest rates, whether because of an increase in market interest rates, increases due to refinancing our debt in the future, or an increase in our own cost of borrowing, would increase the cost of servicing our debt and could materially reduce our profitability. For example, a change of one-eighth percent in the interest rates for the Credit Facilities would increase or decrease annual interest expense by approximately $1 million.

Our failure to pay rent or otherwise comply with the provisions of our Master Lease Agreement could materially adversely affect our business, financial position, results of operations, and liquidity.

As of December 31, 2017, we leased 29 of our TC hospitals from Ventas under our Master Lease Agreement. Our failure to pay the rent or otherwise comply with the provisions of our Master Lease Agreement would result in an “Event of Default” under the Master Lease Agreement and also could result in a default under the Credit Facilities and, if repayment of the borrowings under the

Credit Facilities were accelerated, also under the indentures governing our outstanding notes. Upon an Event of Default, remedies available to Ventas include, without limitation, terminating the Master Lease Agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under the Master Lease Agreement, including the difference between the rent under the Master Lease Agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of the Master Lease Agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations, and liquidity.

For additional information on the Master Lease Agreement, see “Part I—Item 1—Business—Ventas Master Lease Agreement.”

Repayment of our indebtedness is dependent on cash flow generated by our subsidiaries.

Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment, or otherwise. Certain of our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions or other payments from our subsidiaries, we may be unable to make required principal and interest payments on our outstanding indebtedness.

Recently passed tax legislation may limit the deductibility of interest expense for taxes.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted (the “Tax Reform Act”). The Tax Reform Act may limit interest expense deductions for certain companies, like us, that are highly levered. A reduction in our interest expense deduction could result in us paying more federal income taxes or using our available federal net operating losses (“NOLs”) on an accelerated basis, which could materially adversely affect our financial position, results of operations, and liquidity.

The market price of our Common Stock may fluctuate significantly, and it may trade at prices below the price at which you purchased our Common Stock.

The market price of our Common Stock may fluctuate significantly from time to time as a result of many factors, including, but not limited to:

Broad market and industry factors may adversely affect the market price of our Common Stock, regardless of our actual operating performance. In addition, security holders often institute class action litigation following periods of volatility in the price of a company’s securities. If the market value of our Common Stock experiences adverse fluctuations and we become a party to this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to decline.

Future issuances or sales of our shares could adversely affect the market price of our Common Stock.

Future sales of our Common Stock, or securities convertible or exchangeable into shares of our Common Stock, in the public market, whether by us or our existing stockholders, future issuances of additional shares of Common Stock in connection with any

future acquisitions or pursuant to employee benefit plans and future issuances of shares of Common Stock upon exercise of options or warrants, or the perception that such sales, issuances, and/or exercises or conversions could occur, may adversely affect the market price of our Common Stock, which could decline significantly. Sales by our existing shareholders might also make it more difficult for us to raise equity capital by selling new Common Stock at a time and price that we deem appropriate.

We may issue additional Common Stock in the future in connection with capital raises, acquisitions, strategic transactions, or for other purposes. To the extent we issue substantial additional Common Stock, the ownership of our existing stockholders would be diluted and our earnings per share could be reduced, which may negatively affect the market price for our Common Stock.

We discontinued payment of dividends on our Common Stock in 2017 and we cannot predict if or when a dividend may be declared in the future.

Our Board elected, following the March 31, 2017 cash dividend payment on our Common Stock, to discontinue paying dividends on our Common Stock and will instead redirect funds to repay debt and invest in growth. There can be no assurance if or when we will pay a dividend on our Common Stock. Our ability and desire to pay dividends on our Common Stock are based on many factors, including the success of our operations, the level of demand for our services, the level of payments for our services, changes in healthcare regulations, and our liquidity needs that may vary substantially from our estimates. Many of these factors are beyond our control, and a change in any such factor could affect our ability or desire to pay dividends. In addition, the Credit Facilities and the indentures governing our outstanding notes limit our ability to pay dividends to stockholders and would prevent dividends if we are in default under any of those agreements. Our election to not pay a dividend could adversely affect the price of our Common Stock.

Our issuance of preferred stock may cause the Common Stock price to decline, which may negatively impact your investment.

Our Board is authorized to issue series of shares of preferred stock without any action on the part of our stockholders. Our Board also has the power, without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, conversion rights, dividend rights, preferences over Common Stock with respect to dividends or if we liquidate, dissolve, or wind up our business, and other terms. Any other preferred stock we may issue in the future will rank senior to all of our Common Stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding-up. If we issue cumulative preferred stock in the future that has preference over Common Stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue preferred stock with voting rights that dilute the voting power of Common Stock, the market price of Common Stock could decrease, which may negatively impact your investment.

The condition of the financial markets, including potential volatility and weakness in the equity, capital, and credit markets, could limit the availability and terms of debt and equity financing sources to fund the capital and liquidity requirements of our businesses.

From time to time, financial markets experienced significant disruptions. These disruptions may impact liquidity in the debt markets, make financing terms for borrowers less attractive and, in certain cases, significantly reduce the availability of certain types of debt financing. While we have not experienced any individual lender limitations to extend credit under the Credit Facilities, the obligations of each of the lending institutions in the ABL Facility are separate, and the availability of future borrowings under the ABL Facility could be impacted by volatility and disruptions in the financial credit markets or other events. We cannot assure you that a prolonged downturn in the credit markets or other circumstances will not impact our ability to access or refinance the Credit Facilities. Our inability to access or refinance the Credit Facilities could have a material adverse effect on our business, financial position, results of operations, and liquidity.

If we have future capital needs that cannot be funded from operating cash flows, any future issuances of equity securities may dilute the value of our Common Stock, and any additional issuances of debt may increase our leverage.

We may need additional capital if a substantial acquisition or other growth opportunity becomes available or if unexpected events occur or opportunities arise. We cannot assure you that additional capital will be available or available on terms favorable to us. If capital is not available, we may not be able to fund internal or external business expansion or respond to competitive pressures or other market conditions. If available, we may obtain additional capital through the public or private sale of debt or equity securities. However, our ability to access the public debt or equity capital markets, on terms favorable to us or at all, may be limited by disruptions in these markets or other events. If we sell equity securities, the transaction could be dilutive to our existing shareholders. Furthermore, these securities could have rights, preferences, and privileges more favorable than those of our Common Stock. If we incur additional debt, our leverage may increase and could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We could experience significant increases to our operating costs due to shortages of qualified nurses, therapists, home health and hospice employees, physicians and other healthcare professionals or union activity.

We, like other healthcare providers, have experienced difficulties in attracting and retaining qualified healthcare personnel in a highly competitive market, including nurses, therapists, home health and hospice employees, physicians, and other healthcare professionals. Our operations are particularly dependent on nurses, therapists, and home health and hospice employees for patient care. As the demand for our services continues to exceed the supply of available and qualified staff, our operators have been forced to offer more attractive wage and benefit packages to these professionals. Our difficulty in hiring and retaining qualified personnel has increased our average wage rates and may force us to increase our use of higher cost contract personnel. We expect to continue to experience increases in our labor costs primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel. Salaries, wages, and benefits were approximately 67% of our consolidated revenues for the year ended December 31, 2017. Our ability to manage labor costs will significantly affect our future operating results.

In addition, healthcare providers are experiencing a high level of union activity across the country. At December 31, 2017, approximately 2,400 of the employees at 12 of our facilities were unionized. Though we cannot predict the degree to which future union activity will affect us, there are continuing legislative proposals that could result in increased union activity. We could experience an increase in labor and other costs from such union activity. Furthermore, we could experience a disruption of our operations if our employees were to engage in a strike or other work stoppage.

Federal, state, and local employment-related laws and regulations could increase our cost of doing business and subject us to significant additional labor costs, back pay awards, fines, and lawsuits.

Our operations are subject to a variety of federal, state, and local employment-related laws and regulations, including, but not limited to, the Fair Labor Standards Act, which governs such matters as minimum wages, overtime pay, compensable time, recordkeeping, and other wage and hour matters, Title VII of the Civil Rights Act, the ACA, the Family Medical Leave Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act, the National Labor Relations Act, regulations of the Equal Employment Opportunity Commission, regulations of the Office of Civil Rights, regulations of the Department of Labor, regulations of state attorneys general, federal and state wage and hour laws, and a variety of similar laws enacted by federal, state and local governments that govern these and other employment-related matters. Because labor represents such a large portion of our operating costs, compliance with these evolving laws and regulations could substantially increase our cost of doing business while failure to do so could subject us to significant back pay awards, fines, and lawsuits. We are currently subject to class actions, employee-related claims, and other lawsuits and proceedings in connection with our operations, including, but not limited to, those related to alleged violations of federal and state wage and hour laws, wrongful discharge, retaliation, and illegal discrimination. These claims, lawsuits, and proceedings are in various stages of adjudication or investigation and involve a wide variety of claims and potential outcomes. In addition, federal, state and local proposals to introduce a system of mandated health insurance and flexible work time, provide for higher minimum wages, paid time off and other similar initiatives could, if implemented, adversely affect our operations. Our failure to comply with federal, state, and local employment-related laws and regulations could have a material adverse effect on our business, financial position, results of operations, and liquidity. See note 24 of the notes to consolidated financial statements for a description of pending legal proceedings, governmental reviews, audits, and investigations to which we are subject.

If we fail to comply with the terms of our Corporate Integrity Agreement, we could be subject to substantial monetary penalties or suspension or exclusion from participation in the Medicare and Medicaid programs.

We entered into the RehabCare CIA on January 11, 2016 with the OIG. The RehabCare CIA imposes monitoring, auditing (including by an independent review organization), reporting, certification, oversight, screening, and training obligations with which we must comply.

In the event of a breach of the RehabCare CIA, we could become liable for payment of certain stipulated penalties and/or our RehabCare subsidiaries could be excluded from participation in federal healthcare programs. The imposition of monetary penalties would adversely affect our profitability. The costs associated with compliance with the RehabCare CIA could be substantial and may be greater than we currently anticipate. Any breach or failure to comply with the RehabCare CIA, the imposition of substantial monetary penalties, or any suspension or exclusion from participation in federal healthcare programs, could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We could experience significant legal actions, fines, and increases in our operating costs if we fail to comply with state minimum staffing requirements.

Various states in which we operate have established minimum staffing requirements or may establish minimum staffing requirements in the future. Staffing requirements in some states are not contingent upon any additional appropriation of state funds in any budget act or other statute. Our ability to satisfy such staffing requirements will, among other things, depend upon our ability to attract and retain qualified healthcare professionals.

While we seek to comply with all applicable staffing requirements, the regulations in this area are complex and we 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 fines or other sanctions. In addition, private litigation involving these matters also has become more common.

Moreover, a portion of the staffing costs we incur is funded by states through Medicaid program appropriations or otherwise. If states do not appropriate sufficient additional funds to pay for any additional operating costs resulting from such minimum staffing requirements, our profitability may be materially adversely affected.

If we are unable to obtain professional and general liability insurance, or if professional and general liability insurance becomes more costly for us to obtain, our business may be adversely affected.

For professional and general liability risks, we maintain a self-insured retention per occurrence and Cornerstone insures all losses in excess of this retention up to specified limits per occurrence. Cornerstone maintains commercial reinsurance through unaffiliated commercial reinsurers for these losses in excess of our retention. On a per claim basis, coverage for losses in excess of those insured by Cornerstone are maintained through unaffiliated commercial reinsurance carriers. Cornerstone insures claims in all states up to a per occurrence limit without the benefit of any aggregate stop loss limit. We maintain professional and general liability insurance in amounts and coverage that management believes are sufficient for our operations. However, our insurance may not cover all claims against us or the full extent of our liability nor continue to be available at a reasonable cost. Moreover, the cost of reinsurance coverage maintained with unaffiliated commercial insurance carriers is costly and may continue to increase. There can be no assurances that in the future reinsurance will be available at a reasonable price or that we will be able to maintain adequate levels of professional and general liability insurance coverage. If we are unable to maintain adequate insurance coverage or are required to pay punitive damages that are uninsured, we may be exposed to substantial liabilities, which could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Certain events or circumstances could result in the impairment of our assets or other charges, including, without limitation, impairments of goodwill and identifiable intangible assets that result in material charges to earnings.

We review the carrying value of certain long-lived assets, finite lived intangible assets, and indefinite-lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period may be necessary, such as when the market value of our Common Stock is below equity carrying value. On an ongoing basis, we also evaluate, based upon the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If circumstances suggest that the recorded amounts of any of these assets cannot be recovered based upon estimated future cash flows, the carrying values of such assets are reduced to fair value. If the carrying value of any of these assets is impaired, we may incur a material charge to earnings. There has been a significant increase in activity in this area the past few years, including the selected items set forth below. See note 5 of the notes to consolidated financial statements for a complete discussion of recent impairment charges.

During the fourth quarter of 2017, we recorded a hospital division reporting unit goodwill impairment charge of $236 million in connection with our goodwill annual impairment test performed as of October 1, 2017. The impairment was required after cash flow projections and related mitigation strategies were refined after completing the first full year of operations under the LTAC Legislation. The refinement of the projections and mitigation strategies were finalized over the last three months of 2017 in connection with the preparation of our annual budget for 2018. We also tested the carrying value of our hospital division intangible assets and property and equipment and determined impairment charges of $3 million for a Medicare license and $1 million for property and equipment were also 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.

During the fourth quarter of 2017, we also recorded an asset impairment charge of $4 million related to previously acquired home health and hospice certificates of need as part of the annual indefinite-lived intangible assets impairment review at October 1, 2017. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

During the year ended December 31, 2017, we recorded asset impairment charges of $135 million related to the previously acquired RehabCare trade name ($98 million) and customer relationship intangible asset ($37 million) due to the expected loss of affiliated contracts related to the SNF Divestiture and cancellation of non-affiliated contracts. The fair value of the trade name was measured using Level 3 inputs, such as projected revenues and royalty rate. The fair value of the customer relationship intangible asset was measured using Level 3 inputs, such as discounted projected future operating cash flows.

In connection with (1) the October 2016 sale of 12 TC hospitals to a group of entities operating under the name “Curahealth” (the “Curahealth Disposal”), (2) the closure of three TC hospitals in the third quarter of 2016, (3) a reduction in revenues associated with revenue rate reductions announced by CMS on August 2, 2016, (4) continued increases in labor costs during 2016, and (5) a refinement of the impact of the LTAC Legislation that became effective for the majority of our TC hospitals on September 1, 2016 (collectively, the “Hospital Division Triggering Event”), we were required to assess the recoverability of our hospital division reporting unit goodwill in the third quarter of 2016.

As a result of the Hospital Division Triggering Event, we determined that a goodwill impairment charge aggregating $261 million was necessary for the third quarter of 2016. We also assessed the recoverability of the hospital division intangible assets and property and equipment and concluded a property and equipment impairment charge of $3 million was necessary.

During the year ended December 31, 2016, we also recorded impairment charges in connection with the Curahealth Disposal aggregating $33 million, of which $20 million was related to property and equipment, and $13 million was related to goodwill and other intangible assets. In addition, in the first quarter of 2016, we also recorded a property and equipment impairment charge of $8 million under the held and used accounting model related to the planned Curahealth Disposal.

Future adverse changes in the operating environment and related key assumptions used to determine the fair value of our reporting units and indefinite-lived intangible assets or a decline in the value of our Common Stock may result in future impairment charges for a portion or all of these assets. Moreover, the value of our goodwill and indefinite-lived intangible assets could be negatively impacted by potential healthcare reforms. Any such impairment charges could have a material adverse effect on our business, financial position, and results of operations.

Delays in collection of our accounts receivable could adversely affect our business, financial position, results of operations, and liquidity.

Prompt billing and collection are important factors in our liquidity. Billing and collection of our accounts receivable are subject to the complex regulations that govern Medicare and Medicaid reimbursement and rules imposed by nongovernment payors. Our inability, or the inability of our customers, to bill and collect on a timely basis pursuant to these regulations and rules could subject us to payment delays that could negatively impact our business, financial position, results of operations, and liquidity. Further, the timing of payments made under the Medicare and Medicaid programs is subject to governmental budgetary constraints, resulting in an increased period of time between submission of claims and subsequent payment under specific programs, most notably under the Medicaid and Medicaid Managed programs, which typically pay claims approximately 60 to 90 days slower than the average TC hospital claim. Reimbursement from the Medicaid and Medicaid Managed programs accounted for 7% and 3% of our revenues, respectively, for the fiscal year ended December 31, 2017. In addition, we may experience delays in reimbursement as a result of the failure to receive prompt approvals related to change of ownership applications for acquired or other facilities or from delays caused by our or other third parties’ information system failures. Significant delays in billing and/or collections may adversely affect the borrowing base under the ABL Facility, potentially limiting the availability of funds under the ABL Facility.

We are exposed to the credit risk of our payors and customers, which in the future may cause us to make larger allowances for doubtful accounts or incur bad debt write-offs.

Due to weak economic and industry conditions, Medicare and Medicaid reimbursement reductions, shifts in healthcare utilization, and other factors, commercial payors and customers may default on their payments to us, and individual patients may default on co-payments and deductibles for which they are responsible under the terms of either commercial insurance programs or Medicare. Although we review the credit risk of our commercial payors and customers regularly, such risks may arise from events or circumstances that are difficult to anticipate or control, such as a general economic downturn or changes in Medicare or Medicaid reimbursement. If our payors or customers default on their payments to us in the future, we may have to record higher provisions for allowances for doubtful accounts or incur bad debt write-offs, both of which could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Any acquisition, investment, or strategic alliance that we have made or may make in the future may use significant resources, may be unsuccessful, and could expose us to unforeseen liabilities.

We intend to continue to selectively pursue strategic acquisitions of, investments in, and strategic alliances with, home health and hospice operations, IRFs, hospitals, and rehabilitation operations, particularly where an acquisition may assist us in scaling our operations more rapidly and efficiently than internal growth. Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses, amortization of certain intangible assets of acquired companies, dilutive issuances of equity securities, and expenses that could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Acquisitions, investments, and strategic alliances involve numerous risks. These risks include:

In addition to acquisitions, we also may pursue strategic opportunities involving the construction of new facilities. The construction of new facilities involves numerous risks, including construction delays, cost over-runs, and the satisfaction of zoning and other regulatory requirements. We may be unable to operate newly constructed facilities profitably, and such facilities may involve significant cash expenditures, debt incurrence, additional operating losses, and expenses that could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Our participation in partnerships may negatively impact our business, financial position, results of operations, and liquidity.

As of December 31, 2017, we operated 24 of our facilities and three home health and hospice agencies through partnerships with unrelated parties. We are the majority owner of most of those partnerships. We may enter into additional partnerships with unrelated parties in the future to acquire, own, or operate IRFs, home health and hospice services, and/or hospitals. Although, we typically control the day-to-day activities of these partnerships, the partnership agreements with our partners often include provisions reserving certain major actions for super-majority approval. Failure to obtain, or delays or substantial time and costs involved in obtaining, our partners’ approval rights, if any, could adversely affect our ability to operate such partnerships, and could have a material adverse effect on such ventures or our business, financial position, results of operations, and liquidity more generally. Such actions may include entering into a new business activity or ceasing an existing activity, taking on substantial debt, admitting new partners, and terminating the venture. In addition, the partnership agreements may restrict our ability to derive cash from the partnerships and affect our ability to transfer our interest in the partnerships. We may be required to provide additional capital to a partnership if our partner defaults on its capital obligations. Our restrictions to derive cash, transfer our interests, or provide additional funding to these partnerships could have a material adverse effect on our business, financial position, results of operations, and liquidity.

If we lose our key management personnel, we may not be able to successfully manage our business and achieve our objectives.

Our future success depends in large part upon the leadership and performance of our executive management team and key employees and our ability to retain and motivate these individuals. Competition for these individuals is intense and there can be no assurance that we will retain our key officers and employees or that we can attract or retain other highly qualified individuals in the future. If we lose the services of one or more of our key officers or employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business, achieve our business objectives, or replace them with similarly qualified personnel. If we lose key personnel, we may be unable to replace them with personnel of comparable experience, reputation in the industry, or skills. The loss of any of our key officers or employees could have a material adverse effect on our business, financial position, results of operations, and liquidity.

If we fail to attract patients and compete effectively with other healthcare providers or if our referral sources fail to view us as an attractive or cost-effective post-acute healthcare provider, our revenues and profitability may decline.

The post-acute healthcare services industry is highly competitive. Our Kindred at Home and Kindred Rehabilitation Services divisions compete with national, regional, and local home health, hospice, community care and rehabilitation service providers within our markets. Our Kindred at Home and Kindred Rehabilitation Services divisions further operate in industries with little or no barriers to entry in which other healthcare providers may elect to expand their services to include home health, hospice care, community care, rehabilitation or similar services. Several of these competitors may have greater financial and other resources than us, may be more established in the markets in which we compete, and may be willing to provide services at lower prices. Our hospitals and IRFs face competition from healthcare providers that provide services comparable to those offered by our hospitals and IRFs. Many competing hospitals or IRFs are larger and more established than us. Some of our competitors operate newer facilities and may offer services not provided by us or are operated by entities having greater financial and other resources than us. We cannot assure you that increased competition in the future will not adversely affect our business, financial position, results of operations, and liquidity.

Our success is heavily dependent on referrals from physicians, hospitals, IRFs, nursing centers, assisted living facilities, managed care companies, insurance companies, and other patient referral sources in the communities where we provide services, as well as our ability to maintain good relations with these referral sources. Our referral sources are not obligated to refer business to us and may refer business to other healthcare providers. We believe many of our referral sources refer patients to us as a result of the quality of our patient services and our efforts to establish and build a relationship with them. In addition, many of our third party referral sources are becoming increasingly focused on controlling PAC costs, including as a result of bundled payment initiatives, population health management activities, and incentives placed on short-term acute care hospitals to reduce spending on Medicare fee-for-service patients over 90-day episodes of care. If any of our facilities fail to provide or maintain a reputation for providing high quality or cost-effective care, or are perceived to provide lower quality or less cost-effective care than comparable facilities within the same geographic area, or customers of our home health, hospice services, community care, or rehabilitation therapy perceive that they could receive higher quality or more cost-effective services from other providers, our ability to attract and retain patients and customers could be adversely affected. We believe that the perception of our quality of care by potential patients or their families seeking our services is influenced by a variety of factors, including physician and other healthcare professional referrals, community information and referral services, electronic media, newspapers and other print, and results of patient surveys, recommendations from family and friends, and published quality care statistics compiled by CMS or other industry data. If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships or if we are perceived by our referral sources for any reason as not providing high quality or cost-effective patient care, our patient volumes and the quality of our patient mix could suffer, and our revenue and profitability could decline.

Failure to maintain the security and functionality of our information systems, or to defend against or otherwise prevent a cybersecurity attack or breach, could adversely affect our business, financial position, results of operations and liquidity.

We are dependent on the proper function and availability of our information systems and related software programs. Though we have taken steps to protect the safety and security of our information systems and the patient health information and other data maintained within those systems, there can be no assurance that our safety and security measures and disaster recovery plan will prevent damage to, or interruption or breach of, our information systems and operations. Because the techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our employees or contractors.

As a result of our acquisition activities, we have acquired additional information systems. We have been taking steps to reduce the number of systems we operate, have upgraded and expanded our information systems capabilities, and are gradually migrating to fewer information systems. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in technology, evolving industry and regulatory standards, and changing customer preferences.

In addition, certain software supporting our business and information systems are licensed to us by third party software developers. Our inability, or the inability of these developers, to continue to maintain and upgrade our information systems and software could disrupt or reduce the efficiency of our operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems also could disrupt or reduce the efficiency of our operations.

A cybersecurity attack or other incident that bypasses our information systems security could cause a security breach that may lead to a material disruption to our information systems infrastructure or business and may involve a significant loss of business or patient health information. If a cybersecurity attack or other unauthorized attempt to access our systems or facilities were to be successful, it could result in the theft, destruction, loss, misappropriation, or release of confidential information or intellectual property, and could cause operational or business delays that may materially impact our ability to provide various healthcare services. Any successful cybersecurity attack or other unauthorized attempt to access our systems or facilities also could result in negative publicity which could damage our reputation or brand with our patients, referral sources, payors, or other third parties and could subject us to substantial sanctions, fines and damages and other additional civil and criminal penalties under HIPAA, HITECH, the Omnibus Rule and other federal and state privacy laws, in addition to litigation with those affected.

Failure to maintain the security and functionality of our information systems and related software, or to defend a cybersecurity attack or other attempt to gain unauthorized access to our systems, facilities or patient health information could expose us to a number of adverse consequences, the vast majority of which are not insurable, including but not limited to disruptions in our operations, regulatory and other civil and criminal penalties, fines, investigations and enforcement actions (including, but not limited to, those arising from the SEC, Federal Trade Commission, the OIG or state attorneys general), fines, litigation with those affected by the data breach, loss of customers, disputes with payors and increased operating expense, which either individually or in the aggregate could have a material adverse effect on our business, financial position, results of operations, and liquidity.

There are risks of business disruption associated with new business systems and technology initiatives.

In the ordinary course of business, we implement new business and information technology systems for our various businesses. Implementation disruptions or the failure of new systems and technology initiatives to operate in accordance with expectations could have a material adverse impact on our financial results and operations with respect to our operations.

We have limited operational and strategic flexibility since we lease a substantial number of our facilities.

We lease a substantial number of our facilities from Ventas and other third parties. Under our leases, we generally are required to operate continuously our leased properties as a provider of healthcare services. In addition, these leases generally limit or restrict our ability to assign the lease to another party. Our failure to comply with these lease provisions would result in an event of default under the leases and subject us to material damages, including potential defaults under the Credit Facilities and the indentures governing our outstanding notes. Given these restrictions, we may be forced to continue operating unprofitable facilities to avoid defaults under our leases. For additional information on our Master Lease Agreement, see “Part I—Item 1—Business—Ventas Master Lease Agreement.”

Possible changes in the acuity of patients, as well as payor mix and payment methodologies, may significantly affect our profitability.

The sources and amount of our revenues are determined by a number of factors, including the occupancy rates of our facilities, the length of stay, the payor mix of patients, rates of reimbursement among payors, and patient acuity. Changes in patient acuity as well as payor mix among private pay, third party payor, Medicare, and Medicaid may significantly affect our profitability. In particular, any significant decrease in our population of high-acuity patients or any significant increase in our Medicaid population could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We may be unable to reduce costs to offset completely any decreases in our revenues.

Reduced levels of occupancy in our facilities or use of our services and reductions in reimbursements from Medicare, Medicaid, or other payors would adversely impact our revenues and liquidity. We may be unable to put in place corresponding reductions in costs in response to declines in census or other revenue shortfalls. The inability to timely adjust our operations to address a decrease in our revenues could have a material adverse effect on our business, financial position, results of operations, and liquidity.

Continued deficit spending by the federal government, an economic downturn and state budget pressures may result in a reduction in reimbursement and covered services.

The existing federal deficit, as well as deficit spending by federal and state governments as the result of adverse developments in the economy or other reasons, can lead to continuing pressure to reduce governmental expenditures for other purposes, including government-funded programs in which we participate, such as Medicare and Medicaid. Such actions in turn may adversely affect our results of operations.

An economic downturn could have a detrimental effect on our revenues. Historically, state budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services in the states in which we operate. In addition, an economic downturn coupled with sustained unemployment may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates.

Many states have CON laws or other regulatory provisions that may adversely impact our ability to expand into new markets and thereby limit our ability to grow and increase net patient service revenue.

Many states have enacted CON laws that require prior state approval to open new healthcare facilities or expand services at existing facilities. Those laws require some form of state agency review or approval before a healthcare provider may add new services or undertake significant capital expenditures. Our failure or inability to obtain any necessary approvals could adversely affect our ability to expand into new markets and to expand our services and facilities in existing markets.

Terrorist attacks, pandemics, or natural disasters could negatively impact our business, financial position, results of operations, and liquidity.

Terrorist attacks, pandemics, or acts of nature, such as floods, fires, hurricanes, tornadoes, or earthquakes, may cause damage or disruption to us, our employees, and our facilities, which could have an adverse impact on our patients. In order to provide care for our patients, we are dependent upon consistent and reliable delivery of food, pharmaceuticals, power, and other products to our facilities and the availability of employees to provide services at our facilities. If the delivery of goods or the ability of employees to reach our facilities were interrupted due to a natural disaster, pandemic, or a terrorist attack, it could have a significant negative impact on our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more facilities, which would be costly and would involve substantial risks to our operations and potentially to our

patients. The impact of natural disasters, pandemics, and terrorist attacks is inherently uncertain. Such events could severely damage or destroy one or more of our facilities, harm our business, reputation, and financial performance or otherwise have a material adverse effect on our business, financial position, results of operations, and liquidity.

The inability or failure of management in the future to conclude that we maintain effective internal control over financial reporting, or the inability of our independent registered public accounting firm to issue a report of our internal control over financial reporting, could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We report annually on the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm also must audit the effectiveness of our internal control over financial reporting on an annual basis. If we fail to have, or management or our independent registered public accounting firm is unable to conclude that we maintain, effective internal controls and procedures for financial reporting, we could be unable to provide timely and reliable financial information as required by the federal securities laws, which could have a material adverse effect on our business, financial position, results of operations, and liquidity. Different interpretations of accounting principles or changes in GAAP could have a material adverse effect on our business, financial position, results of operations, and liquidity.

GAAP is complex, continually evolving and changing, and may be subject to varied interpretation by third parties, including the SEC. Such varied interpretations could result from differing views related to specific facts and circumstances. Differences in interpretation of GAAP or changes in GAAP could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The new FASB lease accounting standard is expected to result in a significant increase in balance sheet assets and liabilities.

The Financial Accounting Standards Board (the “FASB”) has promulgated a new accounting standard that will require public companies to include virtually all lease obligations on their balance sheets for fiscal years beginning after December 15, 2018, with early adoption permitted. We will not elect early adoption, and as such, we will be required to adopt this new leasing standard as of January 1, 2019 with a modified retrospective application to previously issued annual and interim financial statements for 2018 and 2017. Given the large number of TC hospitals, IRFs, and home health and hospice locations that we lease, the adoption of this accounting standard is expected to result in a significant increase in balance sheet assets and liabilities.

For information concerning the hospitals and IRFs operated by us, see “Part I—Item 1—Business—Hospital Division—Hospital Facilities,” and “Part I—Item 1—Business—Ventas Master Lease Agreement.” We believe that our facilities are adequate for our future needs in such locations. All borrowings under the Credit Facilities are secured by a first priority lien and second priority lien on all eligible real property, which is held in fee.

Our corporate headquarters is located in a 430,000 square foot building in Louisville, Kentucky.

We are subject to various federal, state, and local laws and regulations governing the use, discharge, and disposal of hazardous materials, including medical waste products. Compliance with these laws and regulations is not expected to have a material adverse effect on us. It is possible, however, that environmental issues may arise in the future that we cannot predict.

We provide services in a highly regulated industry and are 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 our obligation to self-report suspected violations of law). We 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 our businesses in the future. These matters could potentially subject us 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 our business, financial position, results of operations, and liquidity. See note 24 of the notes to consolidated financial statements for a description of pending legal proceedings, governmental reviews, audits, and investigations to which we are subject.

Six purported class action complaints related to the Merger have been filed on behalf of putative classes of our public stockholders (the “Merger Complaints”). Four of these complaints were filed in the United States District Court for the District of Delaware: Sehrgosha v. Kindred Healthcare, Inc., et al., filed on February 8, 2018; Carter v. Kindred Healthcare, Inc., et al., filed on February 14, 2018; Rosenfeld v. Kindred Healthcare, Inc., et al., filed on February 15, 2018; and Einhorn v. Kindred Healthcare, Inc., et al., filed on February 21, 2018. The remaining two complaints were filed in the United States District Court for the Western District of Kentucky: Tompkins v. Kindred Healthcare, Inc., et al., filed on February 9, 2018; and Buskirk v. Kindred Healthcare, Inc., et al., filed on February 13, 2018. We and individual members of the Board are named as defendants in each of the actions. The Tompkins action also names as defendants TPG, WCAS, Humana, Parent, HospitalCo Parent and Merger Sub. The Merger Complaints generally allege that the defendants violated the Exchange Act by failing to disclose material information in our preliminary proxy statement filed on February 5, 2018. The Merger Complaints seek, among other things, injunctive relief prohibiting the stockholder vote to approve the Merger and unspecified compensatory damages and attorneys’ fees. We deny the allegations made in the Merger Complaints and will defend these actions and any related claims vigorously.

A shareholder derivative action (the “Complaint”) was previously pending against certain of the Company’s current and former officers and directors in circuit court for Jefferson County, Kentucky. The Complaint also named the Company as a nominal defendant. The Complaint alleged that the named current and former officers and directors 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, policies, 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 Complaint was settled in January 2018 in exchange for the Company’s agreement to pay plaintiff $950,000 in fees and expenses.

Our Common Stock is quoted on the New York Stock Exchange (the “NYSE”) under the ticker symbol “KND.” The prices in the table below, for the calendar quarters indicated, represent the high and low sale prices for our Common Stock as reported on the NYSE.

Our Credit Facilities and the indentures governing our outstanding notes contain covenants that limit, among other things, our ability to pay dividends. Any determination to pay dividends depends upon our results of operations, financial position, our liquidity needs, compliance with our Credit Facilities, and the indentures governing our outstanding notes, restrictions imposed by applicable laws, and other factors deemed relevant by our Board.

During 2016, we paid cash dividends of $0.12 per share of Common Stock on each of the following dates: December 9, 2016, September 2, 2016, June 10, 2016 and April 1, 2016. During 2017, we paid a cash dividend of $0.12 per share of Common Stock on March 31, 2017 to shareholders of record as of the close of business on March 13, 2017. Our Board elected to discontinue paying dividends on our Common Stock following the March 31, 2017 cash dividend payment and will instead redirect funds to repay debt and invest in growth.

See “Part III—Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for disclosures regarding our equity compensation plans.

The following graph summarizes the cumulative total return to shareholders of our Common Stock from December 31, 2012 to December 31, 2017 compared to the cumulative total return on the Standard & Poor’s 500 Stock Index (the “S&P Composite Index”) and the Standard & Poor’s 1500 Health Care Index (the “S&P 1500 Health Care Index”). The graph assumes an investment of $100 in each of our Common Stock, the S&P Composite Index, and the S&P 1500 Health Care Index on December 31, 2012 and also assumes the reinvestment of all cash dividends.

On June 30, 2017, we entered into a definitive agreement with BlueMountain related to the SNF Divestiture. The results of operations and the losses or impairments associated with the SNF Divestiture have been reclassified as discontinued operations, net of income taxes, in the accompanying consolidated statement of operations for all historical periods.

The results of operations for the historical periods included in the following table are not necessarily indicative of the results to be expected for future periods. In addition, see “Part I – Item 1A – Risk Factors” for a discussion of risk factors that could impact our future results of operations.

	Year ended December 31,
(In thousands, except per share amounts)	2017			2016			2015			2014			2013
Statement of Operations Data:
Revenues	$	6,034,123		$	6,292,529		$	6,119,218		$	4,110,991		$	3,908,814
Salaries, wages and benefits		3,318,885			3,392,263			3,233,047			2,097,651			2,022,907
Supplies		303,923			343,065			342,075			255,973			249,319
Building rent		257,516			264,306			257,221			193,433			178,682
Equipment rent		34,856			39,929			38,590			35,819			37,335
Other operating expenses		640,764			656,792			639,608			443,861			432,401
General and administrative expenses		1,069,764			1,107,648			1,210,787			823,512			745,708
Other (income) expense		(3,460	)		(5,066	)		(2,358	)		65			434
Litigation contingency expense		7,435			2,840			138,648			4,600			-
Impairment charges (a)		381,179			314,729			24,757			-			77,084
Restructuring charges (b)		84,861			96,126			12,618			-			-
Depreciation and amortization		104,805			131,819			129,246			125,580			126,802
Interest expense		241,411			234,612			232,351			168,733			107,997
Investment income		(3,499	)		(3,108	)		(2,756	)		(3,963	)		(3,999	)
		6,438,440			6,575,955			6,253,834			4,145,264			3,974,670
Loss from continuing operations before income taxes		(404,317	)		(283,426	)		(134,616	)		(34,273	)		(65,856	)
Provision (benefit) for income taxes		(157,116	)		314,262			(51,714	)		(7,904	)		(16,290	)
Loss from continuing operations		(247,201	)		(597,688	)		(82,902	)		(26,369	)		(49,566	)
Discontinued operations, net of income taxes:
Income (loss) from operations		(16,854	)		(6,192	)		30,804			(22,365	)		(31,382	)
Gain (loss) on divestiture of operations		(379,260	)		(6,744	)		1,244			(12,698	)		(83,887	)
Income (loss) from discontinued operations		(396,114	)		(12,936	)		32,048			(35,063	)		(115,269	)
Net loss		(643,315	)		(610,624	)		(50,854	)		(61,432	)		(164,835	)
Earnings attributable to noncontrolling interests:
Continuing operations		(42,176	)		(34,847	)		(26,044	)		(1,275	)		(359	)
Discontinued operations		(12,861	)		(18,759	)		(16,486	)		(17,130	)		(3,298	)
		(55,037	)		(53,606	)		(42,530	)		(18,405	)		(3,657	)
Loss attributable to Kindred	$	(698,352	)	$	(664,230	)	$	(93,384	)	$	(79,837	)	$	(168,492	)
Amounts attributable to Kindred stockholders:
Loss from continuing operations	$	(289,377	)	$	(632,535	)	$	(108,946	)	$	(27,644	)	$	(49,925	)
Income (loss) from discontinued operations		(408,975	)		(31,695	)		15,562			(52,193	)		(118,567	)
Net loss	$	(698,352	)	$	(664,230	)	$	(93,384	)	$	(79,837	)	$	(168,492	)
Loss per common share:
Basic:
Loss from continuing operations	$	(3.31	)	$	(7.29	)	$	(1.29	)	$	(0.47	)	$	(0.96	)
Discontinued operations:
Income (loss) from operations		(0.34	)		(0.28	)		0.17			(0.68	)		(0.66	)
Gain (loss) on divestiture of operations		(4.33	)		(0.08	)		0.01			(0.21	)		(1.61	)
Income (loss) from discontinued operations		(4.67	)		(0.36	)		0.18			(0.89	)		(2.27	)
Net loss	$	(7.98	)	$	(7.65	)	$	(1.11	)	$	(1.36	)	$	(3.23	)
Diluted:
Loss from continuing operations	$	(3.31	)	$	(7.29	)	$	(1.29	)	$	(0.47	)	$	(0.96	)
Discontinued operations:
Income (loss) from operations		(0.34	)		(0.28	)		0.17			(0.68	)		(0.66	)
Gain (loss) on divestiture of operations		(4.33	)		(0.08	)		0.01			(0.21	)		(1.61	)
Income (loss) from discontinued operations		(4.67	)		(0.36	)		0.18			(0.89	)		(2.27	)
Net loss	$	(7.98	)	$	(7.65	)	$	(1.11	)	$	(1.36	)	$	(3.23	)

Shares used in computing loss per common share:
Basic		87,525			86,800			84,558			58,634			52,249
Diluted		87,525			86,800			84,558			58,634			52,249
Cash dividends declared and paid per common share	$	0.12		$	0.48		$	0.48		$	0.48		$	0.24
Financial Position:
Working capital	$	483,220		$	798,025		$	389,687		$	450,408		$	366,387
Total assets		5,232,717			6,112,724			6,468,259			5,619,428			3,918,144
Long-term debt		3,146,972			3,215,062			3,086,348			2,818,995			1,551,666
Equity		347,762			1,041,521			1,706,047			1,485,972			1,121,216

You should read the following discussion together with the selected financial data in Item 6 and our consolidated financial statements and the notes thereto included in this Annual Report on Form 10-K. All financial and operating data presented in Items 6 and 7 reflect the continuing operations of our business for all periods presented unless otherwise indicated.

We are a healthcare services company that through our subsidiaries operates a home health, hospice, and community care business, TC hospitals, IRFs, and a contract rehabilitation services business across the United States. We are organized into three operating divisions: the Kindred at Home division, the hospital division, and the Kindred Rehabilitation Services division. At December 31, 2017, our (1) Kindred at Home division primarily provided home health, hospice, and community care services from 608 sites of service in 40 states, (2) hospital division operated 75 TC hospitals (5,553 licensed beds) in 17 states, and (3) Kindred Rehabilitation Services division operated 19 IRFs (995 licensed beds), 99 ARUs and provided rehabilitation services primarily in hospitals and long-term care settings in 45 states.

The operating results of acquired businesses have been included in our accompanying consolidated financial statements from the respective acquisition dates.

On June 30, 2017, we entered into a definitive agreement with BlueMountain under which we agreed to sell our skilled nursing facility business for $700 million in cash (previously defined as the SNF Divestiture). The SNF Divestiture included 89 nursing centers with 11,308 licensed beds and seven assisted living facilities with 380 licensed beds in 18 states. During 2017, we completed the sale of 81 skilled nursing facilities and five assisted living facilities on various dates for gross sales proceeds of approximately $664 million. We, through an escrow agent, paid Ventas $647 million for 34 of the Ventas Properties in connection with the closings that occurred during 2017. Additionally, we paid $53 million to an escrow agent, who paid Ventas, for two facilities to be sold in 2018. The $76 million difference between $641 million of net cash proceeds and $717 million paid to Ventas and another landlord is included in the sale of assets in investing activities in the accompanying consolidated statement of cash flows. See notes 6 and 7 of the notes to consolidated financial statements.

We have previously announced that we have reached an agreement with BlueMountain and the relevant landlord to close four leased nursing centers and one leased assisted living facility in Massachusetts. None of the original purchase price with BlueMountain was allocated to these five facilities. We have transferred the day-to-day operations of these facilities to a third party and expect the closing of these facilities to be completed in the second quarter of 2018.

The completion of the remainder of the sales is subject to customary conditions to closing, including the receipt of all licensure, regulatory and other approvals. We expect that the remainder of the sales will occur in phases as regulatory and other approvals are received. We expect that all of the closings will be completed during 2018.

During 2017, we recorded $379 million of pretax charges related to the SNF Divestiture, including a $265 million lease termination charge, $76 million of transaction and other costs, a $18 million loss on sale-leaseback transaction, and $20 million of retention costs. During 2016, we recorded $7 million of pretax charges related to the SNF Divestiture, including $3 million of transaction costs and $4 million of retention costs.

In October 2017, in connection with the review of our insurance programs as part of the SNF Divestiture, we restructured the funding and retention mechanisms of recent policy years of our professional liability and workers compensation insurance programs (previously defined as the “Insurance Restructuring”). With respect to professional liability, certain funding mechanisms and reinsurance agreements were modified such that approximately $106 million of cash deposits maintained by Cornerstone and $4 million of other cash deposits were released to the parent company. In addition, approximately $115 million of workers compensation restricted cash collateral deposits were replaced with letters of credit and approximately $21 million of other workers compensation cash deposits were released to the parent company. In aggregate, we used the approximately $246 million generated from the Insurance Restructuring, and $35 million of the distributions received from Cornerstone as a result of improved underwriting results during the last two quarters of 2017 to repay in its entirety our ABL Facility balance and to increase cash reserves. We incurred $10 million of contract cancellation costs and professional fees during 2017 in connection with the Insurance Restructuring.

To finance the Gentiva Merger, we issued 172,500 tangible equity units (the “Units”). Each Unit was 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. On December 1, 2017, the remaining holders of 87,379 Purchase Contracts were mandatorily redeemed. As a result, holders thereof received 50.6329 shares of Common Stock per Purchase Contract, resulting in approximately 4.4 million shares of Common Stock being issued on such date. Holders of our Mandatory Redeemable Preferred Stock were previously entitled to receive a quarterly “preferred stock installment payment,” in cash, shares of our Common Stock, or a combination thereof. The final preferred stock installment payment date was December 1, 2017, the same date all shares of Mandatorily Redeemable Preferred Stock were redeemed as planned pursuant to their terms.

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

At the effective time of the Gentiva Merger, each share of Gentiva Common Stock issued and outstanding immediately prior to the effective time of the Gentiva Merger (other than shares held by us, 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 the Gentiva Merger Consideration.

On November 11, 2014, we entered into an agreement to acquire Centerre. On January 1, 2015, we completed the Centerre Acquisition for a purchase price of approximately $195 million in cash. At the time of the Centerre Acquisition, Centerre operated 11 IRFs with 614 beds in partnership with some of the nation’s leading acute care hospital systems.

During 2017, we closed seven TC hospitals and 16 home health and hospice locations and recorded write-offs of property and equipment of $3 million, indefinite-lived intangible assets of $12 million, leasehold assets of $2 million and lease termination charges of $33 million.

During 2017, we also sold four community care facilities for $4 million in cash and sold a building within the Kindred at Home division for $1 million in cash.

During 2016, we closed three TC hospitals and seven home health and hospice locations and recorded write-offs of property and equipment of $7 million, indefinite-lived intangible assets of $9 million and leasehold liabilities of $5 million.

During 2015, we either sold or closed 22 home health and hospice locations and recorded write-offs of property and equipment of $1 million, indefinite-lived intangible assets of $9 million and goodwill of $3 million, which was based upon the relative fair value of the sold home health and hospice locations.

All of the previously mentioned charges were recorded as restructuring charges in the accompanying consolidated statement of operations for all periods. See notes 6 and 8 of the notes to consolidated financial statements.

During 2016, we also completed the Curahealth Disposal for $21 million in net cash proceeds, we acquired five TC hospitals operated by Select Medical Holdings Corporation (“Select”) and sold three of our TC hospitals to Select, and sold a hospital division medical office building for $4 million. See notes 4, 5 and 6 of the notes to consolidated financial statements.

Our discussion and analysis of financial condition and results of operations are based upon our 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. We rely on historical experience and on various other assumptions that we believe 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.

We believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

We have agreements with third party payors that provide for payments to each of our 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, we consider 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. Based upon the termination of RehabCare customers and litigation associated with the collection of past due accounts, we recorded a provision for doubtful accounts of $23 million in 2017 and $13 million in 2015.

The provision for doubtful accounts totaled $46 million for 2017, $19 million for 2016 and $33 million for 2015. The increase in 2017 was primarily attributable to the previously mentioned RehabCare provision for doubtful accounts of $23 million.

such that approximately $106 million of cash deposits maintained by Cornerstone and $4 million of other cash deposits were released to the parent company. In addition, approximately $115 million of workers compensation restricted cash collateral deposits were replaced with letters of credit and approximately $21 million of other workers compensation cash deposits were released to the parent company. In aggregate, we used the approximately $246 million generated from the Insurance Restructuring, and $35 million of the distributions received from Cornerstone as a result of improved underwriting results during the last two quarters of 2017 to repay in its entirety our ABL Facility balance and to increase cash reserves. We incurred $10 million of contract cancellation costs and professional fees during 2017 in connection with the Insurance Restructuring.

As a result of the Insurance Restructuring, on a per-claim basis we maintain a self-insured retention and Cornerstone insures all losses in excess of this retention. Cornerstone maintains commercial reinsurance through unaffiliated commercial reinsurers for these losses in excess of our retention. The Insurance Restructuring had no impact upon the financial risk transfer aspect of Cornerstone’s reinsurance agreements with its third party reinsurers. As a result of the Insurance Restructuring, on a per-claim basis we maintain a deductible under commercial insurance policies for workers compensation which provide coverage up to statutory limits in each state. The Insurance Restructuring had no impact upon the financial risk transfer aspect of these third party insurance agreements. The provisions for loss for these professional liability and workers compensation risks are based upon management’s best available information, including actuarially determined estimates of loss.

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 liabilities 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.

In connection with the Insurance Restructuring, the provision for loss for professional liability risks is no longer discounted and no longer funded to Cornerstone. The allowance for professional liability risks aggregated $338 million at December 31, 2017 and $361 million at December 31, 2016. If we had not discounted the allowance for professional liability risks at December 31, 2016, this balance would have approximated $363 million.

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 our 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 December 31, 2017 would impact our operating income by approximately $3 million.

The provision for professional liability risks (continuing operations), including the cost of coverage maintained with unaffiliated commercial reinsurance carriers, aggregated $42 million for 2017, $53 million for 2016 and $49 million for 2015. Costs in 2017 were lower compared to 2016 primarily as a result of favorable actuarial adjustments of prior year reserves recorded during 2017. Costs in 2016 were higher compared to 2015 primarily as a result of increased frequency and severity of claims.

In connection with the Insurance Restructuring, the provision for loss for workers compensation risks is no longer funded to Cornerstone. The allowance for workers compensation risks aggregated $243 million at December 31, 2017 and $265 million at December 31, 2016. The provision for workers compensation risks (continuing operations), including the cost of coverage maintained with unaffiliated insurance carriers, aggregated $34 million for 2017, $48 million for 2016 and $45 million for 2015. Costs in 2017 were lower compared to 2016 primarily as a result of favorable actuarial adjustments of prior year reserves recorded during 2017. Costs in 2016 were higher compared to 2015 primarily as a result of increased frequency and severity of claims.

The Tax Reform Act, which was enacted on December 22, 2017, is generally effective in 2018 and makes broad and significantly complex changes to the federal corporate tax system but is not expected to have a significant impact on our effective tax rate or cash taxes primarily since the reduction in the U.S. federal corporate income tax rate from 35% to 21% will be offset by the limitation on the deductibility of interest expense. We have estimated the impact of the Tax Reform Act to deferred income taxes on our December 31, 2017 balance sheet in accordance with our understanding of the Tax Reform Act and guidance available as of the date of this filing. As a result, we have recorded an estimated $131 million income tax benefit related to reducing certain deferred income tax liabilities in the fourth quarter of 2017.

that the $131 million income tax benefit recorded is a provisional amount and a reasonable estimate that may change. Additional work is necessary to complete a more detailed analysis of the Tax Reform Act.

The estimated impact of $131 million from the Tax Reform Act resulted from both the reassessment of the deferred income tax valuation allowance and the change in the income tax rate. The removal of the carryforward period for federal NOLs under the Tax Reform Act resulted in a portion of the remaining deferred tax liability becoming available as a source-of-income that can be used to offset certain deferred tax assets. This change resulted in us releasing $119 million of our deferred income tax valuation allowance. The change in the income tax rate from 35% to 21% resulted in our deferred liability being reduced by $12 million.

The provision (benefit) for income taxes is based upon our annual taxable income or loss for each respective accounting period. We recognize 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. We also recognize as deferred tax assets the future tax benefits from NOLs 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 if there are cumulative losses in the two most recent years and the current year, which was the case for us at December 31, 2017 and December 31, 2016. Our outlook of taxable income for 2016 changed after we recorded $287 million of goodwill and property and equipment impairment charges and announced the SNF Divestiture and related loss on divestiture for tax purposes. Accordingly, a full valuation allowance was recorded at both December 31, 2017 and December 31, 2016. The amount of deferred tax asset considered realizable, however, could be adjusted if the weighting of the positive and negative evidence changes.

Our valuation allowance was reduced to $379 million at December 31, 2017 from $423 million at December 31, 2016. We recorded an increase to the valuation allowance of $247 million before the impact of the Tax Reform Act, which required a reduction in the valuation allowance of $291 million, comprised of both the $131 million decrease in deferred tax liabilities discussed above and a $160 million decrease to deferred tax assets and related valuation allowance based upon the change in the U.S. corporate income tax rate from 35% to 21%.

We have 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. Prior to the Tax Reform Act, the uncertain timing of this reversal and the temporary difference associated with certain indefinite-lived intangible assets could not be considered a source of future taxable income for purposes of determining the valuation allowance. As such, certain deferred tax liabilities could not be used to offset deferred tax assets. As a result of the Tax Reform Act, a portion of our federal indefinite-lived intangible assets can be used as a source of income. As a result of this change and other activity in 2017, our net deferred tax liability was reduced to $37 million at December 31, 2017 from $202 million at December 31, 2016. The deferred tax liability at December 31, 2017 is comprised of the entire state portion of indefinite-lived intangible assets and a portion of our federal indefinite-lived intangible assets that could not be used as a source of income. The deferred tax liability at December 31, 2016 is comprised entirely of both federal and state indefinite-lived intangible assets that could not be used as a source of income. This change in deferred tax liabilities available as a source of income relates to changes in carryforward periods and limitations that no longer exist. The new 80% limitation on NOLs creates a new limitation for federal purposes that must be considered.

Our effective income tax rate from continuing operations was 38.9% in 2017, 110.9% in 2016 and 38.4% in 2015. The effective income tax rate from continuing operations for both 2017 and 2016 was negatively impacted by recording a $88 million and a $369 million deferred tax valuation allowance, respectively. The effective income tax rate for 2017 also was favorably impacted by the $131 million reduction in deferred income tax liabilities due to the Tax Reform Act. The effective income tax rate for 2015 was impacted by $12 million related to pretax transaction costs that are not deductible for income tax purposes. We recorded favorable income tax adjustments related to the resolution of state income tax contingencies from prior years that reduced the provision for income taxes by approximately $0.7 million in 2016. We recorded unfavorable income tax adjustments related to interest accrued for state income tax contingencies from prior years that increased the provision for income taxes by approximately $0.2 million in 2017 and $0.4 million in each of 2016 and 2015.

We identified deferred income tax assets for federal income tax NOLs of $162 million at both December 31, 2017 and December 31, 2016 (tax effected at 21% and 35%, respectively) and corresponding deferred income tax valuation allowances of $162 million at both December 31, 2017 and December 31, 2016. The federal income tax NOLs expire in various amounts through 2037. We had deferred income tax assets for state income tax NOLs of $82 million and $60 million at December 31, 2017 and December 31, 2016, respectively, and corresponding deferred income tax valuation allowances of $82 million and $60 million at

December 31, 2017 and December 31, 2016, respectively, for that portion of the net deferred income tax assets that we will likely not realize in the future.

We are 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 we believe our tax positions are appropriate, we cannot assure you that the various authorities engaged in the examination of our income tax returns will not challenge our positions.

We record accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations. Accrued interest related to uncertain tax provisions totaled $4 million and $3 million as of December 31, 2017 and December 31, 2016, respectively.

The federal statute of limitations remains open for tax years 2014 through 2016. During 2017, we resolved federal income tax audits for the 2015 tax year. During 2017, Gentiva and its subsidiaries also resolved federal tax audits for the February 1, 2015 short-period tax return. We are currently under examination by the Internal Revenue Service (the “IRS”) for the 2016 and 2017 tax years. We have been accepted into the IRS Compliance Assurance Process (“CAP”) program for the 2016 through 2018 tax years. The CAP program is an enhanced, real-time review of a company’s tax positions and compliance. We expect our participation in the CAP program will improve the timeliness of our federal tax examinations.

State jurisdictions generally have statutes of limitations for tax returns ranging from three to five years. The state impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We currently have various state income tax returns under examination.

We review 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, we estimate 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 or IRFs, skilled nursing rehabilitation services reporting unit, hospital rehabilitation services reporting unit, or sites of service at a geographical location level 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 our ability to renew the lease or divest a particular property), we define 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 within a renewal bundle in a master lease, are aggregated for purposes of evaluating the carrying values of long-lived assets.

Our 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 15 years.

During the fourth quarter of 2017, we tested the carrying value of our hospital reporting unit goodwill, indefinite-lived intangible assets, and property and equipment and determined an impairment charge of $1 million for property and equipment was necessary. We also recorded an asset impairment charge of $1 million related to property and equipment of the planned sale of two hospitals. The fair value of the property and equipment was measured using Level 3 inputs, such as a pending offer and replacement cost factoring in depreciation, economic obsolescence and inflation trends.

During the year ended December 31, 2017, we recorded an asset impairment charge of $37 million related to a customer relationship intangible asset due to the expected loss of affiliated contracts related to the SNF Divestiture and cancellation of non-affiliated contracts. The fair value of the customer relationship intangible asset was measured using Level 3 inputs, such as discontinued projected future operating cash flows.

During the year ended December 31, 2016, we recorded an asset impairment charge of $20 million related to the property and equipment of the Curahealth Disposal. The fair value of the property and equipment was measured using a Level 3 input of the then pending offer. In addition, in the first quarter of 2016, we also recorded a property and equipment impairment charge of $8 million

under the held and used accounting model related to the then 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.

In connection with the Hospital Division Triggering Event, we were required to assess the recoverability of our hospital division reporting unit goodwill in the third quarter of 2016. During the year ended December 31, 2016, we recorded a property and equipment impairment charge of $3 million related to the Hospital Division Triggering Event. The fair value of the property and equipment was measured using Level 3 inputs such as replacement cost factoring in depreciation, economic obsolescence and inflation trends.

During the year ended December 31, 2016, we recorded an asset impairment charge of $3 million related to the sale of a hospital division medical office building. The fair value of the property was measured using a Level 3 input of the offer pending at June 30, 2016.

In accordance with the authoritative guidance for goodwill and other intangible assets, we are 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. We perform our annual goodwill impairment test on October 1 each fiscal year for each of our reporting units.

We previously performed our annual goodwill impairment test at the end of each fiscal year for each of our reporting units. During the fourth quarter of 2015, we changed the date of the annual goodwill impairment test from December 31 to October 1. Management believes this voluntary change is preferable as it aligns the annual impairment test date with our budgeting process. This goodwill impairment test date change was applied prospectively beginning on October 1, 2015 and had no effect on our consolidated financial statements.

A reporting unit is either an operating segment or one level below the operating segment, referred to as a component. When the components within our operating segments have similar economic characteristics, we aggregate the components of our operating segments into one reporting unit. Accordingly, we have determined that our reporting units are home health, hospice, community care, hospitals, hospital rehabilitation services, inpatient rehabilitation hospitals, and RehabCare. The community care reporting unit is included in the home health operating segment of the Kindred at Home division. 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 carrying value of goodwill for each of our reporting units at December 31, 2017 and December 31, 2016 follows (in thousands):

The goodwill impairment test involved a two-step process at October 1, 2016. The first step was 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 annual impairment test for goodwill for each of our reporting units at October 1, 2016, no impairment charges were

recorded. See note 5 of the notes to consolidated financial statements for a discussion of other goodwill impairment charges and triggering events.

Since quoted market prices for our reporting units are not available, we apply judgment in determining the fair value of these reporting units for purposes of performing the goodwill impairment test. We rely 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 us 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 fourth quarter of 2017, we recorded a hospital division reporting unit goodwill impairment charge of $236 million in connection with our annual impairment test performed as of October 1, 2017. The impairment was required after cash flow projections and related mitigation strategies were refined after completing the first full year of operating under the LTAC Legislation. The refinement of the projections and mitigation strategies were finalized over the last three months of 2017 in connection with the preparation of our annual budget for 2018. The fair value of the goodwill was measured using Level 3 inputs such as operating cash flows.

During the year ended December 31, 2016, we recorded a goodwill impairment charge of $13 million related to the Curahealth Disposal. The fair value of the assets was measured using a Level 3 input of the offer pending from Curahealth at September 30, 2016.

During the year ended December 31, 2016, we recorded a goodwill impairment charge of $261 million related to the Hospital Division Triggering Event. The fair value of the assets was measured using Level 3 inputs such as operating cash flows and market data.

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

As part of the annual goodwill impairment test as of October 1, 2017, it was determined the community care reporting unit carrying value was within 12% of its fair value. We performed a sensitivity analysis on this reporting unit and determined that a 0.5% increase to the weighted average cost of capital would result in the fair value being lower than the carrying value. Adverse changes in the operating environment and related key assumptions used to determine the fair value of our reporting units and indefinite-lived intangible assets or declines in the value of our Common Stock may result in future impairment charges for a portion or all of these assets. Specifically, if the rate of growth of government and commercial revenues earned by our reporting units were to be less than projected, if healthcare reforms were to negatively impact our business, if weighted average cost of capital increases, or if recent increases in labor costs materially exceed our projections in our 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 our business, financial position and results of operations, but would not be expected to have an impact on our cash flows or liquidity.

Our indefinite-lived intangible assets consist of trade names, Medicare certifications, and certificates of need. The fair values of our 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.

During the fourth quarter of 2017, we tested the carrying value of our hospital reporting unit goodwill, indefinite-lived intangible assets, and property and equipment and determined an impairment charge of $3 million for a Medicare license was necessary. The fair value of the Medicare license was measured using Level 3 inputs, such as operating cash flows and market data.

During the year ended December 31, 2017, we recorded an asset impairment charge of $98 million related to the previously acquired RehabCare trade name due to the expected loss of affiliated contracts related to the SNF Divestiture and cancellation of non-affiliated contracts. The fair value of the trade name was measured using Level 3 inputs, such as projected revenues and royalty rate.

The annual impairment tests for our indefinite-lived intangible assets are performed as of May 1 and October 1 each fiscal year. As part of the annual indefinite-lived intangible assets impairment review at October 1, 2017, we recorded an asset impairment charge of $4 million related to previously acquired home health and hospice certificates of need. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

As part of the annual indefinite-lived intangible assets impairment review at May 1, 2017, we recorded asset impairment charges of $1 million related to a hospital certificate of need ($0.7 million) and a Medicare certification for an IRF ($0.6 million). The fair value of the certificate of need was measured using Level 3 inputs, such as operating cash flows. The fair value of the Medicare certification was measured using a pending offer, a Level 3 input.

As part of the annual indefinite-lived intangible assets impairment review at October 1, 2016, an impairment charge of $4 million was recorded related to previously acquired home health and hospice Medicare certifications, certificates of need and a trade name. The fair value of the assets was measured using Level 3 inputs, such as projected revenues and operating cash flows. As part of the impairment review on May 1, 2016, an impairment charge of $3 million was recorded related to certificates of need for two hospitals which had declines in operating cash flows. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

Medicare certifications in our home health, hospice and IRFs reporting units, and trade names in our hospice and community care reporting units (aggregating approximately $124 million and $21 million, respectively), were within 1% of their fair value at October 1, 2017 after the annual impairment test. The majority of the $124 million Medicare certification value and $21 million trade name value related to the Gentiva Merger and the Centerre Acquisition, which were each appraised during 2015.

During the fourth quarter ended December 31, 2015, we recorded an asset impairment charge of $18 million related to the RehabCare trade name due to the cancellation of contracts associated with one large customer in the fourth quarter of 2015 and a reduction in projected revenues in 2016. The fair value of the trade name was measured using Level 3 inputs such as projected revenues and the industry specific royalty rate.

During the year ended December 31, 2015, we 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. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

Each of the impairment charges discussed above reflects the amount by which the carrying value of the assets exceeded its estimated fair value at each impairment date.

All of the previously mentioned charges were recorded as impairment charges in the accompanying consolidated statement of operations for all periods. None of the impairment charges impacted our cash flows or liquidity.

In February 2018, the FASB issued authoritative guidance which permits a company to reclassify the income tax effects of the Tax Reform Act on items within accumulated other comprehensive income to retained earnings. The new guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. We will not elect to early adopt and the adoption of this standard is not expected to have a material impact on our business, financial position, results of operations or liquidity.

In August 2017, the FASB issued authoritative guidance with the objective of improving the financial reporting of hedging relationships under GAAP to better portray economic results and to simplify the application of the current hedge accounting guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The adoption of this standard is not expected to have a material impact on our business, financial position, results of operations or liquidity.

In May 2017, the FASB issued authoritative guidance to provide clarity and reduce diversity in practice when accounting for changes to terms or conditions of a share-based payment award. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on our business, financial position, results of operations or liquidity.

In January 2017, FASB issued authoritative guidance that simplifies the measurement of goodwill impairment to a single-step test. The guidance removes step two of the goodwill impairment test, which requires a hypothetical purchase price allocation, and is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the revised guidance, failing step one will always result in goodwill impairment. The new guidance is effective for annual and interim goodwill impairment tests beginning after December 15, 2019 and early adoption is permitted. We adopted the new guidance

on January 1, 2017 on a prospective basis. If we fail step one of the goodwill impairment test under the new guidance, the results could materially impact our financial position and results of operations but not our business or liquidity.

In January 2017, the FASB issued authoritative guidance that revises the definition of a business, which affects accounting for acquisitions, disposals, goodwill impairment, and consolidation. The guidance is intended to help entities evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The revision provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on our business, financial position, results of operations or liquidity.

In November 2016, the FASB issued authoritative guidance that simplifies the disclosure of restricted cash within the statement of cash flows. The guidance is intended to reduce diversity when reporting restricted cash and requires entities to explain changes in the combined total of restricted and unrestricted balances in the statement of cash flows. Our restricted cash totaled $53 million as of December 31, 2017, comprised of $2 million in other current assets, $22 million in current insurance subsidiary investments and $29 million in long-term insurance subsidiary investments. Our restricted cash totaled $187 million as of December 31, 2016, comprised of $2 million in other current assets, $109 million in current insurance subsidiary investments and $76 million in long-term insurance subsidiary investments. The new guidance should be applied using a retrospective transition method and is effective for annual and interim periods beginning after December 15, 2017. The adoption of this standard is expected to have a material impact on the presentation of our consolidated statement of cash flows, but will not have an impact on our financial position 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. The adoption of this standard is not expected to have a material impact on our 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 adoption of this standard is not expected to have a material impact on our business, financial position, results of operations, and 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. We will not elect early adoption and will apply the modified retrospective approach as required. The adoption of this standard is expected to have a material impact on our financial position. We do not expect an impact on our business, results of operations or 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 our business, financial position, results of operations or liquidity.

In May 2014, the FASB issued authoritative guidance which changes the requirements for recognizing revenue when entities enter into contracts with customers. Under these 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.

We will adopt the guidance as of January 1, 2018 using the modified retrospective transition method, and will disclose the cumulative-effect adjustment to retained earnings in our Quarterly Report on Form 10-Q for the three months ended March 31, 2018. Based upon our assessment of the new guidance, we anticipate a pretax cumulative-effect adjustment to 2017 retained earnings in the range of $12 million to $14 million, which primarily relates to recognizing contractual revenues earlier due to variable considerations arising from the historical collectability of our private payor portfolio and other elements of revenue subject to estimation during the period of service.

In addition, we anticipate a reclassification of other operating expenses or general and administrative expenses to revenue in the range of $15 million to $20 million as a result of the provisions of the new standard in 2018. We estimate between $5 million to $8 million of these reclassifications relates to bad debt expense, while the remaining impact results from the performance obligations under the new standard.

Our remaining implementation efforts are focused primarily on refining the disclosure process and internal controls.

We depend on reimbursement from third party payors, including the Medicare and Medicaid programs, for a substantial portion of our revenues. For the year ended December 31, 2017, we derived approximately 59% of our total revenues (before eliminations) from the Medicare and Medicaid programs and the balance from other third party payors, such as commercial insurance companies, health maintenance organizations, preferred provider organizations and contracted providers.

The Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes. See “Part I – Item 1 – Business – Governmental Regulation” for an overview of the reimbursement systems impacting our businesses and “Part I – Item 1A – Risk Factors.”

For segment purposes, we define segment adjusted operating income as earnings before interest, income taxes, depreciation, amortization, and total rent reported for each of our operating segments, excluding litigation contingency expense, impairment charges, restructuring charges, transaction costs, and the allocation of support center overhead.

	Year ended December 31,
(In thousands)	2017			2016			2015
Revenues:
Kindred at Home:
Home health	$	1,822,357		$	1,762,622		$	1,578,500
Hospice		743,443			736,803			656,527
		2,565,800			2,499,425			2,235,027
Hospital division		2,106,375			2,434,311			2,483,376
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		703,915			679,800			614,321
RehabCare		745,467			776,796			907,548
		1,449,382			1,456,596			1,521,869
		6,121,557			6,390,332			6,240,272
Eliminations:
Kindred Hospital Rehabilitation Services		(77,398	)		(89,724	)		(91,301	)
RehabCare		(7,533	)		(5,803	)		(29,477	)
Hospitals		(2,503	)		(2,276	)		(276	)
		(87,434	)		(97,803	)		(121,054	)
	$	6,034,123		$	6,292,529		$	6,119,218
Loss from continuing operations:
Segment adjusted operating income:
Kindred at Home:
Home health	$	276,218		$	279,531		$	256,173
Hospice		129,273			116,326			109,120
		405,491			395,857			365,293
Hospital division		337,487			441,644			486,213
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		203,392			198,335			177,340
RehabCare		6,884			32,586			35,876
		210,276			230,921			213,216
Support center expenses		(249,007	)		(261,916	)		(259,532	)
Litigation contingency expense		(7,435	)		(2,840	)		(138,648	)
Impairment charges		(381,179	)		(314,729	)		(24,757	)
Restructuring charges		(40,343	)		(34,734	)		(10,250	)
Transaction costs		-			(8,679	)		(109,131	)
Building rent		(257,516	)		(264,306	)		(257,221	)
Equipment rent		(34,856	)		(39,929	)		(38,590	)
Restructuring charges - rent		(44,518	)		(61,392	)		(2,368	)
Depreciation and amortization		(104,805	)		(131,819	)		(129,246	)
Interest, net		(237,912	)		(231,504	)		(229,595	)
Loss from continuing operations before income taxes		(404,317	)		(283,426	)		(134,616	)
Provision (benefit) for income taxes		(157,116	)		314,262			(51,714	)
	$	(247,201	)	$	(597,688	)	$	(82,902	)

	Year ended December 31,
	2017		2016		2015
Kindred at Home:
Home health:
Sites of service (at end of period)		375		390		373
Revenue mix %:
Medicare		75.0		78.8		80.3
Medicaid		1.7		2.1		2.0
Commercial and other		12.1		8.9		8.1
Commercial paid at episodic rates		11.2		10.2		9.6
Episodic revenues ($ 000s)	$	1,314,175	$	1,313,974	$	1,194,536
Total admissions		358,908		349,689		331,135
Same-store total admissions		356,538		345,446	n/a
Total episodic admissions		278,575		278,358		249,805
Same-store total episodic admissions		276,959		275,137	n/a
Medicare episodic admissions		234,580		242,104		218,850
Total episodes		451,442		451,585		406,313
Episodes per admission		1.62		1.62		1.63
Revenue per episode	$	2,911	$	2,910	$	2,940
Hospice:
Sites of service (at end of period)		178		183		175
Admissions		50,720		51,959		45,657
Same-store admissions		49,854		50,458	n/a
Average length of stay		96		95		97
Patient days		4,891,348		4,945,769		4,373,044
Average daily census		13,401		13,513		11,981
Revenue per patient day	$	152	$	149	$	150
Community care and other revenues (included in home health business segment) ($ 000s)	$	298,011	$	285,387	$	248,571

n/a - not available.

	Year ended December 31,
	2017			2016		2015
Hospitals (excluding sub-acute units and skilled nursing facility):
End of period data:
Number of transitional care hospitals		75			82		95
Number of licensed beds		5,553			6,107		7,094
Revenue mix %:
Medicare		51.0			55.5		56.6
Medicaid		4.3			4.2		5.3
Medicare Advantage		12.6			11.7		11.4
Medicaid Managed		9.6			6.7		5.6
Commercial insurance and other		22.5			21.9		21.1
Patient criteria data:
Revenues:
Compliant patients		88.7	%	n/a		n/a
Site neutral		11.3	%	n/a		n/a
Revenues per patient day:
Compliant patients	$	1,814		n/a		n/a
Site neutral		1,051		n/a		n/a
Total		1,677		n/a		n/a
Admissions:
Medicare		26,207			32,384		33,187
Medicaid		1,384			1,560		2,296
Medicare Advantage		5,015			5,372		5,423
Medicaid Managed		3,490			3,149		2,576
Commercial insurance and other		6,106			6,893		7,147
		42,202			49,358		50,629
Patient days:
Medicare		669,629			836,789		868,339
Medicaid		52,144			69,505		98,838
Medicare Advantage		161,401			174,224		173,852
Medicaid Managed		128,986			110,417		96,060
Commercial insurance and other		205,754			239,782		241,115
		1,217,914			1,430,717		1,478,204
Average length of stay:
Medicare		25.6			25.8		26.2
Medicaid		37.7			44.6		43.0
Medicare Advantage		32.2			32.4		32.1
Medicaid Managed		37.0			35.1		37.3
Commercial insurance and other		33.7			34.8		33.7
Weighted average		28.9			29.0		29.2
Revenues per admission:
Medicare	$	39,746		$	40,800	$	41,620
Medicaid		64,042			64,356		56,352
Medicare Advantage		51,102			51,826		51,077
Medicaid Managed		56,198			50,932		53,383
Commercial insurance and other		75,289			75,819		72,150
Weighted average		48,395			48,281		48,209
Revenues per patient day:
Medicare	$	1,556		$	1,579	$	1,591
Medicaid		1,700			1,444		1,309
Medicare Advantage		1,588			1,598		1,593
Medicaid Managed		1,521			1,453		1,432
Commercial insurance and other		2,234			2,180		2,139
Weighted average		1,677			1,666		1,651
Medicare case mix index (discharged patients only)		1.178			1.169		1.162
Average daily census		3,337			3,909		4,050
Occupancy %		63.3			65.1		64.9

	Year ended December 31,
	2017			2016		2015
Same-hospital data:
End of period data:
Number of transitional care hospitals		75			75		72
Number of licensed beds		5,553			5,553		5,436
Revenue mix %:
Medicare		50.9			55.2		57.2
Medicaid		4.1			3.8		4.4
Medicare Advantage		12.5			11.5		10.9
Medicaid Managed		9.9			7.3		6.0
Commercial insurance and other		22.6			22.2		21.5
Patient criteria data:
Revenues:
Compliant patients		89.0	%	n/a		n/a
Site neutral		11.0	%	n/a		n/a
Revenues per patient day:
Compliant patients	$	1,811		n/a		n/a
Site neutral		1,055		n/a		n/a
Total		1,678		n/a		n/a
Admissions:
Medicare		24,934			27,591		27,334
Medicaid		1,297			1,347		1,864
Medicare Advantage		4,779			4,470		4,192
Medicaid Managed		3,397			2,871		2,240
Commercial insurance and other		5,820			5,698		5,623
		40,227			41,977		41,253
Patient days:
Medicare		637,698			712,830		717,092
Medicaid		49,750			48,719		66,443
Medicare Advantage		153,699			147,289		135,958
Medicaid Managed		126,690			102,126		83,858
Commercial insurance and other		197,162			202,487		195,304
		1,164,999			1,213,451		1,198,655
Average length of stay:
Medicare		25.6			25.8		26.2
Medicaid		38.4			36.2		35.6
Medicare Advantage		32.2			33.0		32.4
Medicaid Managed		37.3			35.6		37.4
Commercial insurance and other		33.9			35.5		34.7
Weighted average		29.0			28.9		29.1
Revenues per admission:
Medicare	$	39,935		$	41,154	$	42,222
Medicaid		61,762			57,318		48,088
Medicare Advantage		51,211			53,115		52,427
Medicaid Managed		56,840			52,252		54,214
Commercial insurance and other		75,859			80,313		77,296
Weighted average		48,603			49,021		48,956
Revenues per patient day:
Medicare	$	1,561		$	1,593	$	1,609
Medicaid		1,610			1,585		1,349
Medicare Advantage		1,592			1,612		1,616
Medicaid Managed		1,524			1,469		1,448
Commercial insurance and other		2,239			2,260		2,225
Weighted average		1,678			1,696		1,685
Average daily census		3,192			3,315		3,284
n/a – not available.

	Year ended December 31,
	2017		2016		2015
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Freestanding IRFs:
End of period data:
Number of IRFs		19		19		18
Number of licensed beds		995		995		919
Discharges (a)		19,307		18,409		15,991
Same-hospital discharges (a)		18,058		17,914		15,748
Occupancy % (a)		70.4		69.1		70.2
Average length of stay (a)		12.7		12.8		13.2
Revenue per discharge (a)	$	20,134	$	19,531	$	19,104
Contract services:
Sites of service (at end of period):
ARUs		99		102		100
LTAC hospitals		104		119		119
Sub-acute units		4		5		7
Outpatient units		123		132		130
		330		358		356
Revenue per site	$	904,057	$	858,758	$	837,606
RehabCare:
Sites of service (at end of period)		1,616		1,718		1,798
Revenue per site	$	446,294	$	443,980	$	501,494

Revenues increased 3% to $1.82 billion in 2017 compared to $1.76 billion in 2016 and increased 12% in 2016 compared to $1.58 billion in 2015. Revenue growth in 2017 was primarily the result of a 3% increase in same-store admissions in 2017. Revenue growth in 2016 was primarily attributable to 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.

Home health segment adjusted operating income margins were 15.2% in 2017 compared to 15.9% in 2016 and 16.2% in 2015. Segment adjusted operating income margins declined in 2017 primarily as a result of an increase in managed care and commercial patient revenue mix that pays lower average rates than Medicare and a $3 million impact primarily from business interruption and incremental labor costs related to Hurricanes Irma and Harvey (the “Hurricanes”) during the third quarter of 2017. Segment adjusted operating income margins declined in 2016 primarily as a result of an increase in labor costs, partially offset by lower incentive compensation costs.

Revenues increased 1% to $743 million in 2017 compared to $737 million in 2016 and increased 12% in 2016 compared to $657 million in 2015. Revenue growth in 2017 was primarily attributable to a 2% growth in revenue per patient day. Same-store admissions declined 1% in 2017. Revenue growth in 2016 was primarily attributable to the Gentiva Merger, which was completed on February 2, 2015, and growth in average daily census.

Hospice segment adjusted operating income margins were 17.4% in 2017 compared to 15.8% in 2016 and 16.6% in 2015. Segment adjusted operating income margins increased in 2017 primarily as a result of a reduction in direct labor per patient day of 1%, operating efficiencies and the closure of unprofitable branches, partially offset by a $2 million impact primarily from business interruption and incremental labor costs related to the Hurricanes. Segment adjusted operating income margins declined in 2016 primarily as a result of an increase in labor costs, partially offset by lower incentive compensation costs.

Revenues declined 13% to $2.11 billion in 2017 compared to $2.43 billion in 2016 and declined 2% in 2016 compared to $2.48 billion in 2015. Revenue decline in 2017 was primarily a result of LTAC Legislation going into effect on September 1, 2016 for the majority of our hospitals and the sale or closure of 22 TC hospitals beginning in the second half of 2016 (which eliminated $66 million of revenues in 2017). Revenue decline in 2016 was primarily a result of the sale or closure of 15 TC hospitals during the second half of 2016 and the previously mentioned LTAC Legislation.

On a same-hospital basis, aggregate admissions declined 4% in 2017 and increased 2% in 2016. Medicare same-hospital admissions declined 10% in 2017 and increased 1% in 2016. Managed care and commercial same-hospital admissions increased 7% in 2017 and 8% in 2016. The decrease in same-hospital aggregate admissions in 2017 was due primarily to lower utilization of intensive care unit beds by short-term acute hospitals in certain markets combined with maximum occupancy constraints within our own hospital portfolio in other markets. The increase in same-hospital aggregate admissions in 2016 was primarily associated with our efforts to increase patient admissions to partially mitigate the impact of LTAC Legislation.

Hospital division segment adjusted operating income margins were 16.0% in 2017 compared to 18.1% in 2016 and 19.6% in 2015. The decline in segment adjusted operating income margins in 2017 was primarily a result of LTAC Legislation, lower same-hospital volumes, a $10 million impact primarily from business interruption and incremental labor costs related to the Hurricanes, and operating inefficiency associated with the selling or closing of 22 TC hospitals beginning in the second half of 2016. The decline in segment adjusted operating income margins in 2016 was primarily a result of LTAC Legislation, an increase in contract labor costs and operating inefficiencies associated with the selling or closing of 15 TC hospitals beginning in the second half of 2016.

Average hourly wage rates increased 4% in both 2017 and 2016 compared to the respective prior year, primarily as a result of an increase in contract labor costs. Employee benefit costs decreased 12% in 2017 compared to 2016, primarily as a result of the sale or closure of 22 TC hospitals beginning in the second half of 2016 and a reduction in workers compensation expense. Employee benefit costs decreased 2% in 2016 compared to 2015, primarily as a result of the sale or closure of 15 TC hospitals beginning in the second half of 2016 and a reduction in health and compensated absences expense, offset partially by an increase in workers compensation expense.

Professional liability costs were $33 million, $43 million and $40 million for 2017, 2016 and 2015, respectively. The decrease in 2017 was primarily attributable to a decrease in the frequency and severity of claims resulting in favorable adjustments to estimated prior year costs. The increase in 2016 was primarily attributable to an increase in the frequency and severity of claims.

Revenues increased 4% in 2017 to $704 million compared to $680 million in 2016 and increased 11% in 2016 compared to $614 million in 2015. Revenue growth in 2017 was primarily attributable to a 3% increase in revenue per discharge, a 1% increase in same-hospital discharges and the maturing operations of freestanding IRFs. Revenue growth in 2016 was primarily attributable to two freestanding IRFs that opened during 2016 and two freestanding IRFs that opened during 2015.

Hospital rehabilitation services segment adjusted operating income margins were 28.9% in 2017 compared to 29.2% in 2016 and 28.9% in 2015. The decline in the 2017 segment adjusted operating income margin was primarily a result of an 8% decline in contract sites of service resulting primarily from the closure of ten company-operated TC hospitals beginning in the second half of 2016 and lower company-operated TC hospital volumes. The increase in the 2016 segment adjusted operating income margin was primarily a result of cost efficiencies associated with an increase in same-hospital discharges and new hospital development.

Employee benefit costs increased 6% in 2017 compared to 2016, primarily as a result of an increase in health expense and the maturing operations of freestanding IRFs. Employee benefit costs increased 8% in 2016 compared to 2015, primarily as a result of new IRF openings and an increase in compensated absence expense.

Revenues declined 4% in 2017 to $745 million compared to $777 million in 2016 and declined 14% in 2016 compared to $908 million in 2015. The revenue decline in 2017 was primarily attributable to a net loss of 102 customer contract sites of service, including 24 sites of service associated with company-operated nursing centers that were divested in 2017. The revenue decline in 2016 was primarily attributable to a net loss of 80 customer contract sites of service and a decline in customer average daily census during 2016. The loss of customer contract sites of service in 2016 was primarily attributable to the strategic termination of unprofitable customer contract sites, skilled nursing center consolidations, competition, and customers moving therapy services in-house. Revenues derived from non-affiliated customers aggregated $738 million in 2017, $771 million in 2016 and $878 million in 2015.

RehabCare segment adjusted operating income margins were 0.9% in 2017 compared to 4.2% in 2016 and 4.0% in 2015. Segment adjusted operating income margins declined in 2017 primarily as a result of a $23 million allowance for doubtful accounts related to customer contract litigation and the loss of customer contract sites of service. Segment adjusted operating income margins improved in 2016 primarily as a result of a reduction in bad debts and contract labor expense.

Employee benefit costs declined 3% in 2017 compared to 2016, primarily a result of the loss of customer contract sites of service discussed above and a reduction in workers compensation expense. Employee benefit costs declined 14% in 2016 compared to 2015, primarily a result of the loss of customer contract sites of service discussed above.

Operating income for our operating divisions excludes allocations of support center overhead. These costs aggregated $249 million in 2017, $262 million in 2016 and $259 million in 2015. The decline in 2017 was primarily attributable to cost reduction initiatives executed in 2017 and the fourth quarter of 2016. The increase in 2016 was primarily attributable to an increase in research and development costs, partially offset by lower incentive compensation costs. As a percentage of consolidated revenues, support center overhead totaled 4.1% in 2017, 4.2% in 2016 and 4.2% in 2015. The decline in support center overhead as a percentage of consolidated revenues for 2017 was primarily attributable to the previously mentioned cost reduction initiatives.

On January 12, 2016, we entered into a settlement agreement (the “Settlement Agreement”) with the United States to resolve the pending DOJ investigation concerning the operations of RehabCare. Under the Settlement Agreement, we paid $125 million, plus accrued interest from August 31, 2015, at the rate of 1.875% per annum to the United States during the first quarter of 2016. In the first quarter of 2015, we 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, we recorded an additional $30 million loss provision in the third quarter of 2015. We 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 us or our subsidiaries from participating in the federal healthcare programs, on January 11, 2016, we entered into the RehabCare CIA.

In connection with the Settlement Agreement, RehabCare 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. We settled indemnification disputes totaling $6 million during 2017.

We have initiated various restructuring activities whereby we have incurred costs associated with reorganizing our operations, including the divestiture, swap, closure and consolidation of facilities and branches, reduced headcount and realigned operations in order to improve operations, cost efficiencies and capital structure in response to changes in the healthcare industry, increasing leverage 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 accompanying statement of operations and would have been recorded as general and administrative expense or rent expense if not classified as restructuring charges.

During the fourth quarter of 2017, we announced that the Board had approved the Merger Agreement. The costs incurred in 2017 related to the Merger Agreement include merger costs and a lease amendment fee and are expected to be substantially completed in 2018. The additional costs cannot be reasonably estimated at this time.

Restructuring charges related to these initiatives consisted of $10 million for merger costs and $5 million for a lease amendment fee for the year ended December 31, 2017.

During the third quarter of 2017, we approved phase two of the LTAC hospital portfolio repositioning plan that incorporated the closure and conversion of certain LTAC hospitals as part of our mitigation strategies in response to the new patient criteria for LTAC hospitals under the LTAC Legislation. The activities related to the LTAC hospital portfolio repositioning 2017 plan are expected to be substantially completed by the end of 2018. The additional costs cannot be reasonably estimated at this time.

Restructuring charges that we incurred related to the LTAC hospital portfolio repositioning 2017 plan consisted of $10 million for asset write-offs, $5 million for severance, and $32 million for lease termination costs for the year ended December 31, 2017.

During the first quarter of 2016, we approved the LTAC hospital portfolio repositioning 2016 plan that incorporated the divestiture, swap or closure of certain LTAC hospitals as part of our mitigation strategies to prepare for new patient criteria for LTAC hospitals under the LTAC Legislation. The activities related to the LTAC hospital portfolio repositioning 2016 plan were substantially completed during 2016.

During the year ended December 31, 2016, we completed the facility swap with Select and the Curahealth Disposal. In addition, we closed three TC hospitals in the third quarter of 2016 and had similar hospital division realignment initiatives during 2015.

Restructuring charges that we incurred related to the LTAC hospital portfolio repositioning 2016 plan consisted of $5 million for lease termination costs and $1 million for asset write-offs for the year ended December 31, 2017. The activities related to the LTAC hospital portfolio repositioning 2016 plan for the year ended December 31, 2016 included $58 million for lease termination costs, $21 million for facility closure costs, gain on disposal and asset write-offs, $3 million for severance and $2 million for transaction costs. The activities related to the LTAC hospital portfolio repositioning 2016 plan for the year ended December 31, 2015 included $1 million of costs related to severance, lease terminations, facility closure, loss on disposal and other costs.

During the first quarter of 2017, our Kindred at Home division approved and initiated a cost and operations efficiency initiative to address increases in labor costs associated with competitive labor markets and the integration of pay practices from acquisitions across the Kindred at Home portfolio. This initiative included the consolidation and closure of under-performing branches and a reduction in force associated with the restructuring of divisional and regional support teams. These activities were substantially completed during 2017.

Restructuring charges related to these initiatives consisted of $1 million for lease termination costs, $5 million for asset write-offs and $2 million for severance for the year ended December 31, 2017.

During the first quarter of 2015, we approved and initiated branch consolidations and closures in specific markets to improve operations and cost efficiencies in the Kindred at Home division. The branch consolidations and closures included branches that served both the home health and hospice business segment operations. Gentiva initiated similar branch consolidations and closures prior to the Gentiva Merger and these activities are included herein. These activities were substantially completed during 2016.

Restructuring charges related to these consolidations and closures consisted of $1 million for lease termination costs, $1 million for severance, and $2 million for asset write-offs for the year ended December 31, 2017. Restructuring charges related to these consolidations and closures consisted of $4 million for lease termination costs, $1 million for severance, and $3 million for branch closures, asset write-offs and other costs for the year ended December 31, 2016. Lease termination costs were $2 million and branch closures and other costs were $10 million for the year ended December 31, 2015.

As a result of our plan to exit the skilled nursing facility business, we plan to optimize our overhead structure by eliminating certain corporate and shared services overhead above the facility level. The activities related to the skilled nursing facility business exit are expected to be substantially complete in 2018.

During the year ended December 31, 2016, we initiated a restructuring plan to improve operations and cost efficiencies in the Kindred Rehabilitation Services division and support center. Actions related to these plans were completed during 2016.

We incurred restructuring costs of $4 million for severance, retention and other costs related to the SNF Divestiture for the year ended December 31, 2017. We incurred severance, retention and other costs for the Kindred Rehabilitation Services division and support center reorganizations of $4 million for the year ended December 31, 2016.

Operating results for 2016 and 2015 included transaction costs associated with acquisition activities totaling $9 million and $109 million, respectively. The transaction costs for 2016 were primarily related to the Gentiva Merger. The transaction costs for 2015 were primarily related to the Gentiva Merger and the Centerre Acquisition. Transaction costs in all periods were included in general and administrative expenses.

Total rent expense (excluding rent related to restructuring) declined 4% to $292 million in 2017 and increased 3% to $304 million in 2016. The decline in rent expense in 2017 resulted primarily from the sale or closure of 22 TC hospitals beginning in the second half of 2016. The increase in rent expense in 2016 resulted primarily from new facility leases.

Depreciation and amortization expense was $105 million in 2017, $132 million in 2016 and $129 million in 2015. The decline in 2017 was primarily attributable to a change in estimate in the depreciable life of certain information technology equipment and software which reduced depreciation expense by $11 million for the year ended December 31, 2017, as well as the sale or closure of 22 TC hospitals beginning in the second half of 2016. The increase in 2016 was primarily the result of our ongoing capital expenditure program.

Interest expense aggregated $241 million in 2017 compared to $234 million in 2016 and $232 million in 2015. Interest expense increased for 2017 primarily as a result of interest rate increases related to the Term Loan Facility. Interest expense increased for 2016 primarily as a result of increased long-term borrowings. Interest expense for 2015 included $17 million of pre-closing financing costs associated with the Gentiva Merger.

Investment income related primarily to Cornerstone’s investments totaled $3 million in each of 2017, 2016 and 2015. Investment income in 2017, 2016 and 2015 included investment gains of $2 million, $2 million and $1 million, respectively, realized in each year for equity sales in Cornerstone’s investment portfolio. Investment income in 2016 and 2015 was negatively impacted by pretax other-than-temporary impairments of investments of approximately $0.2 million and $0.4 million, respectively, held in Cornerstone’s investment portfolio.

The provision (benefit) for income taxes is based upon our annual reported income or loss for each respective accounting period and includes the effect of certain non-taxable and non-deductible items. Our effective income tax rate from continuing operations was 38.9% in 2017, 110.9% in 2016 and 38.4% in 2015. The effective income tax rate from continuing operations for both 2017 and 2016 was negatively impacted by recording a $88 million and a $369 million deferred tax valuation allowance provision, respectively. The

effective income tax rate from continuing operations for 2017 also was favorably impacted by a $131 million reduction in deferred income tax liabilities due to the Tax Reform Act. The effective income tax rate for 2015 was impacted by $12 million related to pretax transaction costs that are not deductible for income tax purposes. We recorded favorable income tax adjustments related to the resolution of state income tax contingencies from prior years that reduced the provision for income taxes by approximately $0.7 million in 2016. We recorded unfavorable income tax adjustments related to interest accrued for state income tax contingencies from prior years that increased the provision for income taxes by approximately $0.2 million in 2017 and $0.4 million in 2016 and 2015, respectively.

Loss from continuing operations before income taxes was $404 million in 2017, $283 million in 2016 and $135 million in 2015. Loss from continuing operations attributable to us was $289 million in 2017 compared to $632 million in 2016 and $109 million in 2015. Operating results in 2017 included impairment charges, restructuring charges, insurance restructuring costs, customer contract litigation cost, litigation contingency expense, debt amendment fees, and business interruption settlements totaling $505 million. In addition, the income tax provision includes a $131 million tax benefit related to deferred tax liabilities due to the Tax Reform Act and a $88 million increase to the deferred tax asset valuation allowance for 2017. Operating results in 2016 included impairment charges, restructuring charges, research and development, transaction and integration costs, litigation contingency expense, debt amendment costs, and business interruption settlements totaling $428 million. In addition, the income tax provision includes a $369 million increase to the deferred tax asset valuation allowance for 2016. Operating results in 2015 included transaction and integration costs, pre-closing financing costs, litigation contingency expense, retirement and severance costs, restructuring charges, facility closing costs, customer contract litigation costs, and impairment charges totaling $326 million. See notes 1, 3, 4, 5, 6, 15 and 24 of the notes to consolidated financial statements.

Loss from discontinued operations was $17 million in 2017 and $6 million in 2016 compared to income from discontinued operations of $31 million in 2015.

We recorded pretax losses on divestiture of operations of $384 million ($379 million net of income taxes) (primarily related to the SNF Divestiture) during 2017, and $7 million ($7 million net of income taxes) during 2016 compared to a pretax gain on divestiture of operations of $2 million ($1 million net of income taxes) during 2015. See note 6 of the notes to consolidated financial statements.

Revenues declined 29% to $732 million in 2017 compared to $1.04 billion in 2016 and declined 5% in 2016 compared to $1.09 billion in 2015. The decline in revenues in 2017 was primarily a result of the sale of 81 skilled nursing facilities to new operators during 2017 in connection with the SNF Divestiture. These 81 skilled nursing facilities contributed revenues of $632 million and $913 million for the years ended December 31, 2017 and 2016, respectively. The decline in revenues in 2016 was attributable to lower average daily census, primarily Medicare and Medicare Advantage. Admissions declined 33% and patient days declined 29% in 2017 compared 2016 as a result of the SNF Divestiture. Admissions declined 8% and patient days declined 6% in 2016 compared to 2015 as a result of declines in Medicare average length of stay.

Nursing center segment adjusted operating income margins were 8.6% in 2017 compared to 13.5% in 2016 and 14.7% in 2015. The decline in segment adjusted operating income margins in 2017 was primarily a result of the SNF Divestiture. The decline in segment adjusted operating income margins in 2016 was primarily a result of a 6% decline in average daily census.

Average hourly wage rates increased 4% in both 2017 and 2016 compared to the respective prior year, primarily as a result of pay rate increases and higher contract labor costs. Employee benefit costs declined 26% in 2017 compared to 2016, primarily as a result of the SNF Divestiture. Employee benefit costs declined 2% in 2016 compared to 2015, primarily as a result of a decline in health and compensated absence expenses.

Professional liability costs were $23 million, $24 million and $17 million for 2017, 2016 and 2015, respectively. The increase in 2016 was primarily attributable to increases in the frequency and severity of claims.

Cash flows provided by operations (including discontinued operations) aggregated $76 million for 2017, $188 million for 2016 and $176 million for 2015. During each year, we maintained sufficient liquidity to finance our routine capital expenditures, ongoing development programs and acquisitions (excluding the Gentiva Merger and the Centerre Acquisition).

Fluctuations in operating cash flows during the past three years were primarily attributable to the impact of the new patient criteria imposed by the LTAC Legislation, changes in accounts receivable collections, the timing of income tax payments and the payment of one-time bonuses, lease cancellation, litigation, transaction, severance and financing payments. Operating cash flows for 2017 were negatively impacted by $94 million of litigation, severance, retention, lease termination fees, insurance restructuring, debt refinancing, transaction payments, and business interruption settlements. Operating cash flows for 2016 were negatively impacted by $179 million of litigation, severance, retention, lease termination fee, debt refinancing, transaction payments, and business interruption settlements. Operating cash flows for 2015 were negatively impacted by $232 million of litigation, severance, retirement, retention, lease termination fee, Gentiva Merger financing, debt refinancing, and transaction payments.

During 2017, as a result of improved underwriting results, we received distributions from Cornerstone totaling $43 million for the year ended December 31, 2017. The distributions were used to repay a portion of our ABL Facility. These distributions were completed in accordance with applicable regulations and had no impact on earnings or cash flows from operations.

In October 2017, in connection with the review of our insurance programs as part of the SNF Divestiture, we completed the Insurance Restructuring. With respect to professional liability, certain funding mechanisms and reinsurance agreements were modified such that approximately $106 million of cash deposits maintained by Cornerstone and $4 million of other cash deposits were released to the parent company. In addition, approximately $115 million of workers compensation restricted cash collateral deposits were replaced with letters of credit and approximately $21 million of other workers compensation cash deposits were released to the parent company. The cash released to parent in aggregate was $246 million and was used to repay in its entirety our ABL Facility balance and to increase cash reserves.

We utilize our ABL Facility to meet working capital needs and finance our acquisition and development activities. As a result, we typically carry minimal amounts of cash on our consolidated balance sheet. Based upon our expected operating cash flows and the availability of borrowings under our ABL Facility ($504 million at December 31, 2017), management believes that we have the necessary financial resources to satisfy our expected short-term and long-term liquidity needs.

In August 2013, our Board approved the initiation of a cash dividend to our shareholders of $0.12 per share of Common Stock. Our Board elected to discontinue paying dividends on our Common Stock following the March 31, 2017 cash dividend payment and instead redirected funds to repay debt and invest in growth.

During 2017, we paid a cash dividend to our shareholders of $0.12 per share of Common Stock on March 31, 2017.

During 2016, we paid cash dividends of $0.12 per share of Common Stock on each of the following dates: December 9, 2016, September 2, 2016, June 10, 2016 and April 1, 2016.

During 2015, we paid cash dividends of $0.12 per share of Common Stock on each of the following dates: December 11, 2015, September 4, 2015, June 10, 2015 and April 1, 2015.

We made quarterly installment payments on the Units of $18.75 per Unit on December 1, 2017, September 1, 2017, June 1, 2017, March 1, 2017, December 1, 2016, September 1, 2016, March 1, 2016, December 1, 2015, September 1, 2015 and June 1, 2015, and of $18.76 per Unit on June 1, 2016. We also made an installment payment on the 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.

The cash funding for the dividends during 2017 on our Common Stock required the use of approximately $10 million. The cash funding of installment payments during 2017 on the Units required approximately $13 million.

Our Term Loan Facility refers to our $1.36 billion term loan credit facility provided pursuant to the terms and provisions of that certain Sixth Amended and Restated Term Loan Credit Agreement dated as of March 14, 2017, among us, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent. All obligations under our Term

Loan Facility are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of our wholly owned, domestic material subsidiaries, as well as certain non-wholly owned domestic subsidiaries as we may determine from time to time in our sole discretion.

Our Term Loan Facility (1) matures on April 9, 2021, (2) contains financial maintenance covenants in the form of a maximum total leverage ratio, a minimum fixed charge coverage ratio and a maximum amount of annual capital expenditures, (3) imposes restrictions on our ability to incur debt and liens and make acquisitions, investments and payments on equity and junior debt, and (4) provides for interest rate margins of 3.50% for the London Interbank Offered Rate (“LIBOR”) borrowings (subject to a floor of 1.00%) and 2.50% for base rate borrowings.

A summary of the amendments to our Term Loan Facility since January 1, 2015 is set forth below.

On March 14, 2017, we amended and restated the Term Loan Facility to, among other things, (1) make adjustments to certain covenants and definitions to better accommodate the SNF Divestiture, (2) provide us with increased leverage covenant flexibility for an interim period, (3) increase the applicable margin on the outstanding borrowings from 3.25% to 3.50% for LIBOR borrowings and from 2.25% to 2.50% for base rate borrowings, (4) require a maximum leverage ratio of no more than 5.00 to 1.00 for use of the $50 million annual dividend basket, and (5) provide for a prepayment premium of 1.00% in connection with any repricing transaction within six months of the closing date. In accordance with the authoritative guidance on debt, we accounted for the amendment as a debt modification.

On June 14, 2016, we amended and restated our 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, and (4) an incremental term loan in an aggregate principal amount of $200 million. The incremental term loan 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 then outstanding under the Term Loan Facility. We used the net proceeds of the incremental term loan to repay a portion of the outstanding borrowings under our ABL Facility.

On March 10, 2015, we entered into an incremental amendment agreement to the Term Loan Facility that provided for an incremental term loan in an aggregate principal amount of $200 million under our Term Loan Facility. We used the net proceeds of the incremental term loan to repay outstanding borrowings under our ABL Facility. The incremental term loan was issued with 50 basis points of OID and has the same terms as, and is fungible with, the other term loans outstanding under our Term Loan Facility.

Our ABL Facility refers to our $900 million asset-based loan revolving credit facility provided pursuant to the terms and provisions of that certain Fourth Amended and Restated ABL Credit Agreement dated as of June 14, 2016, among us, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, as amended on September 27, 2017. All obligations under our ABL Facility are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of our wholly owned, domestic material subsidiaries, as well as certain non-wholly owned domestic subsidiaries as we may determine from time to time in our sole discretion. As of December 31, 2017, $156 million of letters of credit were outstanding under the ABL Facility.

Our ABL Facility (1) matures on April 9, 2019, (2) contains financial maintenance covenants in the form of a minimum fixed charge coverage ratio and a maximum amount of annual capital expenditures, (3) imposes restrictions on our ability to incur debt and liens and make acquisitions, investments and payments on equity and junior debt, (4) provides for interest rate margins of 2.00% to 2.50% for LIBOR borrowings and 1.00% to 1.50% for base rate borrowings (in each case depending on average daily excess availability), and (5) employs a borrowing base calculation to determine total available capacity thereunder.

A summary of the amendments to our ABL Facility since January 1, 2015 is set forth below.

On September 27, 2017, we entered into an amendment to the ABL Facility to update the provisions pertaining to letters of credit issued thereunder.

On June 14, 2016, we amended and restated our 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 June 3, 2015, we entered into an amendment agreement to the ABL Facility that, among other items, modified the restrictions on the amount of cash and temporary cash investments that may be held outside of certain deposit accounts subject to control agreements.

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

On December 18, 2014, the Escrow Issuer, one of our subsidiaries, completed a private placement of $750 million aggregate principal amount of 8.00% Senior Notes due 2020 (previously defined as the Notes due 2020) and $600 million aggregate principal amount of 8.75% Senior Notes due 2023 (previously defined as the Notes due 2023, and, together with the Notes due 2020, the “Notes”). The Notes due 2020 were issued pursuant to the indenture, dated as of December 18, 2014 (the “2020 Indenture”), between the Escrow Issuer and Wells Fargo Bank, National Association, as trustee. The Notes due 2023 were issued pursuant to the indenture, dated as of December 18, 2014 (the “2023 Indenture” and, together with the 2020 Indenture, the “Indentures”), between the Escrow Issuer and Wells Fargo Bank, National Association.

The Notes were assumed by us and fully and unconditionally guaranteed on a senior unsecured basis by substantially all of our wholly owned, domestic material subsidiaries, including substantially all of our and Gentiva’s wholly owned, domestic material subsidiaries (the “Guarantors”), ranking pari passu with all of our respective existing and future senior unsubordinated indebtedness. On October 30, 2015, we completed a registered exchange offer to exchange the Notes for registered notes with substantially identical terms.

The Indentures contain certain restrictive covenants that limit our and our restricted subsidiaries’ ability to, among other things, incur, assume or guarantee additional indebtedness; pay dividends, make distributions or redeem or repurchase capital stock; effect dividends, loans or asset transfers from its subsidiaries; sell or otherwise dispose of assets; and enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The Indentures also contain customary events of default.

Under the terms of the Indentures, we may pay dividends pursuant to specified exceptions, including if our consolidated coverage ratio (as defined therein) is at least 2.0 to 1.0, we may also pay dividends in an amount equal to 50% of our consolidated net income (as defined therein) and 100% of the net cash proceeds from the issuance of capital stock, in each case since January 1, 2014. The making of certain other restricted payments or investments by us or our restricted subsidiaries would reduce the amount available for the payment of dividends pursuant to the foregoing exception.

On November 25, 2014, in an offering registered with the SEC, we completed the sale of 150,000 Units for cash and granted the underwriters a 13-day over-allotment option to purchase up to an additional 22,500 Units. On December 1, 2014, the underwriters exercised in full their over-allotment option to purchase 22,500 additional Units, which we closed on December 3, 2014. Each Unit was composed of a Purchase Contract and one share of Mandatory Redeemable Preferred Stock, with 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. The net proceeds from this offering, after deducting the underwriting discount and offering expenses, were $166.3 million. The Purchase Contracts were recorded as capital in excess of par value, net of issuance costs, and the Mandatory Redeemable Preferred Stock has been recorded as long-term debt.

On December 1, 2017, the remaining holders of the 87,379 Purchase Contracts were mandatorily redeemed. As a result, holders thereof received 50.6329 shares of Common Stock per Purchase Contract, resulting in approximately 4.4 million shares of Common Stock being issued on such date. Holders of our Mandatory Redeemable Preferred Stock were previously entitled to receive a quarterly “preferred stock installment payment,” in cash, shares of our Common Stock, or a combination thereof. The final preferred stock installment payment date was December 1, 2017, the same date all shares of Mandatorily Redeemable Preferred Stock were redeemed as planned pursuant to their terms.

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

The Notes due 2022 bear interest at an annual rate of 6.375% and are senior unsecured obligations of ours and of the 2022 Guarantors. The indenture governing the Notes due 2022 contains certain restrictive covenants that, among other things, limits our and our restricted subsidiaries’ ability to incur, assume or guarantee additional indebtedness; pay dividends, make distributions or redeem or repurchase capital stock; effect dividends, loans or asset transfers from our subsidiaries; sell or otherwise dispose of assets; and enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The indenture governing the Notes due 2022 also contains customary events of default. The Notes due 2022 are fully and unconditionally guaranteed, subject to customary release provisions, by substantially all of our wholly owned, domestic material subsidiaries. On January 28, 2015, we completed a registered exchange offer to exchange each of the Notes due 2022 for registered notes with substantially identical terms.

Under the terms of the Notes due 2022, we may pay dividends pursuant to specified exceptions, including if our consolidated coverage ratio (as defined therein) is at least 2.0 to 1.0, we may pay dividends in an amount equal to 50% of our consolidated net income (as defined therein) and 100% of the net cash proceeds from the issuance of capital stock. The making of certain other restricted payments or investments by us or our restricted subsidiaries would reduce the amount available for the payment of dividends pursuant to the foregoing exception.

On January 30, 2015, following the receipt of sufficient consents to approve the proposed amendments, we, the 2022 Guarantors and Wells Fargo Bank, National Association, as trustee, entered into the first supplemental indenture (the “2022 Supplemental Indenture”) to the indenture governing the Notes due 2022. The 2022 Supplemental Indenture conforms certain covenants, definitions and other terms in the indenture governing the Notes due 2022 to the covenants, definitions and terms contained in the Indentures governing the Notes. The 2022 Supplemental Indenture became effective following the consummation of the Gentiva Merger.

In January 2016, we entered into three interest rate swap agreements to hedge our floating interest rate on an aggregate of $325 million of outstanding Term Loan Facility debt. The interest rate swaps have an effective date of January 11, 2016, and expire on January 9, 2021. We are 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, we 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%.

In March 2014, we entered into an interest rate swap agreement to hedge our floating interest rate on an aggregate of $400 million of outstanding Term Loan Facility debt. On April 8, 2014, we completed a novation of a portion of our $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 and will expire on April 9, 2018 and continues to apply to the Term Loan Facility. We are required to make payments based upon a fixed interest rate of 1.867% calculated on the notional amount of $400 million. In exchange, we 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 interest rate swaps were assessed for hedge effectiveness for accounting purposes and we determined the interest rate swaps qualify for cash flow hedge accounting treatment at December 31, 2017 and 2016. We record 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 record the ineffective portion of the gain or loss on these derivative financial instruments as interest expense. There was no ineffectiveness related to the interest rate swaps for the years ended December 31, 2017 and 2016. The ineffectiveness related to the interest rate swaps for the year ended December 31, 2015 was immaterial.

At December 31, 2017 and 2016, the aggregate fair value of the interest rate swaps was recorded in other current assets for $3 million and in other accrued liabilities for $3 million, respectively. The fair value was determined by reference to a third party valuation and is considered a Level 2 input within the fair value hierarchy.

We were in compliance with the terms of the Credit Facilities and the indentures governing our outstanding notes at December 31, 2017.

Future payments of principal and interest due under long-term debt agreements and lease obligations as of December 31, 2017 follow (in thousands):


											Non-cancelable operating leases
Year	Term Loan Facility (1)		Notes due 2020		Notes due 2023		Notes due 2022		Other long-term debt (2)		Ventas (3)		Other		Subtotal		Total
2018	$	82,902	$	60,000	$	52,500	$	31,875	$	633	$	110,319	$	128,494	$	238,813	$	466,723
2019		81,667		60,000		52,500		31,875		366		111,201		112,606		223,807		450,215
2020		80,974		752,500		52,500		31,875		19		112,231		96,762		208,993		1,126,861
2021		1,330,967		-		52,500		31,875		-		113,225		84,968		198,193		1,613,535
2022		-		-		52,500		509,297		-		114,179		69,687		183,866		745,663
Thereafter		-		-		602,188		-		-		219,505		306,920		526,425		1,128,613
	$	1,576,510	$	872,500	$	864,688	$	636,797	$	1,018	$	780,660	$	799,437	$	1,580,097	$	5,531,610

As of December 31, 2017, we had approximately $338 million of allowances for professional liability risks and approximately $243 million of allowances for workers compensation risks that are excluded from the table above.

We have no other off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for $156 million of letters of credit outstanding as of December 31, 2017.

Excluding acquisitions and including discontinued operations, routine capital expenditures (expenditures necessary to maintain existing facilities that generally do not increase capacity or add services) totaled $70 million in 2017, $96 million in 2016 and $122 million in 2015. Kindred Hospital Rehabilitation Services development capital expenditures (primarily new IRF development) totaled $1 million in 2017, $21 million in 2016 and $5 million in 2015. Support center development capital expenditures totaled $25 million in 2017, $8 million in 2016 and $3 million in 2015. Nursing center development capital expenditures totaled $6 million in 2016 and $12 million in 2015. These capital expenditures were financed primarily through internally generated funds. At December 31, 2017, the estimated cost to complete and equip construction in progress approximated $17 million. We believe that our capital expenditure program is adequate to improve and equip our existing facilities.

Expenditures for acquisitions totaled $10 million in 2017 (primarily related to home health and hospice acquisitions), $79 million in 2016 (primarily related to home health and hospice acquisitions), and $674 million in 2015 (primarily related to the Gentiva Merger and the Centerre Acquisition). We financed these transactions with operating cash flows and our ABL Facility. See note 4 of the notes to consolidated financial statements.

We derive a substantial portion of our revenues from the Medicare and Medicaid programs. We have 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.

We could be adversely affected by the continuing efforts of governmental and private third party payors to contain healthcare costs. We cannot assure you 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 home health, hospice, LTAC hospitals, and IRFs 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, MedPAC recommends payment policies 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 can be impacted negatively by state budgetary pressures, which may lead to reduced reimbursement or delays in receiving payments. Moreover, we cannot assure you that the facilities operated by us, or the provision of goods and services offered by us, 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 our 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 our services, the methods of payment for our 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, which 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 and IRFs, home health agencies and hospice providers; (3) a quality reporting system for hospitals (including LTAC hospitals and IRFs); and (4) reductions in Medicare payments to hospitals (including LTAC hospitals and IRFs) for failure to meet certain quality reporting standards or to comply with standards in new value-based purchasing demonstration project programs.

The Bipartisan Budget Act of 2018 (previously defined as the BBA), enacted on February 9, 2018, includes several provisions impacting Medicare reimbursement to home health, hospice, LTAC hospital and rehabilitation therapy services providers.

With respect to LTAC hospital providers, the BBA extends the initial two-year phase-in period of the new LTAC patient criteria under the LTAC Legislation for an additional two-year period, and will impose a mandatory 4.6% reduction in payments for services provided to site-neutral patients over a nine-year period beginning October 1, 2018.

The LTAC Legislation creates new Medicare criteria and payment rules for LTAC hospitals. 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. We expect the majority of these site-neutral payments will be materially less than the payments currently provided under LTAC PPS. The BBA imposes a mandatory 4.6% reduction in payments for services provided to site-neutral patients over a nine-year period beginning October 1, 2018.

The effective date of the new patient criteria was October 1, 2015, tied to each LTAC hospital’s cost reporting period, followed by an initial two-year phase-in period, which was extended by an additional two years by the BBA. During the phase-in period, payment for patients receiving the site-neutral rate is based 50% on LTAC PPS and 50% on the site-neutral rate.

The majority of our TC hospitals (all of 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 the new patient criteria did not begin for a majority of our TC hospitals until September 1, 2016, and, with the enactment of the BBA, full implementation of the new criteria will not occur until September 1, 2020. We expect that the full implementation of the new criteria on September 1, 2020 will have a further negative impact on Medicare payments to our TC hospitals.

Beginning in 2020, the LTAC Legislation requires that at least 50% of a hospital’s patients must be paid under the new LTAC payment system to maintain Medicare certification as a LTAC hospital. The failure of one or more of our TC hospitals to maintain its Medicare certification as a LTAC hospital could have a material adverse effect on our business, financial position, results of operations, and liquidity.

The new patient criteria imposed by the LTAC Legislation reduces the population of patients eligible for reimbursement under LTAC PPS and changes the basis upon which we are paid for other patients. In addition, the LTAC Legislation is subject to additional governmental regulations and the interpretation and enforcement of those regulations. In response to the impact of the LTAC Legislation, we have sold or closed approximately 23% of our TC hospitals from 2013 through 2017. The LTAC Legislation, the implementation of new patient criteria, changes in referral patterns, and other associated elements has had, and will continue to have, an adverse effect on our business, financial position, results of operations, and liquidity.

See “Part I – Item 1 – Business – Governmental Regulation” for a detailed discussion of Medicare and Medicaid reimbursement regulations. Also see “Part I – Item 1A – Risk Factors.”

The following table provides information about our financial instruments as of December 31, 2017 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
	2018			2019			2020			2021		2022			Thereafter			Total		Fair value December 31, 2017
Liabilities:
Long-term debt, including amounts due within one year:
Fixed rate:
Notes due 2020 (a)	$	-		$	-		$	750,000		$	-	$	-		$	-		$	750,000	$	806,250
Notes due 2022 (a)		-			-			-			-		500,000			-			500,000		521,900
Notes due 2023 (a)		-			-			-			-		-			600,000			600,000		628,500
Other		394			257			18			-		-			-			669		669	(b)
	$	394		$	257		$	750,018		$	-	$	500,000		$	600,000		$	1,850,669	$	1,957,319
Average interest rate		3.0	%		3.3	%		8.0	%				6.4	%		8.8	%
Variable rate:
ABL Facility (c)	$	-		$	-		$	-		$	-	$	-		$	-		$	-	$	-
Term Loan Facility (a,d,e)		14,034			14,034			14,034			1,313,326		-			-			1,355,428		1,358,817
	$	14,034		$	14,034		$	14,034		$	1,313,326	$	-		$	-		$	1,355,428	$	1,358,817

The information required by this Item 8 is included in appendix pages F-2 through F-72 of this Annual Report on Form 10-K, which is incorporated herein by reference.

We have carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our 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 our evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2017, the disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, are effective.

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Based upon our assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2017, based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears herein.

Set forth below are the names, ages (as of January 1, 2018) and present and past positions of our current executive officers:

Benjamin A. Breier has served as one of our directors and as Chief Executive Officer since March 2015 and as President since May 2012. Mr. Breier served as our Chief Operating Officer from August 2010 until March 2015. He served as our Executive Vice President and President, Hospital Division from March 2008 until August 2010, and as President, Rehabilitation Division from August 2005 to March 2008.

Kent H. Wallace has served as our Executive Vice President and Chief Operating Officer since February 2015. Prior to joining us, Mr. Wallace served from February 2013 to January 2014 as Chief Executive Officer of RegionalCare Hospital Partners, Inc., an operator of community hospitals. Prior to that, Mr. Wallace was the President and Chief Operating Officer of Vanguard Health Systems, Inc. (formerly NYSE:VHS) from 2005 to 2013. Mr. Wallace also previously worked for Province Healthcare Company, Tenet Healthcare Corporation (NYSE:THC), and HCA Holdings, Inc. (NYSE:HCA).

Stephen D. Farber has served as our Executive Vice President, Chief Financial Officer since February 2014. Prior to joining us, Mr. Farber served from May 2013 to December 2013 as Executive Vice President and Chief Financial Officer of Rural/Metro Corporation, the nation’s leading provider of ambulance, fire protection, and safety services, where he led that company’s financial restructuring efforts. Prior to joining Rural/Metro Corporation, Mr. Farber’s principal roles included serving (1) from 2011 to 2012 as Executive-in-Residence with Warburg Pincus LLC, a global private equity firm, (2) from 2006 to 2009 as Chairman and Chief Executive Officer of Connance, Inc., a predictive analytics provider to healthcare companies, and (3) from 2002 to 2005 as Chief Financial Officer of Tenet Healthcare Corporation (NYSE:THC), which was, at the time, the nation’s second largest hospital operator.

Peter K. Kalmey has served as our President, Hospital Division since January 2016. He previously served as our Chief Operating Officer, Hospital Division from October 2013 to December 2015, and as Vice President, Operations, Hospital Division from 2010 to 2013. In addition, Mr. Kalmey has served in other operational and financial positions with the Company since 1995.

David A. Causby has served as our Executive Vice President and President, Kindred at Home since February 2015. Prior to joining us, Mr. Causby served in various capacities with Gentiva (formerly NASDAQ:GTIV), including as its President and Chief Operating Officer from May 2014 to February 2015, Executive Vice President and Chief Operating Officer from October 2013 to May 2014, Senior Vice President and President, Home Health Division from May 2011 to October 2013, and Senior Vice President of Operations from 2008 to May 2011.

Jason Zachariah has served as our President, Kindred Rehabilitation Services, since August 2016. He previously served as our Chief Operating Officer, Kindred Hospital Rehabilitation Services, from July 2013 to August 2016. From May 2006 to July 2013, he served in various roles in our Hospital Division, including Chief Operating Officer/Executive Director of the California/Arizona district.

William M. Altman, an attorney, has served as our Executive Vice President, Strategy and Chief of Staff since May 2017. He served as our Executive Vice President for Strategy, Policy and Integrated Care from May 2012 to May 2017, as Senior Vice President, Strategy and Public Policy from January 2008 to May 2012 and as Senior Vice President, Compliance and Government Programs from April 2002 to December 2007.

Stephen R. Cunanan has served as our Chief Administrative Officer and Chief People Officer since March 2015. Mr. Cunanan served as our Chief People Officer from June 2013 until March 2015. Prior to joining us, Mr. Cunanan served as Chief Human Resources Officer for Catalyst Health Solutions, Inc. (formerly NASDAQ:CHSI), a Fortune 500 pharmacy benefit management and specialty pharmacy organization, from July 2011 to August 2012, and as Global Vice President, Human Resources for Johnson & Johnson (NYSE:JNJ), a Fortune 500 medical devices, pharmaceutical, and consumer packaged goods manufacturer, from 2007 through July 2011.

Joseph L. Landenwich, an attorney and certified public accountant, has served as our General Counsel and Corporate Secretary since January 2016. Mr. Landenwich served as our Co-General Counsel and Corporate Secretary from May 2012 to January 2016. He served as our Senior Vice President of Corporate Legal Affairs and Corporate Secretary from December 2003 to May 2012.

As noted above, Mr. Farber served as Executive Vice President and Chief Financial Officer of Rural/Metro Corporation from May 2013 to December 2013, where he led such company’s financial restructuring. Rural/Metro Corporation and its affiliates filed a voluntary petition under the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware on August 4, 2013.

The information required by this Item, other than the information set forth above under “Executive Officers of the Registrant,” will be provided by an amendment to this Annual Report on Form 10-K containing the applicable disclosures within 120 days after the end of the fiscal year covered by this report.

Information required by this item will be provided by an amendment to this Annual Report on Form 10-K containing the applicable disclosures within 120 days after the end of the fiscal year covered by this report.

The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10-K.

The response to this portion of Item 15 is included on page F-72 of this Annual Report on Form 10-K.

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Kindred Healthcare, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

	Year ended December 31,
	2017			2016			2015
Revenues	$	6,034,123		$	6,292,529		$	6,119,218
Salaries, wages and benefits		3,318,885			3,392,263			3,233,047
Supplies		303,923			343,065			342,075
Building rent		257,516			264,306			257,221
Equipment rent		34,856			39,929			38,590
Other operating expenses		640,764			656,792			639,608
General and administrative expenses (exclusive of depreciation and amortization expense included below)		1,069,764			1,107,648			1,210,787
Other income		(3,460	)		(5,066	)		(2,358	)
Litigation contingency expense		7,435			2,840			138,648
Impairment charges		381,179			314,729			24,757
Restructuring charges		84,861			96,126			12,618
Depreciation and amortization		104,805			131,819			129,246
Interest expense		241,411			234,612			232,351
Investment income		(3,499	)		(3,108	)		(2,756	)
		6,438,440			6,575,955			6,253,834
Loss from continuing operations before income taxes		(404,317	)		(283,426	)		(134,616	)
Provision (benefit) for income taxes		(157,116	)		314,262			(51,714	)
Loss from continuing operations		(247,201	)		(597,688	)		(82,902	)
Discontinued operations, net of income taxes:
Income (loss) from operations		(16,854	)		(6,192	)		30,804
Gain (loss) on divestiture of operations		(379,260	)		(6,744	)		1,244
Income (loss) from discontinued operations		(396,114	)		(12,936	)		32,048
Net loss		(643,315	)		(610,624	)		(50,854	)
Earnings attributable to noncontrolling interests:
Continuing operations		(42,176	)		(34,847	)		(26,044	)
Discontinued operations		(12,861	)		(18,759	)		(16,486	)
		(55,037	)		(53,606	)		(42,530	)
Loss attributable to Kindred	$	(698,352	)	$	(664,230	)	$	(93,384	)
Amounts attributable to Kindred stockholders:
Loss from continuing operations	$	(289,377	)	$	(632,535	)	$	(108,946	)
Income (loss) from discontinued operations		(408,975	)		(31,695	)		15,562
Net loss	$	(698,352	)	$	(664,230	)	$	(93,384	)
Loss per common share:
Basic:
Loss from continuing operations	$	(3.31	)	$	(7.29	)	$	(1.29	)
Discontinued operations:
Income (loss) from operations		(0.34	)		(0.28	)		0.17
Gain (loss) on divestiture of operations		(4.33	)		(0.08	)		0.01
Income (loss) from discontinued operations		(4.67	)		(0.36	)		0.18
Net loss	$	(7.98	)	$	(7.65	)	$	(1.11	)

Diluted:
Loss from continuing operations	$	(3.31	)	$	(7.29	)	$	(1.29	)
Discontinued operations:
Income (loss) from operations		(0.34	)		(0.28	)		0.17
Gain (loss) on divestiture of operations		(4.33	)		(0.08	)		0.01
Income (loss) from discontinued operations		(4.67	)		(0.36	)		0.18
Net loss	$	(7.98	)	$	(7.65	)	$	(1.11	)
Shares used in computing loss per common share:
Basic		87,525			86,800			84,558
Diluted		87,525			86,800			84,558
Cash dividends declared and paid per common share	$	0.12		$	0.48		$	0.48

	December 31,			December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	160,254		$	137,061
Insurance subsidiary investments		22,546			108,966
Accounts receivable less allowance for loss of $96,899 ─ 2017 and $71,070 ─ 2016		1,122,532			1,172,078
Inventories		21,716			22,438
Income taxes		4,546			10,067
Assets held for sale		17,335			289,450
Other (Note 20)		60,610			63,693
		1,409,539			1,803,753
Property and equipment, at cost:
Land		55,731			54,726
Buildings		788,879			624,021
Equipment		814,011			813,070
Construction in progress		24,344			39,781
		1,682,965			1,531,598
Accumulated depreciation		(946,986	)		(912,978	)
		735,979			618,620

Goodwill		2,188,566			2,427,074
Intangible assets less accumulated amortization of $77,603 ─ 2017 and $101,612 ─ 2016		604,338			770,108
Insurance subsidiary investments		28,988			204,929
Other (Note 20)		265,307			288,240
Total assets (a)	$	5,232,717		$	6,112,724
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	191,827		$	203,925
Salaries, wages and other compensation		352,179			397,486
Due to third party payors		35,321			41,320
Professional liability risks		60,767			65,284
Accrued lease termination fees		7,610			5,224
Other accrued liabilities (Note 20)		263,977			264,512
Long-term debt due within one year		14,638			27,977
		926,319			1,005,728

Long-term debt		3,146,972			3,215,062
Professional liability risks		276,829			295,311
Deferred tax liabilities		36,881			201,808
Deferred credits and other liabilities (Note 20)		497,954			353,294

Commitments and contingencies (Note 17)

Equity:
Stockholder's equity:
Common stock, $0.25 par value; authorized 175,000 shares; issued 91,454 shares ─ 2017 and 85,166 shares ─ 2016		22,864			21,291
Capital in excess of par value		1,713,179			1,710,231
Accumulated other comprehensive income		6,179			1,573
Accumulated deficit		(1,618,896	)		(920,544	)
		123,326			812,551
Noncontrolling interests		224,436			228,970
Total equity		347,762			1,041,521
Total liabilities (a) and equity	$	5,232,717		$	6,112,724

	Attributable to Kindred stockholders
	Shares of common stock			Par value common stock			Capital in excess of par value			Accumulated other comprehensive income (loss)			Accumulated deficit			Noncontrolling interests			Total
Balances, December 31, 2014		69,977		$	17,494		$	1,586,692		$	(2,551	)	$	(159,768	)	$	44,105		$	1,485,972
Comprehensive loss:
Net income (loss)														(93,384	)		42,530			(50,854	)
Net unrealized investment losses, net of income taxes											(199	)								(199	)
Other											118									118
Comprehensive loss																				(50,935	)
Grant of non-vested restricted stock		672			168			(168	)											-
Issuance of common stock in connection with employee benefit plans		216			54			482						(2	)					534
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(481	)		(120	)		(7,050	)					(3,055	)					(10,225	)
Stock-based compensation amortization								20,636												20,636
Income tax benefit in connection with the issuance of common stock under employee benefit plans								3,170												3,170
Exchange of tangible equity units, net of costs		3,668			917			(917	)											-
Contributions made by noncontrolling interests																	8,132			8,132
Distributions to noncontrolling interests																	(42,458	)		(42,458	)
Purchase of noncontrolling interests																	153,884			153,884
Dividends paid								(40,119	)											(40,119	)
Issuance of common stock in Gentiva Merger (see Note 3)		9,740			2,435			175,021												177,456
Balances, December 31, 2015		83,792			20,948			1,737,747			(2,632	)		(256,209	)		206,193			1,706,047
Comprehensive loss:
Net income (loss)														(664,230	)		53,606			(610,624	)
Net unrealized investment gains, net of income taxes											339									339
Other											3,866									3,866
Comprehensive loss																				(606,419	)
Grant of non-vested restricted stock		1,384			346			(346	)											-
Issuance of common stock in connection with employee benefit plans		292			73			(73	)											-
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(302	)		(76	)		(2,985	)					(105	)					(3,166	)
Stock-based compensation amortization								16,425												16,425
Income tax benefit in connection with the issuance of common stock under employee benefit plans								435												435
Contributions made by noncontrolling interests																	17,314			17,314
Distributions to noncontrolling interests																	(45,985	)		(45,985	)
Purchase of noncontrolling interests								(234	)								(2,158	)		(2,392	)
Dividends paid								(40,738	)											(40,738	)
Balances, December 31, 2016		85,166			21,291			1,710,231			1,573			(920,544	)		228,970			1,041,521
Comprehensive loss:
Net income (loss)														(698,352	)		55,037			(643,315	)
Net unrealized investment losses, net of income taxes											(52	)								(52	)
Other											4,658									4,658
Comprehensive loss																				(638,709	)
Grant of non-vested restricted stock		2,023			506			(506	)											-
Issuance of common stock in connection with employee benefit plans		151			38			(6	)											32
Shares tendered by employees for statutory tax withholdings upon issuance of common stock		(310	)		(77	)		(2,455	)											(2,532	)
Stock-based compensation amortization								17,249												17,249
Contributions made by noncontrolling interests																	1,655			1,655
Distributions to noncontrolling interests																	(61,226	)		(61,226	)
Settlements of tangible equity units		4,424			1,106			(1,106	)											-
Dividends paid								(10,228	)											(10,228	)
Balances, December 31, 2017		91,454		$	22,864		$	1,713,179		$	6,179		$	(1,618,896	)	$	224,436		$	347,762

	Year ended December 31,
	2017			2016			2015
Cash flows from operating activities:
Net loss	$	(643,315	)	$	(610,624	)	$	(50,854	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense		102,481			135,966			128,533
Amortization of intangible assets		14,637			23,673			29,841
Amortization of stock-based compensation costs		17,249			16,425			20,636
Amortization of deferred financing costs		17,189			15,267			13,721
Payment of capitalized lender fees related to debt amendments		(5,403	)		(7,375	)		(28,012	)
Provision for doubtful accounts		68,284			40,804			52,460
Deferred income taxes		(164,694	)		310,338			(46,632	)
Impairment charges		382,447			342,559			24,757
(Gain) loss on divestiture of discontinued operations		379,260			6,744			(1,244	)
Other		17,935			12,414			13,537
Change in operating assets and liabilities:
Accounts receivable		(20,896	)		(59,031	)		(8,577	)
Inventories and other assets		22,854			(24,226	)		54,493
Accounts payable		(12,267	)		26,215			(10,380	)
Income taxes		10,242			4,350			30,155
Due to third party payors		(5,999	)		3,692			(30,882	)
Other accrued liabilities		(104,309	)		(48,955	)		(15,302	)
Net cash provided by operating activities		75,695			188,236			176,250
Cash flows from investing activities:
Routine capital expenditures		(69,806	)		(96,052	)		(121,931	)
Development capital expenditures		(25,895	)		(34,825	)		(19,931	)
Acquisitions, net of cash acquired		(9,650	)		(78,840	)		(673,547	)
Acquisition deposits		-			18,489			176,511
Sale of assets, net of lease termination charges		(71,555	)		25,987			8,735
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		(113,661	)		(97,740	)		(85,222	)
Sale of insurance subsidiary investments		243,616			95,488			75,075
Net change in insurance subsidiary cash and cash equivalents		133,618			877			(12,271	)
Proceeds from note receivable		-			-			25,000
Net change in other investments		24,637			(32,770	)		(4,620	)
Other		7			(255	)		10,972
Net cash provided by (used in) investing activities		111,311			(199,641	)		752,209
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,369,700			1,643,300			1,740,450
Repayment of borrowings under revolving credit		(1,432,200	)		(1,689,400	)		(1,631,850	)
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		(14,034	)		(13,527	)		(12,010	)
Repayment of other long-term debt		(1,045	)		(1,104	)		(6,752	)
Payment of deferred financing costs		(413	)		(522	)		(3,446	)
Issuance of common stock in connection with employee benefit plans		32			-			534
Payment of costs associated with issuance of common stock and tangible equity units		-			-			(915	)
Payment of dividend for mandatory redeemable preferred stock		(12,372	)		(11,514	)		(10,887	)
Dividends paid		(10,228	)		(40,738	)		(40,119	)
Contributions made by noncontrolling interests		505			14,514			2,152
Distributions to noncontrolling interests		(61,226	)		(45,985	)		(42,458	)
Purchase of noncontrolling interests		-			(1,000	)		-
Payroll tax payments for equity awards issuance		(2,532	)		(3,166	)		(10,225	)
Net cash provided by (used in) financing activities		(163,813	)		49,708			(993,889	)
Change in cash and cash equivalents		23,193			38,303			(65,430	)
Cash and cash equivalents at beginning of period		137,061			98,758			164,188
Cash and cash equivalents at end of period	$	160,254		$	137,061		$	98,758
Supplemental information:
Interest payments	$	221,177		$	216,062		$	180,266
Income tax refunds		2,054			253			26,473
Rental payments to Ventas, Inc.		154,374			167,743			171,829
Issuance of common stock in Gentiva Merger (see Note 3)		-			-			177,456
Non-cash contributions made by noncontrolling interests		1,150			2,800			5,980

Kindred Healthcare, Inc. is a healthcare services company that through its subsidiaries operates a home health, hospice, and community care business, transitional care (“TC”) hospitals (certified as long-term acute care (“LTAC”) hospitals under the Medicare program), inpatient rehabilitation hospitals (“IRFs”), and a contract rehabilitation services business across the United States (collectively, the “Company” or “Kindred”).

The consolidated financial statements include all subsidiaries that the Company controls, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All intercompany transactions have been eliminated.

The Company has completed several transactions related to the divestiture of unprofitable hospitals and nursing centers to improve its future operating results. The Company is also currently in the process of completing the SNF Divestiture (as defined and described more fully in Note 6). For accounting purposes, the operating results of these businesses and the gains, losses or impairments associated with these transactions have been classified as discontinued operations in the accompanying 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.

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and include amounts based upon the estimates and judgments of management. Actual amounts may differ from those estimates.

In February 2018, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which permits a company to reclassify the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) on items within accumulated other comprehensive income to retained earnings. The new guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company will not elect to early adopt and 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 2017, the FASB issued authoritative guidance with the objective of improving the financial reporting of hedging relationships under GAAP to better portray economic results and to simplify the application of the current hedge accounting guidance. The new guidance is effective for annual and interim periods beginning after December 15, 2018 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 2017, the FASB issued authoritative guidance to provide clarity and reduce diversity in practice when accounting for changes to terms or conditions of a share-based payment award. The new guidance is effective for annual and interim periods beginning after December 15, 2017. 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 January 2017, the FASB issued authoritative guidance that simplifies the measurement of goodwill impairment to a single-step test. The guidance removes step two of the goodwill impairment test, which required a hypothetical purchase price allocation. The measurement of goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the revised guidance, failing step one will always result in goodwill impairment. The new guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company adopted the new guidance on January 1, 2017 on a prospective basis. If the Company fails step one of the goodwill impairment test under the new guidance, the results could materially impact the Company’s financial position and results of operations but not its business or liquidity.

In January 2017, the FASB issued authoritative guidance that revises the definition of a business, which affects accounting for acquisitions, disposals, goodwill impairment, and consolidation. The guidance is intended to help entities evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The revision provides a more robust framework to use in determining when a set of assets and activities is a business. The new guidance is effective for annual and interim periods beginning after December 15, 2017. 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 November 2016, the FASB issued authoritative guidance that simplifies the disclosure of restricted cash within the statement of cash flows. The guidance is intended to reduce diversity when reporting restricted cash and requires entities to explain changes in the combined total of restricted and unrestricted balances in the statement of cash flows. The Company’s restricted cash totaled $53.2 million as of December 31, 2017, comprised of $1.7 million in other current assets, $22.5 million in current insurance subsidiary investments and $29.0 million in long-term insurance subsidiary investments. The Company’s restricted cash totaled $187.1 million as of December 31, 2016, comprised of $1.9 million in other current assets, $109.0 million in current insurance subsidiary investments and $76.2 million in long-term insurance subsidiary investments. The new guidance should be applied using a retrospective transition method and is effective for annual and interim periods beginning after December 15, 2017. The adoption of this standard is expected to have a material impact on the presentation of the Company’s consolidated statement of cash flows, but will not have an impact on the Company’s financial position or liquidity.

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 adoption of this standard is not expected to have a material impact on the Company’s business, financial position, results of operations, and 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. The Company will not elect early adoption and will apply the modified retrospective approach as required. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company does not expect an impact on its business, results of operations or 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.

The Company will adopt the guidance as of January 1, 2018 using the modified retrospective transition method, and will disclose the cumulative-effect adjustment to retained earnings in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2018. Based upon the Company’s assessment of the new guidance, it anticipates a pretax cumulative-effect adjustment to 2017 retained earnings in the range of $12 million to $14 million, which primarily relates to recognizing contractual revenues earlier due to variable considerations arising from the historical collectability of its private payor portfolio and other elements of revenue subject to estimation during the period of service.

In addition, the Company anticipates a reclassification of other operating expenses or general and administrative expenses to revenue in the range of $15 million to $20 million as a result of the provisions of the new standard in 2018. The Company estimates between $5 million to $8 million of these reclassifications relates to bad debt expense, while the remaining impact results from the performance obligations under the new standard.

The Company’s remaining implementation efforts are focused primarily on refining the disclosure process and internal controls.

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 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.

Cash and cash equivalents include highly liquid investments with an original maturity of three months or less when purchased. The Company reclassifies outstanding checks in excess of funds on deposit. As of December 31, 2017, $41.2 million was reclassified to accounts payable and $4.1 million was reclassified to salaries, wages and other compensation. As of December 31, 2016, $44.0 million was reclassified to accounts payable and $4.9 million was reclassified to salaries, wages and other compensation.

The Company maintains investments 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 fair value of publicly traded debt and equity securities and money market funds are based upon quoted market prices or observable inputs such as interest rates using either a market or income valuation approach. Since the Company’s insurance subsidiary investments are restricted for a limited purpose, they are classified in the accompanying consolidated balance sheet based upon the expected current and long-term cash requirements of the limited purpose insurance subsidiary.

The Company follows the authoritative guidance related to the meaning of other-than-temporary impairment and its application to certain investments to assess whether the Company’s investments with unrealized loss positions are other-than-temporarily impaired. Unrealized gains and losses, net of deferred income taxes, are reported as a component of accumulated other comprehensive income (loss). Realized gains and losses and declines in value judged to be other-than-temporary are determined using the specific identification method and are reported in the Company’s accompanying consolidated statement of operations. See Note 13.

Accounts receivable consist primarily of amounts due from the Medicare and Medicaid programs, other government programs, managed care health plans, commercial insurance companies, 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 change. Based upon the termination of RehabCare (as defined below) customers and litigation associated with the collection of past due accounts, the Company recorded a provision for doubtful accounts of $23.1 million and $12.9 million for the years ended December 31, 2017 and 2015, respectively.

The provision for doubtful accounts totaled $45.8 million for 2017, $19.3 million for 2016 and $33.5 million for 2015.

The Company’s TC hospitals, IRFs, home health services and hospice services are required to submit cost reports at least annually to various state and federal agencies administering the respective reimbursement programs. In many instances, interim cash payments to the Company are only an estimate of the amount due for services provided. Any overpayment to the Company arising from the completion of a cost report is recorded as a liability in the accompanying consolidated balance sheet.

Gentiva Health Services, Inc. (“Gentiva”) entered into a five-year Corporate Integrity Agreement with the United States Department of Health and Human Services Office of Inspector General (the “OIG”) (the “Gentiva CIA”), which became effective on February 15, 2012 and expired in February 2017. The Gentiva CIA imposed monitoring, reporting, certification, oversight and training obligations which the Company, as a result of the Gentiva Merger (as defined in Note 3), had to comply. In the event of a breach of the Gentiva CIA, the Company could have become liable for payment of certain stipulated penalties, or its Gentiva subsidiaries could have been excluded from participation in federal healthcare programs. During 2016, the Company paid stipulated penalties of $3.1 million for the failure to fully and adequately adhere to the requirements to implement the corrective actions called for in the Gentiva CIA.

The Company entered into a five-year corporate integrity agreement with the OIG on January 11, 2016 (the “RehabCare CIA”). The RehabCare CIA imposes monitoring, auditing (including by an independent review organization), reporting, certification, oversight, screening, and training obligations with which the Company must comply. These obligations include retention of an independent review organization to perform duties under the RehabCare CIA, which include reviewing compliance by RehabCare Group, Inc. and its subsidiaries (“RehabCare”), a therapy services company acquired by the Company on June 1, 2011, with federal program requirements and accepted medical practices, and annual reporting obligations to the OIG regarding RehabCare’s compliance with the RehabCare CIA (including corresponding certification by senior management and the Board of Directors or a committee thereof). In the event of a breach of the RehabCare CIA, the Company could become liable for payment of certain stipulated penalties, or RehabCare’s subsidiaries could be excluded from participation in federal healthcare programs. The costs associated with compliance with the RehabCare CIA could be substantial and may be greater than the Company currently anticipates.

Any breach or failure to comply with the RehabCare CIA, the imposition of substantial monetary penalties, or any suspension or exclusion from participation in federal healthcare programs, could have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

Inventories consist primarily of pharmaceutical and medical supplies and are stated at the lower of cost (first-in, first-out) or market.

Beginning April 1, 2017, the Company changed the estimated useful life of certain information technology equipment and software based upon a detailed review of actual utilization. Following the Gentiva Merger (as defined in Note 3), the Company made significant investments in information technology and software. The actual usage and longevity of these assets supports longer lives than previously estimated. The change in estimate extended the expected useful life by one to two years depending on the asset category and has been accounted for prospectively. The impact from this change in accounting estimate was a decrease to loss from continuing operations before income taxes of approximately $10.6 million for the year ended December 31, 2017.

Property and equipment is carried at cost less accumulated depreciation. Depreciation expense, computed by the straight-line method, was $90.2 million for 2017, $108.3 million for 2016 and $99.5 million for 2015. These amounts include amortization of assets recorded under capital leases. Depreciation rates for buildings range generally from 20 to 45 years. Leasehold improvements are depreciated over their estimated useful lives or the remaining lease term, whichever is shorter. Estimated useful lives of equipment vary from five to 15 years. Depreciation expense is not recorded for property and equipment classified as held for sale. Repairs and maintenance are expensed as incurred.

The Company separates capital expenditures into two categories, routine and development, in the accompanying consolidated statement of cash flows. Purchases of routine property and equipment include expenditures at existing facilities that generally do not result in increased capacity or the expansion of services. Development capital expenditures include expenditures for the development of new facilities or the expansion of services or capacity at existing facilities.

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 or IRFs, skilled nursing rehabilitation services reporting unit, hospital rehabilitation services reporting unit or sites of service at a geographical location level 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 within a renewal bundle in a master lease, are aggregated for purposes of evaluating the carrying values of long-lived assets.

Impairment charges recorded for the three years ended December 31, 2017 associated with long-lived assets are discussed in Note 5. Losses associated with the disposition or planned disposition of long-lived assets for the three years ended December 31, 2017 are discussed in Note 6.

Goodwill and indefinite-lived intangible assets primarily originated from business combinations accounted for as purchase transactions. Indefinite-lived intangible assets consist of trade names, Medicare certifications and certificates of need.

	Home health			Hospice		Community care			Hospitals			Hospital rehabilitation services (2)		IRFs		RehabCare			Total
Balances, December 31, 2015	$	739,677		$	639,006	$	166,312		$	628,519		$	173,618	$	322,678	$	-		$	2,669,810
Acquisitions		6,989			6,627		7,365			23,751			-		2,800		-			47,532
Dispositions		-			-		-			(29,831	)		-		-		-			(29,831	)
Impairment charges		-			-		-			(261,129	)		-		-		-			(261,129	)
Other (1)		(647	)		696		(214	)		-			-		857		-			692
Balances, December 31, 2016		746,019			646,329		173,463			361,310			173,618		326,335		-			2,427,074
Acquisitions		594			-		-			-			-		-		-			594
Dispositions		-			-		(2,837	)		-			-		-		-			(2,837	)
Impairment charges		-			-		-			(236,265	)		-		-		-			(236,265	)
Balances, December 31, 2017	$	746,613		$	646,329	$	170,626		$	125,045		$	173,618	$	326,335	$	-		$	2,188,566
Accumulated impairment charges:
December 31, 2016	$	(76,082	)	$	-	$	-		$	(261,129	)	$	-	$	-	$	(153,898	)	$	(491,109	)
December 31, 2017	$	(76,082	)	$	-	$	-		$	(497,394	)	$	-	$	-	$	(153,898	)	$	(727,374	)

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 home health, hospice, community care, hospitals, hospital rehabilitation services, IRFs, and RehabCare. The community care reporting unit is included in the home health operating segment of the Kindred at Home division. The hospital rehabilitation services and IRFs reporting units are both included in the Kindred Hospital Rehabilitation Services operating segment of the Kindred Rehabilitation Services division.

In January 2017, the FASB issued authoritative guidance that simplifies the measurement of goodwill impairment to a single-step test. The guidance removes step two of the goodwill impairment test, which required a hypothetical purchase price allocation. The measurement of goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under the revised guidance, failing step one will always result in goodwill impairment. The Company adopted the new guidance on January 1, 2017 on a prospective basis. Based upon the results of the annual impairment test for goodwill for each of the Company’s reporting units at October 1, 2017, an impairment charge of $236.3 million was recorded. See Note 5 for a discussion of goodwill impairment charges.

The goodwill impairment test involved a two-step process at October 1, 2016. The first step was 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 annual impairment test for goodwill for each of the Company’s reporting units at October 1, 2016, no impairment charges were recorded in connection with the Company’s annual impairment test. See Note 5 for a discussion of goodwill impairment triggering events.

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.

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 or declines in the value of the Company’s Common Stock (as defined below) may result in future impairment charges for a portion or all of these assets. Specifically, if the rate of growth of government and commercial revenues earned by the Company’s reporting units were to be less than projected, if healthcare reforms were to negatively impact the Company’s business, or if recent increases in labor costs materially exceed the Company’s projections in its 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 Company performs its annual indefinite-lived intangible asset impairment tests on May 1 and October 1 each fiscal year depending on the indefinite-lived intangible asset. See Note 5 for a discussion of indefinite-lived intangible asset impairment charges recorded during the years ended December 31, 2017 and 2016 as a result of these impairment tests and other triggering events. Based upon the results of the annual impairment test for indefinite-lived intangible assets discussed above for the year ended December 31, 2015, no impairment charges were recorded.

Losses associated with the disposition or planned disposition of goodwill and indefinite-lived intangible assets for the three years ended December 31, 2017 are discussed in Note 6.

The Company’s intangible assets include both finite and indefinite-lived intangible assets. The Company’s intangible assets with finite lives are amortized in accordance with the authoritative guidance for goodwill and other intangible assets, such as customer relationship assets, trade names, leasehold interests and non-compete agreements, primarily using the straight-line method over their estimated useful lives ranging from two to 15 years.

Amortization expense computed by the straight-line method totaled $14.6 million for 2017, $23.5 million for 2016 and $29.7 million for 2015.

The estimated annual amortization expense for the next five years for intangible assets at December 31, 2017 follows (in thousands):

	2017								2016
	Cost		Accumulated amortization			Carrying value		Weighted average life	Cost		Accumulated amortization			Carrying value		Weighted average life
Non-current:
Certificates of need (indefinite life)	$	314,323	$	-		$	314,323		$	313,816	$	-		$	313,816
Medicare certifications (indefinite life)		190,306		-			190,306			202,749		-			202,749
Trade names (indefinite life)		21,200		-			21,200			118,569		-			118,569
Non-compete agreements		210		(84	)		126	5 years		2,335		(2,130	)		205	2 years
Leasehold interests		11,032		(4,212	)		6,820	9 years		14,682		(3,162	)		11,520	8 years
Trade names		18,580		(17,536	)		1,044	4 years		18,580		(15,374	)		3,206	4 years
Customer relationship assets		126,290		(55,771	)		70,519	15 years		200,989		(80,946	)		120,043	14 years
	$	681,941	$	(77,603	)	$	604,338		$	871,720	$	(101,612	)	$	770,108

In connection with the Insurance Restructuring in October 2017 (as defined in Note 12), the provision for loss for professional liability risks is no longer funded to the Company’s wholly owned limited purpose insurance subsidiary, Cornerstone Insurance Company (“Cornerstone”) and as such, according to policy, the risks are no longer discounted. Likewise, the provision for loss for workers compensation risks is no longer funded to Cornerstone. Provisions for loss for these professional liability and workers compensation risks are based upon management's best available information, including actuarially determined estimates of loss. To the extent that expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited. See Notes 7 and 12.

Earnings per common share are based upon the weighted average number of common shares outstanding during the respective periods. The diluted calculation of earnings per common share includes the dilutive effect of stock options, performance-based restricted shares and tangible equity units. The Company follows the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities for purposes of calculating earnings per common share. See Note 9.

The Company accounts for derivative financial instruments in accordance with the authoritative guidance for derivatives and hedging. These derivative financial instruments are recognized as assets or liabilities in the accompanying consolidated balance sheet and are measured at fair value. The Company’s derivatives are designated as cash flow hedges. The Company entered into interest rate swap agreements in January 2016 and March 2014 to hedge its floating interest rate risk.

The interest rate swaps were assessed for hedge effectiveness for accounting purposes and the Company determined the interest rate swaps qualify for cash flow hedge accounting treatment at December 31, 2017 and 2016. The Company records the effective portion of the gain or loss on the 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 the derivative financial instruments as interest expense. There was no ineffectiveness related to the interest rate swaps for the years ended December 31, 2017 and 2016. The ineffectiveness related to the interest rate swaps for the year ended December 31, 2015 was immaterial. See Note 15.

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.

Of the Company’s 19 operating IRFs, 17 are partnerships subject to an operating and management services agreement. Under GAAP, the Company determined that 14 of these 17 partnerships qualify as VIEs and concluded that the Company is the primary beneficiary in all but one partnership. The Company holds an ownership interest and acts as manager in each of the partnerships. 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 upon 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 these partnerships.

The analysis upon which the consolidation determination rests can be complex, can involve uncertainties, and requires 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 at December 31 follow (in thousands):

The Company recognizes compensation expense in its consolidated financial statements using a Black-Scholes option valuation model for non-vested stock options. See Note 18.

The Company has performed an evaluation of subsequent events through the date on which the financial statements were issued.

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

On December 19, 2017, the Company announced that its Board of Directors (the “Board”) had approved a definitive agreement under which the Company will be acquired by a consortium of three companies: TPG Capital (“TPG”), Welsh, Carson, Anderson & Stowe (“WCAS”) and Humana Inc. (“Humana”). Subject to the terms and conditions of an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, Kentucky Hospital Holdings, LLC (“HospitalCo Parent”), Kentucky Homecare Holdings, Inc. (“Parent”) and Kentucky Homecare Merger Sub, Inc. (“Merger Sub”), Merger Sub will be merged with and into Kindred (the “Merger”), with Kindred continuing as the surviving company in the Merger (the “Surviving Entity”).

At the effective time of the Merger, each share of the Company’s common stock, par value $0.25 per share (“Common Stock”) issued and outstanding immediately prior to the effective time of the Merger (other than shares held by Parent, HospitalCo Parent, Merger Sub or Kindred and their respective wholly owned subsidiaries (which will be cancelled) and shares that are owned by stockholders who have properly exercised and perfected a demand for appraisal rights under Delaware law), will be cancelled and converted into the right to receive $9.00 in cash, without interest (the “Merger Consideration”).

The Merger Agreement contains customary representations, warranties and covenants for a transaction of this nature. The Merger Agreement also contains customary covenants, including, among others, covenants (i) providing for the Company and its respective subsidiaries to conduct business in all material respects in the ordinary course and not to take certain actions without Merger Sub’s consent and (ii) for each of the parties to use reasonable best efforts to cause the transactions contemplated by the Merger Agreement to be consummated. Additionally, the Merger Agreement provides for customary pre-closing covenants, including covenants not to solicit proposals relating to alternative transactions or, subject to certain exceptions, enter into discussions concerning or provide information in connection with alternative transactions, covenants to call and hold a meeting of the Company’s stockholders and a covenant to recommend that its stockholders adopt the Merger Agreement, subject to certain exceptions to permit the Company’s directors to satisfy their applicable fiduciary duties.

Consummation of the Merger is subject to various conditions, including, among others, adoption of the Merger Agreement by the requisite vote of the Company’s stockholders, the receipt of certain licensure and regulatory approvals, the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (this condition was satisfied on February 20, 2018), the consummation of the purchase of the two remaining skilled nursing facilities from Ventas, Inc. (“Ventas”) and payment of corresponding expense reimbursement to Ventas (this condition was satisfied on December 21, 2017), the satisfaction of the closing conditions to the Separation Agreement (as defined below) and certain related entity conversions, the absence of any material adverse effect on each of the Company, its home health, hospice and community care business, and its TC hospitals, IRFs and contract rehabilitation services business, and certain other customary closing conditions.

The Merger Agreement also contains certain termination rights for the Company and Merger Sub (including if the Merger is not consummated by August 17, 2018 (the “End Date”)) and provides that upon termination of the Merger Agreement under specified circumstances, including, among others, following a change in recommendation of the Board or its termination of the Merger Agreement to enter into a written definitive agreement for a “superior proposal,” the Company will be required to pay Merger Sub a termination fee of $29 million and reimburse the documented out-of-pocket expenses of Parent, HospitalCo Parent and certain of their affiliates in connection with the Merger Agreement (the “Parent Expenses”) up to $10 million.

If the Merger Agreement is submitted to a vote of the Company’s stockholders and approval of the Merger Agreement is not obtained, the Company will be required to reimburse Merger Sub for the amount of the Parent Expenses, up to $7.5 million.

Parent will be required to pay the Company a reverse termination fee of $61.5 million, and to reimburse certain of the Company’s expenses, including the reasonable and documented out-of-pocket expenses the Company incurred in connection with the implementation of the Separation Transactions (as defined in the Separation Agreement), up to $13.5 million, in the event the Merger Agreement is terminated (i) by the Company, subject to certain limitations set forth in the Merger Agreement, if (A) there has been a breach of a representation, warranty or covenant of Parent or Merger Sub that would cause the related closing condition to be incapable of being satisfied or cured by the End Date or, if curable, is not cured by Parent or Merger Sub by the earlier of 30 days after receipt of written notice of such breach and the End Date, (B) the conditions to Parent, HospitalCo Parent and Merger Sub’s obligations to consummate the closing have been satisfied (other than those conditions that by their terms are to be satisfied at or immediately prior to the closing, provided that such conditions are then capable of being satisfied at the closing), the Company has irrevocably confirmed to Parent in writing that the Company is prepared and able to consummate the closing, and Parent and Merger Sub fail to consummate the Merger by the later of the date the closing should have occurred and three business days following the date

of the notice from the Company described above, or (ii) by the Company or Parent if the Merger has not occurred by the End Date and at the time of termination all of the conditions to Parent, HospitalCo Parent and Merger Sub’s obligations to consummate the closing have been satisfied (other than those conditions that by their terms are to be satisfied by actions taken at the closing, provided that such conditions are then capable of being satisfied at the closing) other than those relating to obtaining specified licensure and regulatory approvals and/or there being any injunction or other order by a governmental entity charged with jurisdiction over the granting of such approvals.

In connection with the Merger Agreement, Parent and HospitalCo Parent have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement and the Separation Agreement, the aggregate proceeds of which will be sufficient to consummate the transactions contemplated by the Merger Agreement and the Separation Agreement on the closing date, including the payment of any amounts required to be paid by Parent pursuant to the Merger Agreement on the closing date, the repayment of the Company’s existing indebtedness, and the payment of all fees and expenses reasonably expected to be incurred in connection therewith. Pursuant to equity commitment letters executed and delivered concurrently with the Merger Agreement, subject to the terms and conditions set forth therein, Humana, TPG, WCAS and Port-aux-Choix Private Investments Inc. (“PSP”), have committed, severally but not jointly, to capitalize Parent, and TPG, WCAS and PSP have committed, severally but not jointly, to capitalize HospitalCo Parent, with the aggregate amount of the equity financing. In addition, each of Humana, TPG, WCAS and PSP have provided us limited guarantees, guaranteeing Parent’s obligation to pay the reverse termination fee and certain other reimbursement obligations of the Parent and Merger Sub pursuant to the Merger Agreement.

Concurrently with the execution and delivery of the Merger Agreement, on December 19, 2017, Kindred, Parent, HospitalCo Parent, and Kentucky Hospital Merger Sub, Inc., entered into a Separation Agreement (the “Separation Agreement”), pursuant to which, promptly following the effective time of the Merger, the Surviving Entity will be separated from the Company’s home health, hospice and community care services business and acquired by HospitalCo Parent.

The Separation Agreement relates to, among other things (i) certain restructuring transactions that are to take place with respect to the Company and its subsidiaries, (ii) procedures concerning the transfer of certain assets and employees used or employed in the Company’s respective businesses and (iii) the allocation of costs and expenses related to the separation of the Surviving Entity from the Homecare Business (as defined in the Separation Agreement). The Separation Agreement requires, among other things, the Company to take certain actions and expend certain efforts prior to the closing of the Merger in preparation for such separation transactions.

On October 9, 2014, the Company entered into an Agreement and Plan of Merger with Gentiva, providing for the Company’s acquisition of Gentiva. On February 2, 2015, the Company consummated the acquisition with one of its subsidiaries merging with and into Gentiva (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 (i) $14.50 in cash (the “Gentiva Cash Consideration”), without interest, and (ii) 0.257 of a validly issued, fully paid and nonassessable share of Common Stock (the “Gentiva Stock Consideration”). The purchase price totaled $722.3 million and was comprised of $544.8 million of Cash Consideration and $177.5 million of Gentiva Stock Consideration. The Company also assumed $1.2 billion of long-term debt, which was paid off upon consummation of the Gentiva Merger.

The Company used the net proceeds from the Gentiva Financing Transactions (as defined in Note 15), to fund the Gentiva Cash Consideration, repay Gentiva’s existing debt and pay related transaction fees and expenses.

Operating results for the year ended December 31, 2016 included transaction and integration costs totaling $5.6 million, retention and severance totaling $0.7 million, and a lease termination charge of $0.3 million related to the Gentiva Merger. Operating results for the year ended December 31, 2015 included transaction and integration costs totaling $37.9 million, retention and severance costs totaling $60.3 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, and the lease termination charge was recorded as building rent expense for 2016. Transaction, integration, retention and severance costs were recorded as general and administrative expenses, the lease termination charge was recorded as building rent expense and financing costs were recorded as general and administrative expenses ($6.0 million) and as interest expense ($17.4 million) for 2015.

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 21).

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 was 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 following is a summary of the Company’s other acquisition activities. The operating results of the acquired businesses have been included in the accompanying consolidated financial statements of the Company from the respective acquisition dates. The purchase price of acquired businesses and acquired leased facilities resulted from negotiations with each of the sellers that were based upon both the historical and expected future cash flows of the respective businesses and real estate values. The majority of these acquisitions were financed through operating cash flows and borrowings under the Company’s ABL Facility (as defined in Note 15). Unaudited pro forma financial data related to the acquired businesses have not been presented because the acquisitions are not material, either individually or in the aggregate, to the Company’s consolidated financial statements.

	Allocation of purchase price
Acquisitions	Accounts receivable			Property and equipment		Goodwill		Identifiable intangible assets		Other assets		Deferred income taxes and other liabilities			Total purchase price, net of cash received
Year ended December 31, 2017:
Home health acquisitions	$	-		$	-	$	594	$	6,056	$	-	$	-		$	6,650
Acquisition of previously leased real estate		-			3,000		-		-		-		-			3,000
	$	-		$	3,000	$	594	$	6,056	$	-	$	-		$	9,650
Year ended December 31, 2016:
Home health and hospice acquisitions (a)	$	989		$	-	$	19,557	$	56,993	$	-	$	-		$	77,539
Acquisition of TC hospitals from Select (defined below)		-			10,191		23,751		17,731		749		5,850			46,572
Home-based primary care acquisition		-			-		1,424		376		-		-			1,800
IRF acquisitions		-			-		2,800		1,129		-		2,800			1,129
Other		(3,287	)		-		692		-		21		(2,574	)		-
	$	(2,298	)	$	10,191	$	48,224	$	76,229	$	770	$	6,076		$	127,040
Year ended December 31, 2015:
Acquisition of Centerre (defined below)	$	28,525		$	15,122	$	265,737	$	23,512	$	21,135	$	174,766		$	179,265
Home-based primary care acquisitions		1,410			47		9,991		2,112		-		1,408			12,152
Home health acquisition		-			-		155		1,845		-		-			2,000
Other		-			-		5,980		-		-		5,980			-
	$	29,935		$	15,169	$	281,863	$	27,469	$	21,135	$	182,154		$	193,417

The fair value of each of the acquisitions noted above was measured primarily using discounted cash flow methodologies which are considered Level 3 inputs (as described in Note 21).

During the year ended December 31, 2017, the Company acquired a TC hospital building formerly leased from Ventas. The Company is currently marketing the building for sale and the net book value, which approximates fair value, is reported in other long-term assets as of December 31, 2017.

In 2016, the Company acquired five TC hospitals (233 licensed beds) operated by Select Medical Holdings Corporation (“Select”) and sold three of its TC hospitals (255 licensed beds) to Select. The Company paid Select $7.4 million, of which $6.0 million was in lieu of selling another TC hospital to Select. See Note 6.

On January 1, 2015, the Company completed the acquisition of Centerre Healthcare Corporation (“Centerre”) for a purchase price of approximately $195 million in cash. The Company paid approximately $4 million in cash for a working capital settlement. Centerre operated 11 IRFs with 614 beds through partnerships.

For the years ended December 31, 2016 and 2015, the Company incurred $8.7 million and $109.1 million, respectively, in transaction costs. Transaction costs related to the Gentiva Merger incurred for the years ended December 31, 2016, and 2015 totaled $6.3 million and $104.2 million, respectively. These costs were charged to general and administrative expenses for the periods incurred.

During the fourth quarter of 2017, the Company recorded a hospital division reporting unit goodwill impairment charge of $236.3 million in connection with its annual impairment test performed as of October 1, 2017. The impairment was required after cash flow projections and related mitigation strategies were refined after completing the first full year of operations under LTAC Legislation (as defined below). The refinement of the projections and mitigation strategies were finalized over the last three months of 2017 in connection with the preparation of the Company’s annual budget for 2018. The Company also tested the carrying value of its hospital division intangible assets and property and equipment and determined impairment charges of $3.2 million for a Medicare license and $0.8 million for property and equipment were also 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.

During the fourth quarter of 2017, the Company also recorded an asset impairment charge of $3.5 million related to previously acquired home health and hospice certificates of need as part of the annual indefinite-lived intangible assets impairment review at October 1, 2017. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

During the fourth quarter of 2017, the Company also recorded asset impairment charges of $1.1 million related to property and equipment of the planned sale of two hospitals. The fair value of the property and equipment was measured using Level 3 inputs, primarily replacement cost and a pending offer.

During the year ended December 31, 2017, the Company recorded asset impairment charges of $134.6 million related to the previously acquired RehabCare trade name ($97.4 million) and customer relationship intangible asset ($37.2 million) due to the expected loss of affiliated contracts related to the SNF Divestiture and cancellation of non-affiliated contracts. The fair value of the trade name was measured using Level 3 inputs, such as projected revenues and royalty rate. The fair value of the customer relationship intangible asset was measured using Level 3 inputs, such as discounted projected future operating cash flows.

During the year ended December 31, 2017, the Company also recorded asset impairment charges of $1.3 million related to a hospital certificate of need ($0.7 million) and a Medicare certification for an IRF ($0.6 million) after completing the annual indefinite-lived intangible assets impairment review at May 1, 2017. The fair value of the certificate of need was measured using Level 3 inputs, such as operating cash flows. The fair value of the Medicare certification was measured using a pending offer, a Level 3 input.

On October 1, 2016, the Company completed the sale of 12 TC 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 TC hospitals in the third quarter of 2016, (3) a reduction in revenues associated with revenue rate reductions announced by the Centers for 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 Legislation that became effective for the majority of the Company’s TC hospitals on September 1, 2016 (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.

This goodwill impairment test involved a two-step process at October 1, 2016. The first step was 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.

During the year ended December 31, 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. The fair value of the assets was measured using a Level 3 input of the then 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 the year ended December 31, 2016, the Company recorded an asset impairment charge of $2.6 million related to the sale of a hospital division medical office building. The fair value of the property was measured using a Level 3 input of the offer pending at June 30, 2016. The property was subsequently sold during the third quarter of 2016.

The Company determined that the sale of three TC 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.

As part of the annual indefinite-lived intangible assets impairment review at October 1, 2016, an impairment charge of $3.6 million was recorded related to previously acquired home health and hospice Medicare certifications, certificates of need and a trade name. The fair value of the assets was measured using Level 3 inputs, such as projected revenues and operating cash flows. As part of the impairment review at May 1, 2016, an impairment charge of $3.5 million was recorded related to certificates of need for two hospitals. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

In connection with the preparation of the Company’s operating results for the third quarter of 2015, the Company determined that the impact of the regulatory changes announced on July 31, 2015 as part of the Pathway for SGR Reform Act of 2013 (the “SGR Reform Act”) related to the Company’s hospital reporting unit was an impairment triggering event. As part of the SGR Reform Act, Congress adopted various legislative changes impacting LTAC hospitals (the “LTAC Legislation”). The LTAC Legislation created new Medicare patient criteria and payment rules for LTAC hospitals. The Company tested the recoverability of its hospital reporting unit goodwill and determined that goodwill was not impaired.

During the fourth quarter of 2015, the Company recorded an asset impairment charge of $18.0 million related to the previously acquired RehabCare trade name due to the cancellation of contracts associated with one large customer in the fourth quarter of 2015 and a reduction in projected revenues in 2016. The fair value of the trade name was measured using Level 3 inputs such as projected revenues and the industry specific royalty rate.

During the year ended December 31, 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. The fair value of the trade names was measured using Level 3 unobservable inputs, primarily economic obsolescence.

Each of the impairment charges discussed above reflects the amount by which the carrying value of the assets exceeded its estimated fair value at each impairment date.

During 2017, the Company closed seven TC hospitals and 16 home health and hospice locations and recorded write-offs of property and equipment of $2.9 million, indefinite-lived intangible assets of $12.2 million, leasehold assets of $2.4 million and lease termination charges of $33.4 million.

During 2017, the Company sold four community care facilities for $3.6 million in cash and sold a building within the Kindred at Home division for $0.8 million in cash.

During 2016, the Company closed three TC hospitals and seven home health and hospice locations and recorded write-offs of property and equipment of $7.1 million, indefinite-lived intangible assets of $8.7 million and leasehold liabilities of $5.2 million.

During 2015, the Company either sold or closed 22 home health and hospice locations and recorded write-offs of property and equipment of $1.4 million, indefinite-lived intangible assets of $8.9 million and goodwill of $2.6 million, which was based upon the relative fair value of the sold home health and hospice locations.

All of the previously mentioned charges were recorded as restructuring charges in the accompanying consolidated statement of operations for all periods. See Note 8.

During 2016, the Company also completed the Curahealth Disposal for $21.0 million in net cash proceeds, the facility swap with Select and sold a hospital division medical office building for $3.7 million. See Notes 4 and 5.

On June 30, 2017, the Company entered into a definitive agreement with BM Eagle Holdings, LLC, a joint venture led by affiliates of BlueMountain Capital Management, LLC (“BlueMountain”), under which the Company agreed to sell its skilled nursing facility business for $700 million in cash (the “SNF Divestiture”). The SNF Divestiture included 89 nursing centers with 11,308 licensed beds and seven assisted living facilities with 380 licensed beds in 18 states. During 2017, the Company completed the sale of 81 skilled nursing facilities and five assisted living facilities on various dates for gross sales proceeds of $664.2 million.

As previously disclosed, 36 of the skilled nursing facilities were previously leased from Ventas (the “Ventas Properties”). The Company had an option to acquire the real estate of the Ventas Properties for aggregate consideration of $700 million, which the Company exercised as it closed on the sale of the Ventas Properties in connection with the SNF Divestiture during 2017. On each respective closing date, the Company paid Ventas the allocable portion of the $700 million purchase price for the Ventas Properties and Ventas conveyed the real estate for the applicable Ventas Property to BlueMountain or its designee. The Company, through an escrow agent, paid Ventas $647.4 million for 34 of the Ventas Properties in connection with the closings that occurred during 2017. Additionally, the Company paid $52.6 million to an escrow agent, who paid Ventas, for two facilities to be sold in 2018. The $76.0 million difference between the $640.9 million net cash proceeds and $716.9 million paid to Ventas and another landlord is included in the sale of assets in investing activities in the accompanying consolidated statement of cash flows.

The Company has previously announced that it has reached an agreement with BlueMountain and the relevant landlord to close five leased facilities in Massachusetts. None of the original purchase price with BlueMountain was allocated to these five facilities. The Company has transferred the day-to-day operations of these facilities to a third party and expects the closing of these facilities will be completed in the second quarter of 2018.

The completion of the remainder of the sales is subject to customary conditions to closing, including the receipt of all licensure, regulatory and other approvals. The Company expects that the remainder of the sales will occur in phases as regulatory and other approvals are received. The Company expects that all of the closings will be completed during 2018.

During 2017, the Company recorded $379.4 million of pretax charges related to the SNF Divestiture, including a $265.5 million lease termination charge, $76.3 million of transaction and other costs, a $17.9 million loss on sale-leaseback transaction, and $19.7 million of retention costs. During 2016, the Company recorded $7.0 million of pretax charges related to the SNF Divestiture, including $3.0 million of transaction costs and $4.0 million of retention costs.

In connection with the SNF Divestiture, the Company entered into an interim management agreement in the third quarter of 2017 with certain affiliates of BlueMountain in the state of California whereby the Company would lease its license of certain operations to such affiliates until licensure approval is obtained. Because the Company has continuing involvement in the business through purveying certain rights of ownership of the assets while under the interim management agreement and license sublease, the Company does not meet the requirements for a sale-leaseback transaction as described in ASC 840-40, Leases - Sale-Leaseback Transactions. Under the failed-sale-leaseback accounting model, the Company is deemed under GAAP to still own certain real estate assets sold to BlueMountain, which the Company must continue to reflect in its consolidated balance sheet and depreciate over the assets’ remaining useful life. The Company also must treat a portion of the pretax cash proceeds from the SNF Divestiture as though it were the result of a $140.8 million other long-term liability financing obligation in its accompanying consolidated balance sheet, and also must defer a $17.9 million gain associated with some of these assets until continuing involvement ceases. The lease will terminate upon licensure approval, at which time the Company will cease to recognize the remaining other long-term liability financing obligation, as well as the remaining net book value of the real estate assets and will recognize the gain.

The Company recorded a loss on divestiture of $4.6 million for the year ended December 31, 2017, related to the sale of 15 non-strategic hospitals and one nursing center to an affiliate of Vibra Healthcare, LLC in 2013. The loss on divestiture related to an allowance for the settlement of disposed working capital under the terms of the sale agreement.

On December 27, 2014, the Company entered into an agreement with 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. During 2015, the Company transferred the operations of seven of the 2014 Expiring Facilities and recorded a gain on divestiture of $2.0 million. The two remaining facilities were transferred during 2016 and the Company recorded a gain on divestiture of $0.3 million. For accounting purposes, the 2014 Expiring Facilities qualified as assets held for sale. Under the terms of the agreement to transition operations of the 2014 Expiring Facilities, the Company incurred a $40 million termination fee in exchange for early termination of the leases, which was paid to Ventas in January 2015. The early termination fee was accrued as rent expense in discontinued operations in 2014.

In accordance with the authoritative guidance for the impairment or disposal of long-lived assets, the divestiture of unprofitable businesses discussed in Notes 1 and 6 have been accounted for as discontinued operations. Accordingly, the results of operations of these businesses for all periods presented and the gains, losses or impairments related to these divestitures have been classified as discontinued operations, net of income taxes, in the accompanying 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. At December 31, 2017, the Company had five nursing centers held for sale classified as discontinued operations.

In June 2017, the Company entered into a definitive agreement regarding the SNF Divestiture. In connection with the SNF Divestiture, the results of operations of the skilled nursing facility business, which previously were reported in the nursing center division, and the gains or losses associated with the SNF Divestiture, have been classified as discontinued operations for all periods presented. In addition, direct overhead and the profits from applicable RehabCare contracts servicing the Company’s skilled nursing facility business that were not retained with new operators were moved to discontinued operations for all periods presented. The

Company has reclassified certain retained businesses and expenses previously reported in the nursing center division to other business segments, including hospital-based sub-acute units and a skilled nursing facility to the hospital division and a small therapy business to the Kindred Hospital Rehabilitation Services operating segment for all periods presented. See Note 6.

The following table summarizes (in thousands) the SNF Divestiture liability activity (included in current liabilities) during the two years ended December 31, 2017, which does not include non-cash charges of $14.9 million related to other costs for the year ended December 31, 2017:


	Year ended December 31,
	2017			2016			2015
Revenues	$	733,504		$	1,038,770		$	1,087,423
Salaries, wages and benefits		287,641			383,526			391,898
Supplies		31,496			43,374			45,938
Building rent		62,819			80,881			83,630
Equipment rent		6,203			7,575			7,816
Other operating expenses		218,555			288,856			297,115
General and administrative expenses		130,543			181,634			192,677
Other income		(709	)		(606	)		(683	)
Impairment charges		1,268			27,830			-
Restructuring charges		-			4,010			352
Depreciation and amortization		12,313			27,820			29,128
Interest expense		21			50			48
Investment income		(63	)		(57	)		(64	)
		750,087			1,044,893			1,047,855
Income (loss) from operations before income taxes		(16,583	)		(6,123	)		39,568
Provision for income taxes		271			69			8,764
Income (loss) from operations		(16,854	)		(6,192	)		30,804
Gain (loss) on divestiture of operations		(379,260	)		(6,744	)		1,244
Income (loss) from discontinued operations		(396,114	)		(12,936	)		32,048
Earnings attributable to noncontrolling interests		(12,861	)		(18,759	)		(16,486	)
Income (loss) attributable to Kindred	$	(408,975	)	$	(31,695	)	$	15,562

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

	Year ended December 31,
	2017		2016		2015
Revenues:
Nursing center division	$	731,609	$	1,036,066	$	1,085,055
Hospital division		1,895		2,704		2,368
	$	733,504	$	1,038,770	$	1,087,423
Segment adjusted operating income:
Nursing center division	$	63,143	$	139,840	$	159,558
Hospital division		2,835		2,146		920
	$	65,978	$	141,986	$	160,478
Rent:
Nursing center division:
Building rent	$	60,942	$	79,018	$	81,653
Equipment rent		6,203		7,575		7,804
	$	67,145	$	86,593	$	89,457
Hospital division:
Building rent	$	1,877	$	1,863	$	1,977
Equipment rent		-		-		12
	$	1,877	$	1,863	$	1,989
Totals:
Building rent	$	62,819	$	80,881	$	83,630
Equipment rent		6,203		7,575		7,816
	$	69,022	$	88,456	$	91,446

Depreciation and amortization:
Nursing center division	$	12,313	$	27,820	$	29,128
Hospital division		-		-		-
	$	12,313	$	27,820	$	29,128

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 operations, cost efficiencies and capital structure in response to changes in the healthcare industry, increasing leverage 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 accompanying consolidated 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 fourth quarter of 2017, the Company announced that the Board had approved the Merger Agreement as described in Note 2. The costs incurred in 2017 related to the Merger Agreement include merger costs and a lease amendment fee and are expected to be substantially completed in 2018.

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

The following table (in thousands) summarizes the Merger restructuring liability activity (included in other accrued liabilities):

During the third quarter of 2017, the Company approved phase two of the LTAC hospital portfolio repositioning plan that incorporated the closure and conversion of certain LTAC hospitals as part of its mitigation strategies in response to new patient criteria for LTAC hospitals under the LTAC Legislation. The activities related to the LTAC hospital portfolio repositioning 2017 plan are expected to be substantially completed by the end of 2018.

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 hospital portfolio repositioning 2017 plan liability activity (included in current liabilities and deferred credits and other liabilities) during the year ended December 31, 2017, which does not include non-cash charges of $10.2 million related to asset write-offs:

During the first quarter of 2016, the Company approved LTAC hospital portfolio repositioning 2016 plan that incorporated 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 hospital portfolio repositioning 2016 plan were substantially completed during 2016.

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 hospital portfolio repositioning 2016 plan liability activity (included in current liabilities and deferred credits and other liabilities) for the two years ended December 31, 2017, which does not include non-cash charges of $1.1 million and $20.9 million related to asset write-offs in 2017 and 2016, respectively:

During the first quarter of 2017, the Kindred at Home division approved and initiated a cost and operations efficiency initiative to address increases in labor costs associated with competitive labor markets and the integration of pay practices from acquisitions across the Kindred at Home portfolio. This initiative included the consolidation and closure of under-performing branches and a reduction in force associated with the restructuring of divisional and regional support teams. These activities were substantially completed during 2017.

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

The following table (in thousands) summarizes the related restructuring liability activity (included in current liabilities) during the year ended December 31, 2017, which does not include non-cash charges of $4.6 million related to asset write-offs:

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

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

The following table (in thousands) summarizes the Company’s Kindred at Home branch consolidation restructuring liability activity (included in current liabilities) for the two years ended December 31, 2017, which does not include non-cash charges of $2.6 million and $2.5 million related to asset write-offs in 2017 and 2016, respectively:

As a result of the Company’s plan to exit the skilled nursing facility business, the Company plans to optimize its overhead structure by eliminating certain corporate and shared services overhead above the facility level. The activities related to the skilled nursing facility business exit are expected to be substantially complete in 2018.

During the year ended December 31, 2016, the Company initiated a restructuring plan to improve operations and cost efficiencies in the Kindred Rehabilitation Services division and support center. Actions related to these plans were completed during 2016.

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

The following table summarizes the Company’s skilled nursing facility business exit plan liability activity (included in current liabilities) (in thousands):

Loss per common share is based upon the weighted average number of common shares outstanding during the respective periods. Because the Company is reporting a loss from continuing operations attributable to the Company for the three years ended December 31, 2017, the diluted calculation of earnings per common share excludes the dilutive impact of stock options, performance-based restricted shares and tangible equity units of 1.4 million, 1.7 million and 2.6 million for 2017, 2016 and 2015, respectively. 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. However, because the Company reported a loss from continuing operations attributable to the Company, there was no allocation to participating unvested restricted stockholders for all periods presented.

The Company is organized into three operating divisions: the Kindred at Home division, the hospital division, and the Kindred Rehabilitation Services division. Based upon the authoritative guidance for business segments, the Company’s operating divisions represent five reportable operating segments, including (1) home health services, (2) hospice services, (3) hospitals, (4) Kindred Hospital Rehabilitation Services, and (5) RehabCare. 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.

The Company has reclassified certain retained businesses and expenses previously reported in the nursing center division, including hospital-based sub-acute units and a skilled nursing facility to the hospital division and a small therapy business to the Kindred Hospital Rehabilitation Services operating segment for all periods presented.

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

Loss from continuing operations:
Segment adjusted operating income:
Kindred at Home:
Home health	$	276,218		$	279,531		$	256,173
Hospice		129,273			116,326			109,120
		405,491			395,857			365,293
Hospital division		337,487			441,644			486,213
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		203,392			198,335			177,340
RehabCare		6,884			32,586			35,876
		210,276			230,921			213,216
Support center expenses		(249,007	)		(261,916	)		(259,532	)
Litigation contingency expense		(7,435	)		(2,840	)		(138,648	)
Impairment charges		(381,179	)		(314,729	)		(24,757	)
Restructuring charges		(40,343	)		(34,734	)		(10,250	)
Transaction costs		-			(8,679	)		(109,131	)
Building rent		(257,516	)		(264,306	)		(257,221	)
Equipment rent		(34,856	)		(39,929	)		(38,590	)
Restructuring charges - rent		(44,518	)		(61,392	)		(2,368	)
Depreciation and amortization		(104,805	)		(131,819	)		(129,246	)
Interest, net		(237,912	)		(231,504	)		(229,595	)
Loss from continuing operations before income taxes		(404,317	)		(283,426	)		(134,616	)
Provision (benefit) for income taxes		(157,116	)		314,262			(51,714	)
	$	(247,201	)	$	(597,688	)	$	(82,902	)

	Year ended December 31,
	2017		2016		2015
Rent:
Kindred at Home:
Home health:
Building	$	32,469	$	33,026	$	31,315
Equipment		1,028		1,302		1,607
		33,497		34,328		32,922
Hospice:
Building		16,725		17,105		16,219
Equipment		331		334		420
		17,056		17,439		16,639
Hospital division:
Building		172,040		177,381		175,795
Equipment		29,370		34,239		32,497
		201,410		211,620		208,292
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Building		34,086		33,710		29,423
Equipment		1,685		1,567		1,357
		35,771		35,277		30,780
RehabCare:
Building		1,281		1,276		1,236
Equipment		2,332		2,361		2,589
		3,613		3,637		3,825
Support center:
Building		915		1,808		3,233
Equipment		110		126		120
		1,025		1,934		3,353
Totals:
Building		257,516		264,306		257,221
Equipment		34,856		39,929		38,590
	$	292,372	$	304,235	$	295,811
Depreciation and amortization:
Kindred at Home:
Home health	$	10,759	$	15,721	$	17,279
Hospice		4,360		6,364		6,581
		15,119		22,085		23,860
Hospital division		41,827		50,618		54,049
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services		14,881		14,538		13,523
RehabCare		4,161		7,961		7,780
		19,042		22,499		21,303
Support center		28,817		36,617		30,034
	$	104,805	$	131,819	$	129,246

	Year ended December 31,
	2017		2016		2015
Capital expenditures, excluding acquisitions (including discontinued operations):
Kindred at Home:
Home health:
Routine	$	4,323	$	6,401	$	4,201
Development		-		-		-
		4,323		6,401		4,201
Hospice:
Routine		2,379		2,342		1,215
Development		-		-		-
		2,379		2,342		1,215
Hospital division:
Routine		18,304		23,858		28,935
Development		-		-		-
		18,304		23,858		28,935
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Routine		2,743		1,389		948
Development		547		20,773		4,701
		3,290		22,162		5,649
RehabCare:
Routine		1,820		1,867		1,449
Development		-		-		-
		1,820		1,867		1,449
Support center:
Routine:
Information systems		33,064		38,123		64,813
Other		1,525		4,695		1,589
Development		25,083		8,117		3,484
		59,672		50,935		69,886
Discontinued operations - nursing centers:
Routine		5,648		17,377		18,781
Development		265		5,935		11,746
		5,913		23,312		30,527
Totals:
Routine		69,806		96,052		121,931
Development		25,895		34,825		19,931
	$	95,701	$	130,877	$	141,862

The Tax Reform Act, which was enacted on December 22, 2017, is generally effective in 2018 and makes broad and significantly complex changes to the federal corporate tax system, including the reduction in the U.S. federal corporate income tax rate from 35% to 21% and the limitation on the deductibility of interest expense. The Company estimated the impact of the Tax Reform Act to deferred income taxes on its December 31, 2017 balance sheet in accordance with its understanding of the Tax Reform Act and guidance available as of the date of this filing. As a result, the Company has recorded an estimated $130.5 million income tax benefit related to reducing certain deferred income tax liabilities in the fourth quarter of 2017.

In December 2017, the FASB issued authoritative guidance to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with this authoritative guidance, the Company has determined that the $130.5 million income tax benefit recorded in connection with the assessment of the valuation allowance is a provisional amount and a reasonable estimate that may change. Additional work is necessary to complete a more detailed analysis of the Tax Reform Act.

The estimated impact of $130.5 million from the Tax Reform Act resulted from both the reassessment of the deferred income tax valuation allowance and the change in the income tax rate. The removal of the carryforward period for federal net operating losses (“NOLs”) under the Tax Reform Act resulted in a portion of the remaining deferred tax liability becoming available as a source-of-income that can be used to offset certain deferred tax assets. This change resulted in the Company releasing $118.4 million of its deferred income tax valuation allowance. The change in the income tax rate from 35% to 21% resulted in the Company’s deferred liability being reduced by $12.1 million.

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 if there are cumulative losses in the two most recent years and the current year, which was the case for the Company at December 31, 2017 and December 31, 2016. The Company’s outlook of taxable income for 2016 changed after the Company recorded $286.8 million of goodwill and property and equipment impairment charges and announced the planned SNF Divestiture and related expected loss on divestiture for tax purposes. Accordingly, a full valuation allowance was recorded at both December 31, 2017 and December 31, 2016. 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 valuation allowance was reduced to $378.8 million at December 31, 2017 from $423.1 million at December 31, 2016. The Company recorded an increase to the valuation allowance of $ 246.4 million before the impact of the Tax Reform Act, which required a reduction in the valuation allowance of $290.7 million, comprised of both the $130.5 million decrease in deferred tax liabilities discussed above and a $160.2 million decrease to deferred tax assets and related valuation allowance based upon the change in the U.S. corporate income tax rate from 35% to 21%.

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. Prior to the Tax Reform Act, the uncertain timing of this reversal and the temporary difference associated with certain indefinite lived intangible assets could not be considered a source of future taxable income for purposes of determining the valuation allowance. As such, certain deferred tax liabilities could not be used to offset deferred tax assets. As a result of the Tax Reform Act, a portion of the Company’s federal indefinite-lived intangible assets can be used as a source of income. As a result of this change and other activity in 2017, the Company’s net deferred tax liability was reduced to $36.9 million at December 31, 2017 from $201.8 million at December 31, 2016. The deferred tax liability at December 31, 2017 is comprised of the entire state portion of indefinite-lived intangible assets and a portion of the Company’s federal indefinite-lived intangible assets that could not be used as a source of income. The deferred tax liability at December 31, 2016 is comprised entirely of both federal and state indefinite-lived intangible assets that could not be used as a source of income. This change in deferred tax liabilities available as a source of income relates to changes in carryforward periods and limitations that no longer exist. The new 80% limitation on NOLs creates a new limitation for federal purposes that must be considered.

Reconciliation of federal statutory tax benefit to the provision (benefit) for income taxes follows (in thousands):

Other items consist of meals, entertainment, lobbying, and other permanent differences, which individually are deemed immaterial.

A summary of net deferred income tax assets (liabilities) by source included in the accompanying consolidated balance sheet at December 31 follows (in thousands):

	2017					2016
	Assets			Liabilities		Assets			Liabilities
Property and equipment	$	-		$	11,572	$	-		$	18,457
Insurance		80,800			-		50,901			-
Account receivable allowances		31,809			-		39,739			-
Compensation		34,252			-		56,746			-
Net operating losses		244,424			-		222,828			-
Assets held for sale		-			1,847		-			-
Litigation		-			-		-			-
Goodwill and intangibles		-			98,048		-			226,490
Lease amendments		14,991			-		17,426			-
Jobs tax and other credits		22,795			-		28,310			-
Other		24,347			-		50,343			-
		453,418		$	111,467		466,293		$	244,947
Reclassification of deferred tax liabilities		(111,467	)				(244,947	)
Net deferred tax assets		341,951					221,346
Valuation allowance		(378,832	)				(423,154	)
	$	(36,881	)			$	(201,808	)

Net deferred income tax liabilities totaling $36.9 million and $201.8 million at December 31, 2017 and 2016, respectively, were classified as noncurrent liabilities.

The Company identified deferred tax assets for federal income tax NOLs of $162.2 million (tax effected at 21%) and $162.4 million (tax effected at 35%) at December 31, 2017 and December 31, 2016, respectively, with corresponding deferred income tax valuation allowances of $162.2 million and $162.4 million at December 31, 2017 and December 31, 2016, respectively. The federal income tax NOLs expire in various amounts through 2037. The Company had deferred income tax assets for state income tax NOLs of $82.2 million and $60.4 million at December 31, 2017 and December 31, 2016, respectively, and corresponding deferred income tax valuation allowances of $82.0 million and $60.0 million at December 31, 2017 and December 31, 2016, respectively, for that portion of the net deferred income tax assets that the Company will likely not realize in the future.

The Company follows the provisions of the authoritative guidance for accounting for uncertainty in income taxes which clarifies the accounting for uncertain income tax issues recognized in an entity’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return.

The Company records accrued interest and penalties associated with uncertain tax positions as income tax expense in the consolidated statement of operations. Accrued interest related to uncertain tax provisions totaled $3.5 million as of December 31, 2017 and $3.3 million as of December 31, 2016.

The federal statute of limitations remains open for tax years 2014 through 2016. During 2017, the Company resolved federal income tax audits for the 2015 tax year. During 2017, Gentiva and its subsidiaries also resolved federal tax audits for the February 1, 2015 short-period tax return. The Company is currently under examination by the Internal Revenue Service (the “IRS”) for the 2016 and 2017 tax years. The Company has been accepted into the IRS Compliance Assurance Process (“CAP”) program for the 2016 through 2018 tax years. The CAP program is an enhanced, real-time review of a company’s tax positions and compliance. The Company expects participation in the CAP program will improve the timeliness of its federal tax examinations.

State jurisdictions generally have statutes of limitations for tax returns ranging from three to five years. The state impact of federal income tax changes remains subject to examination by various states for a period of up to one year after formal notification to the states. Currently, the Company has various state income tax returns under examination.

In October 2017, in connection with the review of the Company’s insurance programs as part of the SNF Divestiture, the Company restructured the funding and retention mechanisms of recent policy years of its professional liability and workers compensation insurance programs (the “Insurance Restructuring”). With respect to professional liability, certain funding mechanisms and reinsurance agreements were modified such that approximately $106 million of cash deposits maintained by Cornerstone and $4 million of other cash deposits were released to the parent company. In addition, approximately $115 million of workers compensation restricted cash collateral deposits were replaced with letters of credit (see Note 15) and approximately $21 million of other workers compensation cash deposits were released to the parent company. In aggregate, the Company used the approximately $246 million generated from the Insurance Restructuring and $35 million of the distributions received from Cornerstone as a result of improved underwriting results during the last two quarters of 2017 to repay in its entirety the Company’s ABL Facility (as defined in Note 15) balance and to increase cash reserves. The Company incurred $10.4 million of contract cancellation costs and professional fees during 2017 in connection with the Insurance Restructuring.

As a result of the Insurance Restructuring, on a per-claim basis the Company maintains a self-insured retention and Cornerstone insures all losses in excess of this retention. Cornerstone maintains commercial reinsurance through unaffiliated commercial reinsurers for these losses in excess of our retention. The Insurance Restructuring had no impact upon the financial risk transfer aspect of Cornerstone’s reinsurance agreements with its third party reinsurers. As a result of the Insurance Restructuring, on a per-claim basis the Company maintains a deductible under commercial insurance policies for workers compensation which provide coverage up to statutory limits in each state. The Insurance Restructuring had no impact upon the financial risk transfer aspect of these third party insurance agreements. The provisions for loss for these professional liability and workers compensation risks are based upon management’s best available information, including actuarially determined estimates of loss.

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

Changes in the allowance for professional liability risks and workers compensation risks for the years ended December 31 follow (including discontinued operations) (in thousands):

	2017									2016
	Professional liability			Workers compensation			Total			Professional liability			Workers compensation			Total
Allowance for insurance risks at beginning of year	$	360,595		$	265,208		$	625,803		$	327,372		$	254,849		$	582,221
Provision for loss for retained insurance risks:
Current year		64,649			49,143			113,792			66,750			52,754			119,504
Prior years		(12,764	)		(28,445	)		(41,209	)		(2,310	)		(14,018	)		(16,328	)
		51,885			20,698			72,583			64,440			38,736			103,176
Provision for reinsurance and insurance, administrative and overhead costs		12,666			16,531			29,197			12,914			15,082			27,996
Discount accretion		1,110			-			1,110			953			-			953
Contributions from managed facilities		508			349			857			273			496			769
Payments for insurance risks:
Current year		(3,937	)		(10,584	)		(14,521	)		(3,884	)		(12,026	)		(15,910	)
Prior years		(97,478	)		(28,642	)		(126,120	)		(66,639	)		(32,606	)		(99,245	)
		(101,415	)		(39,226	)		(140,641	)		(70,523	)		(44,632	)		(115,155	)
Payments for reinsurance and insurance, administrative and overhead costs		(12,666	)		(16,531	)		(29,197	)		(12,914	)		(15,082	)		(27,996	)
Change in reinsurance and other recoverables		24,913			(3,633	)		21,280			38,080			15,759			53,839
Allowance for insurance risks at end of year	$	337,596		$	243,396		$	580,992		$	360,595		$	265,208		$	625,803

	2015
	Professional liability			Workers compensation			Total
Allowance for insurance risks at beginning of year	$	307,751		$	189,259		$	497,010
Provision for loss for retained insurance risks:
Current year		55,498			55,172			110,670
Prior years		(1,173	)		(18,151	)		(19,324	)
		54,325			37,021			91,346
Provision for reinsurance and insurance, administrative and overhead costs		12,317			10,475			22,792
Discount accretion		1,190			-			1,190
Contributions from managed facilities		220			344			564
Acquisitions		13,948			64,223			78,171
Payments for insurance risks:
Current year		(6,158	)		(11,483	)		(17,641	)
Prior years		(68,611	)		(36,842	)		(105,453	)
		(74,769	)		(48,325	)		(123,094	)
Payments for reinsurance and insurance, administrative and overhead costs		(12,317	)		(10,475	)		(22,792	)
Change in reinsurance and other recoverables		24,707			12,327			37,034
Allowance for insurance risks at end of year	$	327,372		$	254,849		$	582,221

A summary of the assets and liabilities related to insurance risks included in the accompanying consolidated balance sheet at December 31 follows (in thousands):

	2017						2016
	Professional liability		Workers compensation		Total		Professional liability		Workers compensation		Total
Assets:
Current:
Insurance subsidiary investments	$	17,577	$	4,969	$	22,546	$	64,622	$	44,344	$	108,966
Reinsurance and other recoverables		3,331		969		4,300		7,912		1,488		9,400
Other		-		50		50		-		50		50
		20,908		5,988		26,896		72,534		45,882		118,416
Non-current:
Insurance subsidiary investments		9,576		19,412		28,988		97,223		107,706		204,929
Reinsurance and other recoverables		103,058		97,624		200,682		111,596		101,984		213,580
Deposits		27		1,949		1,976		4,202		22,979		27,181
		112,661		118,985		231,646		213,021		232,669		445,690
	$	133,569	$	124,973	$	258,542	$	285,555	$	278,551	$	564,106
Liabilities:
Allowance for insurance risks:
Current	$	60,767	$	42,394	$	103,161	$	65,284	$	48,237	$	113,521
Non-current		276,829		201,002		477,831		295,311		216,971		512,282
	$	337,596	$	243,396	$	580,992	$	360,595	$	265,208	$	625,803

In connection with the Insurance Restructuring, the provision for loss for professional liability risks is no longer discounted and no longer funded to Cornerstone. Prior to the Insurance Restructuring, provisions for loss for professional liability risks retained by Cornerstone were discounted based upon actuarial estimates of claim payment patterns using a discount rate of 1%. The discount rate was based upon the risk-free interest rate for the respective year. Amounts equal to the discounted loss provision were 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 were not discounted. If the Company had not discounted any of the allowances for professional liability risks, these balances would have approximated $363.2 million at December 31, 2016.

In connection with the Insurance Restructuring, the provision for loss for workers compensation risks is no longer funded to Cornerstone.

In connection with the Insurance Restructuring, the Company liquidated a significant portion of its insurance subsidiary investments and released that cash back to the parent to repay debt and increase cash reserves. The Company maintains a portfolio of insurance subsidiary investments, consisting of cash and cash equivalents at December 31, 2017, for the payment of claims and expenses related to professional liability and workers compensation risks maintained by its limited purpose insurance subsidiary. 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 at December 31 follows (in thousands):

	2017								2016
	Cost		Unrealized gains		Unrealized losses		Fair value		Cost		Unrealized gains		Unrealized losses			Fair value
Cash and cash equivalents (a)	$	51,534	$	-	$	-	$	51,534	$	185,152	$	-	$	-		$	185,152
Debt securities:
Corporate bonds		-		-		-		-		55,239		37		(100	)		55,176
U.S. Treasury notes		-		-		-		-		24,763		6		(42	)		24,727
Debt securities issued by U.S. government agencies		-		-		-		-		18,344		7		(63	)		18,288
		-		-		-		-		98,346		50		(205	)		98,191
Equities by industry:
Consumer		-		-		-		-		2,596		66		(150	)		2,512
Technology		-		-		-		-		2,105		120		(23	)		2,202
Financial services		-		-		-		-		1,641		213		(24	)		1,830
Industrials		-		-		-		-		1,291		57		(19	)		1,329
Healthcare		-		-		-		-		1,332		-		(86	)		1,246
Other		-		-		-		-		6,530		109		(70	)		6,569
		-		-		-		-		15,495		565		(372	)		15,688
Certificates of deposit		-		-		-		-		14,850		14		-			14,864
	$	51,534	$	-	$	-	$	51,534	$	313,843	$	629	$	(577	)	$	313,895

At December 31, 2017, all of the available-for-sale investments of the Company’s insurance subsidiary have maturity dates within one year.

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

Net investment income earned by the Company’s insurance subsidiary investments follows (in thousands):

The available-for-sale investments of the Company’s insurance subsidiary which have unrealized losses at December 31, 2016 are shown below. The investments are categorized by the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016.

December 31, 2016	Less than one year				One year or greater				Total
(In thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Debt securities:
Corporate bonds	$	27,406	$	100	$	-	$	-	$	27,406	$	100
U.S. Treasury notes		11,120		42		-		-		11,120		42
Debt securities issued by U.S. government agencies		10,712		63		-		-		10,712		63
		49,238		205		-		-		49,238		205
Equities by industry:
Consumer		1,294		150		-		-		1,294		150
Technology		459		23		-		-		459		23
Financial services		-		-		152		24		152		24
Industrials		-		-		422		19		422		19
Healthcare		1,246		86		-		-		1,246		86
Other		2,267		70		-		-		2,267		70
		5,266		329		574		43		5,840		372
	$	54,504	$	534	$	574	$	43	$	55,078	$	577

The unrealized losses on equities totaling $0.4 million at December 31, 2016 were due generally to market fluctuations. Accordingly, the Company believes these unrealized losses are temporary in nature.

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 December 31, 2016 and recognized pretax other-than-temporary impairments of $0.2 million 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 value and the likelihood of near term price recovery of each investment. Because the Company considered the remaining unrealized losses at December 31, 2016 to be temporary, the Company did not record any additional impairment losses related to these investments.

The Company leases real estate and equipment under cancelable and non-cancelable arrangements. The following table sets forth rent expense by business segment (in thousands):

	Year ended December 31,
	2017		2016		2015
Kindred at Home:
Home health:
Buildings	$	32,469	$	33,026	$	31,315
Equipment		1,028		1,302		1,607
		33,497		34,328		32,922
Hospice:
Buildings		16,725		17,105		16,219
Equipment		331		334		420
		17,056		17,439		16,639
Hospital division:
Buildings:
Ventas		114,161		118,053		118,511
Other landlords		57,879		59,328		57,284
Equipment		29,370		34,239		32,497
		201,410		211,620		208,292
Kindred Rehabilitation Services:
Kindred Hospital Rehabilitation Services:
Buildings		34,086		33,710		29,423
Equipment		1,685		1,567		1,357
		35,771		35,277		30,780
RehabCare:
Buildings		1,281		1,276		1,236
Equipment		2,332		2,361		2,589
		3,613		3,637		3,825
Support center:
Buildings		915		1,808		3,233
Equipment		110		126		120
		1,025		1,934		3,353
Totals:
Buildings:
Ventas		114,161		118,053		118,511
Other landlords		143,355		146,253		138,710
Equipment		34,856		39,929		38,590
	$	292,372	$	304,235	$	295,811

Various facility leases include contingent annual rent escalators based upon a change in the Consumer Price Index or other agreed upon terms such as a patient revenue test. These contingent rents are included in rent expense in the year incurred. The Company recorded contingent rent of $1.9 million, $0.8 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, including both continuing operations and discontinued operations.

Future minimum payments under non-cancelable operating leases are as follows (in thousands):

At December 31, 2017, the Company leased from Ventas and its affiliates 29 TC hospitals under one master lease agreement (the “Master Lease Agreement”). The Master Lease Agreement includes land, buildings, structures, and other improvements on the land, easements, and similar appurtenances to the land and improvements, and permanently affixed equipment, machinery, and other fixtures relating to the operation of the leased properties. There are one or more bundles of leased properties under the Master Lease Agreement, with each bundle containing several TC hospitals.

As part of the SNF Divestiture, the Company entered into an agreement with Ventas in 2016 which provided the Company with the option to acquire the real estate for all 36 skilled nursing facilities (previously defined as the “Ventas Properties”) that were leased from Ventas for an aggregate consideration of $700 million. As of December 31, 2017, the Company had acquired all of the Ventas Properties from Ventas, and all but two of such Ventas Properties were sold to third parties in the SNF Divestiture.

On November 7, 2017, the Company and Ventas amended the Master Lease Agreement in connection with its purchase and closure of one of the TC hospitals leased thereunder. As part of such amendment, the Company paid Ventas $3 million for the real estate of such TC hospital, with the annual rent otherwise payable for such TC hospital of $5.0 million reallocated among the remaining facilities leased under the Master Lease Agreement. For accounting purposes, the reallocated rent is treated as a one-time non-cash lease termination charge. The Company recorded a $32.3 million lease termination charge in the fourth quarter of 2017 in connection with this transaction. 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 2025, which is the original lease term of the TC hospital. This lease termination fee was recorded as a restructuring charge in the accompanying consolidated statement of operations.

Concurrently with the execution and delivery of the Merger Agreement, on December 19, 2017, the Company and Ventas entered into an Amendment No. 2 (the “Ventas Lease Amendment”) to the Master Lease Agreement pursuant to which, among other things, (i) Ventas agreed that the transactions contemplated by the Merger Agreement and the Separation Agreement comply with the Master Lease Agreement, subject to the satisfaction of the remaining requirements in the Master Lease Agreement related thereto, including payment to Ventas of a transaction fee equal to 10% of annual base rent under the Master Lease Agreement upon closing of the transactions, (ii) the Company agreed to pay to Ventas an additional $5 million fee within one business day of the signing of the Merger Agreement in exchange for Ventas’ approval of and agreement not to challenge the transaction structure (this condition was satisfied on December 20, 2017), (iii) the Company agreed to complete the purchase of the two remaining skilled nursing facilities under the Master Lease Agreement and our former Second Amended and Restated Master Lease No. 2 from Ventas, and pay corresponding expense reimbursements to Ventas, on or before December 31, 2017 (this condition was satisfied on December 21, 2017), and (iv) the Company agreed to make certain minimum expenditures for the leased facilities remaining under the Master Lease Agreement going forward.

In connection with the Curahealth Disposal, the Company entered into amendments to certain of its master lease agreements on April 3, 2016 to transition the operations for seven TC hospitals (the “Leased Hospitals”). The Leased Hospitals were leased under the applicable master lease agreement until the closing of the Curahealth Disposal on October 1, 2016. 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 its 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.

In connection with these transactions, the Company incurred a pretax lease termination fee of $52.3 million comprised of the $6.5 million of fees paid to Ventas in conjunction with execution of the amendments and $45.8 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. These lease termination fees were recorded as restructuring charges in the accompanying consolidated statement of operations.

The Master Lease Agreement is commonly known as a triple-net lease or an absolute-net lease. Accordingly, in addition to rent, the Company is required to pay the following: (1) all insurance required in connection with the leased properties and the business conducted on the leased properties, (2) certain taxes levied on or with respect to the leased properties (other than taxes on the income of Ventas), and (3) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

The Company paid rents to Ventas (including amounts classified within discontinued operations) approximating $154.4 million for the year ended December 31, 2017, $167.7 million for the year ended December 31, 2016, and $171.8 million for the year ended December 31, 2015.

The following table summarizes scheduled maturities of long-term debt (in thousands):

The estimated fair value of the Company’s long-term debt approximated $3.3 billion and $3.2 billion at December 31, 2017 and December 31, 2016, respectively. See Note 21.

As used herein, the “Credit Facilities” refers collectively to the Term Loan Facility and the ABL Facility, in each case as defined and described below.

The “Term Loan Facility” refers to the Company’s $1.36 billion term loan credit facility provided pursuant to the terms and provisions of that certain Sixth Amended and Restated Term Loan Credit Agreement dated as of March 14, 2017 (the “Term Loan Credit Agreement”), among the Company, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent. All obligations under the Term Loan Facility are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of the Company’s wholly owned, domestic material subsidiaries, as well as certain non-wholly owned domestic subsidiaries as the Company may determine from time to time in its sole discretion.

The Term Loan Facility (1) matures on April 9, 2021, (2) contains financial maintenance covenants in the form of a maximum total leverage ratio, a minimum fixed charge coverage ratio and a maximum amount of annual capital expenditures, (3) imposes restrictions on the Company’s ability to incur debt and liens and make acquisitions, investments and payments on equity and junior debt, and (4) provides for interest rate margins of 3.50% for the London Interbank Offered Rate (“LIBOR”) borrowings (subject to a floor of 1.00%) and 2.50% for base rate borrowings.

A summary of the amendments to the Term Loan Facility since January 1, 2015 is set forth below.

On March 14, 2017, the Company entered into the Term Loan Credit Agreement that amended and restated the Term Loan Facility to, among other things, (1) make adjustments to certain covenants and definitions to better accommodate the SNF Divestiture, (2) provide the Company with increased leverage covenant flexibility for an interim period, (3) increase the applicable margin on the outstanding borrowings from 3.25% to 3.50% for LIBOR borrowings and from 2.25% to 2.50% for base rate borrowings, (4) require a maximum leverage ratio of no more than 5.00 to 1.00 for use of the $50 million annual dividend basket, and (5) provide for a prepayment premium of 1.00% in connection with any repricing transaction within six months of the closing date. In accordance with the authoritative guidance on debt, the Company accounted for the amendment as a debt modification.

On June 14, 2016, the Company amended and restated the 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, and (4) an incremental term loan in an aggregate principal amount of $200 million. The incremental term loan 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 then outstanding under the Term Loan Facility. The net proceeds from the incremental term loan were used to repay a portion of the outstanding borrowings under the ABL Facility.

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

The “ABL Facility” refers to the Company’s $900 million asset-based loan revolving credit facility provided pursuant to the terms and provisions of that certain Fourth Amended and Restated ABL Credit Agreement dated as of June 14, 2016 (the “ABL Credit Agreement”) among the Company, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, as amended on September 27, 2017. All obligations under the ABL Facility are fully and unconditionally guaranteed, subject to certain customary release provisions, by substantially all of the Company’s wholly owned, domestic material subsidiaries, as well as certain other subsidiaries as the Company may determine from time to time in its sole discretion. As of December 31, 2017, $156.0 million of letters of credit were outstanding under the ABL Facility.

The ABL Facility (1) matures on April 9, 2019, (2) contains financial maintenance covenants in the form of a minimum fixed charge coverage ratio and a maximum amount of annual capital expenditures, (3) imposes restrictions on the Company’s ability to incur debt and liens and make acquisitions, investments and payments on equity and junior debt, and (4) provides for interest rate

margins of 2.00% to 2.50% for LIBOR borrowings and 1.00% to 1.50% for base rate borrowings (in each case depending on average daily excess availability), and (5) employs a borrowing base calculation to determine total available capacity thereunder.

A summary of the amendments to the ABL Facility since January 1, 2015 is set forth below.

On September 27, 2017, the Company entered into an amendment to the ABL Facility to update the provisions pertaining to letters of credit issued thereunder.

On June 14, 2016, the Company entered into the ABL Credit Agreement that 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 June 3, 2015, the Company entered into an amendment agreement to the ABL Facility that among other items, modified the restrictions on the amount of cash and temporary cash investments that may be held outside of certain deposit accounts subject to control agreements.

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

• the Company issued $1.35 billion aggregate principal amount of the Notes (as defined below);

• the Company issued approximately 15 million shares of its Common Stock through two common stock offerings and issued 9.7 million shares of its Common Stock through the Stock Consideration (see Note 3);

• the Company amended its ABL Facility in October 2014 and Term Loan Facility in November 2014.

On December 18, 2014, Kindred Escrow Corp. II (the “Escrow Issuer”), one of the Company’s subsidiaries, completed a private placement of $750 million aggregate principal amount of 8.00% Senior Notes due 2020 (the “Notes due 2020”) and $600 million aggregate principal amount of 8.75% Senior Notes due 2023 (the “Notes due 2023”, and, together with the Notes due 2020, the “Notes”). The Notes due 2020 were issued pursuant to the indenture, dated as of December 18, 2014 (the “2020 Indenture”), between the Escrow Issuer and Wells Fargo Bank, National Association, as trustee. The Notes due 2023 were issued pursuant to the indenture, dated as of December 18, 2014 (the “2023 Indenture” and, together with the 2020 Indenture, the “Indentures”), between the Escrow Issuer and Wells Fargo Bank, National Association.

The Notes were assumed by the Company and fully and unconditionally guaranteed on a senior unsecured basis by substantially all of the Company’s wholly owned, domestic material subsidiaries, including substantially all of the Company’s and Gentiva’s wholly owned, domestic material subsidiaries (the “Guarantors”), ranking pari passu with all of the Company’s respective existing and future senior unsubordinated indebtedness. On October 30, 2015, the Company completed a registered exchange offer to exchange the Notes for registered notes with substantially identical terms.

The Indentures contain certain restrictive covenants that limit the Company and its restricted subsidiaries’ ability to, among other things, incur, assume or guarantee additional indebtedness; pay dividends, make distributions or redeem or repurchase capital stock; effect dividends, loans or asset transfers from its subsidiaries; sell or otherwise dispose of assets; and enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The Indentures also contain customary events of default.

Under the terms of the Indentures, the Company may pay dividends pursuant to specified exceptions, including if its consolidated coverage ratio (as defined therein) is at least 2.0 to 1.0, it may also pay dividends in an amount equal to 50% of its consolidated net income (as defined therein) and 100% of the net cash proceeds from the issuance of capital stock, in each case since January 1, 2014. The making of certain other restricted payments or investments by the Company or its restricted subsidiaries would reduce the amount available for the payment of dividends pursuant to the foregoing exception.

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.

The Notes due 2022 bear interest at an annual rate of 6.375% and are senior unsecured obligations of the Company and the 2022 Guarantors. The 2022 Indenture contains certain restrictive covenants that, among other things, limits the Company and its restricted subsidiaries’ ability to incur, assume or guarantee additional indebtedness; pay dividends, make distributions or redeem or repurchase capital stock; effect dividends, loans or asset transfers from the Company’s subsidiaries; sell or otherwise dispose of assets; and enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The 2022 Indenture also contains customary events of default. The Notes due 2022 are fully and unconditionally guaranteed, subject to customary release provisions, by substantially all of the Company’s wholly owned, domestic material subsidiaries. On January 28, 2015, the Company completed a registered exchange offer to exchange each of the Notes due 2022 for registered notes with substantially identical terms.

Under the terms of the Notes due 2022, the Company may pay dividends pursuant to specified exceptions, including if its consolidated coverage ratio (as defined therein) is at least 2.0 to 1.0, the Company may pay dividends in an amount equal to 50% of its consolidated net income (as defined therein) and 100% of the net cash proceeds from the issuance of capital stock. The making of certain other restricted payments or investments by the Company or its restricted subsidiaries would reduce the amount available for the payment of dividends pursuant to the foregoing exception.

On January 30, 2015, following the receipt of sufficient consents to approve the proposed amendments, the Company, the 2022 Guarantors and Wells Fargo Bank, National Association, as trustee, entered into the first supplemental indenture (the “2022 Supplemental Indenture”) to the 2022 Indenture. The 2022 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 2022 Supplemental Indenture became operative following the consummation of the Gentiva Merger.

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 outstanding Term Loan Facility debt, which replaced the previous $225 million aggregate swap that expired on January 11, 2016. 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%.

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 outstanding Term Loan Facility debt. 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 and 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 was based upon the three-month LIBOR, subject to a minimum rate of 1.0%.

The interest rate swaps were assessed for hedge effectiveness for accounting purposes and the Company determined the interest rate swaps qualify for cash flow hedge accounting treatment at December 31, 2017 and 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. There was no ineffectiveness related to the interest rate swaps for the years ended December 31, 2017 and 2016. The ineffectiveness related to the interest rate swaps for the year ended December 31, 2015 was immaterial.

At December 31, 2017 and 2016, the aggregate fair value of the interest rate swaps was recorded in other current assets for $2.5 million and in other accrued liabilities for $2.7 million, respectively. The fair value was determined by reference to a third party valuation and is considered a Level 2 input within the fair value hierarchy.

To finance the Gentiva Merger, the Company issued 172,500 tangible equity units (the “Units”). Each Unit was 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. On December 1, 2017, the remaining holders of 87,379 Purchase Contracts were mandatorily redeemed. As a result, holders thereof received 50.6329 shares of Common Stock per Purchase Contract, resulting in approximately 4.4 million shares of Common Stock being issued on such date. Holders of the Mandatory Redeemable Preferred Stock were previously entitled to receive a quarterly “preferred stock installment payment,” in cash, shares of Common Stock, or a combination thereof. The final preferred stock installment payment date was December 1, 2017, the same date that all shares of Mandatorily Redeemable Preferred Stock were redeemed as planned pursuant to their terms.

The Purchase Contracts were recorded as capital in excess of par value, net of issuance costs, and the Mandatory Redeemable Preferred Stock was recorded as long-term debt. Issuance costs associated with the Mandatory Redeemable Preferred Stock were recorded as deferred financing costs within long-term debt on the consolidated balance sheet and were amortized using the effective interest method as interest expense over the term of the instrument. On the issuance date, the Company allocated the proceeds of the Units to equity and debt based on the relative fair values of the respective components of each Unit. The aggregate values assigned upon issuance of each component of the Units were as follows (amounts in thousands except price per Unit):

Dividends on each share of Mandatory Redeemable Preferred Stock accumulated on the outstanding liquidation preference at a rate of 7.25% per annum. On March 1, June 1, September 1 and December 1 of each year, commencing on March 1, 2015, the Company paid equal quarterly cash installments of $18.75 per share of Mandatory Redeemable Preferred Stock (except for the March 1, 2015 and June 1, 2016 installment payments, which were $20.00 and $18.76 per share of Mandatory Redeemable Preferred Stock, respectively). Each installment payment constituted a payment of dividends (recorded as interest expense) and a payment of consideration for the partial reduction in liquidation preference of the Mandatory Redeemable Preferred Stock.

Following the Gentiva Merger, the Company included the minimum number of shares to be issued under the Purchase Contracts in the denominator of the calculation of basic earnings per share. Diluted earnings per share, when applicable, included the weighted average number of common shares used in the basic denominator adjusted for the assumed number of shares that would be issued on the balance sheet date.

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 Notes 7 and 12.

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 24.

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.

In connection with the Gentiva Merger, Kindred issued 9.7 million shares of Common Stock as part of the Gentiva Stock Consideration. See Note 3.

As of December 31, 2016, holders of 85,121 Purchase Contracts had elected early settlement. As a result, holders thereof received 43.0918 shares of Common Stock per Purchase Contract, resulting in approximately 3.7 million shares of Common Stock being issued by the Company. On December 1, 2017, the remaining holders of the 87,379 Purchase Contracts were mandatorily redeemed. As a result, holders thereof received 50.6329 shares of Common Stock per Purchase Contract, resulting in approximately 4.4 million shares of Common Stock being issued on such date. See Note 16.

During 2017, the Company paid a cash dividend of $0.12 per share of Common Stock on March 31, 2017 to shareholders of record as of the close of business on March 13, 2017. The Board elected to discontinue paying dividends on the Company’s Common Stock following the March 31, 2017 payment and instead redirected funds to repay debt and invest in growth.

During 2016, the Company paid cash dividends of $0.12 per share of Common Stock on each of the following dates: December 9, 2016, September 2, 2016, June 10, 2016 and April 1, 2016.

During 2015, the Company paid cash dividends of $0.12 per share of Common Stock on each of the following dates: December 11, 2015, September 4, 2015, June 10, 2015 and April 1, 2015.

The Company made quarterly installment payments on the Units of $18.75 per Unit on December 1, 2017 (to holders of record as of close of business on November 15, 2017), September 1, 2017, June 1, 2017 and March 1, 2017. The Company made installment payments on the Units of $18.75 per Unit on December 1, 2016, September 1, 2016, March 1, 2016, December 1, 2015, September 1, 2015, June 1, 2015 and March 2, 2015 and of $18.76 per Unit on June 1, 2016.

In May 2011, the shareholders of the Company approved an additional three million shares of Common Stock issuable under the Company’s incentive compensation plans to Company employees. In May 2014, the shareholders of the Company approved an additional 2.7 million shares of Common Stock issuable under the Company’s incentive compensation plans to Company employees, and in February 2015, pursuant to an exception for shareholder approval under the exchange listing standards, the Company assumed an additional 1.4 million shares of Common Stock in connection with the Gentiva Merger, which shares are only issuable to legacy Gentiva employees or employees of the Company hired after February 2, 2015. In May 2017, the shareholders of the Company approved an additional five million shares of Common Stock issuable under the Company’s incentive compensation plans to Company employees. In May 2012 and again in May 2015, the shareholders of the Company approved an additional 200,000 shares of Common Stock issuable under the Company’s equity compensation plan to the Company’s non-employee directors. In May 2017, the shareholders of the Company approved an additional 800,000 shares of Common Stock issuable under the Company’s equity compensation plan to the Company’s non-employee directors.

The Company maintains plans under which approximately 13 million service-based restricted shares, performance-based restricted shares, service-based restricted stock units and options to purchase Common Stock may be granted to directors, officers and other key employees. Exercise provisions vary, but most stock options are exercisable in whole or in part beginning one to four years after grant and ending seven to ten years after grant. Shares of Common Stock available for future grants were 4,901,301, 1,410,752 and 3,262,892 at December 31, 2017, 2016 and 2015, respectively.

In conjunction with the Gentiva Merger, 1,075,965 stock options were assumed in 2015. There were no other stock option grants during 2017, 2016, and 2015.

Compensation expense related to stock options was immaterial for the year ended December 31, 2017, and approximated $0.2 million ($0.1 million net of income taxes) for the year ended December 31, 2016 and $0.4 million ($0.3 million net of income taxes) for the year ended December 31, 2015.

At December 31, 2017 the intrinsic value of the stock options exercised during 2017 and cash received from stock option exercises in 2017 was immaterial. No stock options were exercised during 2016. The intrinsic value of the stock options exercised during 2015 approximated $0.3 million. Cash received from stock option exercises in 2015 totaled $0.5 million.

The intrinsic value of the stock options outstanding and stock options that are exercisable as of December 31, 2017 was zero.

At December 31, 2017, unearned compensation costs related to non-vested service-based restricted shares aggregated $14.7 million. These costs will be expensed over the remaining weighted average vesting period of approximately two years. Compensation expense related to these awards approximated $15.2 million ($9.2 million net of income taxes) for the year ended December 31, 2017, $14.2 million ($8.6 million net of income taxes) for the year ended December 31, 2016 and $13.6 million ($8.2 million net of income taxes) for the year ended December 31, 2015.

The fair value of restricted shares vested during 2017, 2016 and 2015 was $7.6 million, $6.9 million and $22.7 million, respectively.

Performance-based restricted share awards vest over a three-year period based upon the attainment of various performance measures in each performance period. Compensation expense related to these awards approximated $1.6 million ($1.0 million net of income taxes) for the year ended December 31, 2017, $1.0 million ($0.6 million net of income taxes) for the year ended December 31, 2016 and $5.8 million ($3.5 million net of income taxes) for the year ended December 31, 2015.

The performance measures and fair value for each vesting period of a performance-based restricted share award are established annually. The performance measures and fair value for the non-vested performance-based restricted shares have not been established for vesting periods with performance measures determined after December 31, 2017.

At December 31, 2017, unearned compensation related to non-vested service-based restricted stock units was immaterial. Compensation expense related to these awards approximated $0.4 million ($0.2 million net of income taxes) for the year ended December 31, 2017, $1.0 million ($0.6 million net of income taxes) for the year ended December 31, 2016 and $0.8 million ($0.5 million net of income taxes) for the year ended December 31, 2015.

The Company maintains defined contribution retirement plans covering employees who meet certain minimum eligibility requirements. Benefits are determined as a percentage of a participant’s contributions and generally are vested based upon length of service. Retirement plan expense was $4.4 million for 2017, $5.1 million for 2016 and $8.6 million for 2015. Amounts equal to retirement plan expense are funded annually.

Supplemental information related to the balance sheets at December 31 follows (in thousands):

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 for the years ended December 31, 2017 and 2016 are summarized below (in thousands):

	Fair value measurements
	Level 1		Level 2			Level 3			Assets/liabilities at fair value			Total losses
December 31, 2017
Recurring:
Assets:
Deposits held in money market funds	$	17,012	$	-		$	-		$	17,012		$	-
Money market funds		6,354		-			-			6,354			-
Interest rate swaps		-		2,508			-			2,508			-
	$	23,366	$	2,508		$	-		$	25,874		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(3,375	)	$	(3,375	)	$	-
Non-recurring:
Assets:
Property and equipment	$	-	$	-		$	327,400		$	327,400		$	(2,062	)
Goodwill		-		-			125,045			125,045			(236,265	)
Intangible assets - Kindred at Home		-		-			19,795			19,795			(3,501	)
Intangible assets - Hospitals		-		-			-			-			(3,804	)
Intangible assets - Kindred Rehabilitation Services		-		-			500			500			(135,188	)
Kindred at Home building available for sale		-		-			-			-			(474	)
Hospitals available for sale		-		-			15,430			15,430			(1,153	)
	$	-	$	-		$	488,170		$	488,170		$	(382,447	)
Liabilities	$	-	$	-		$	-		$	-		$	-
December 31, 2016
Recurring:
Assets:
Available-for-sale debt securities:
Corporate bonds	$	-	$	55,176		$	-		$	55,176		$	-
Debt securities issued by U.S. government agencies		-		18,288			-			18,288			-
U.S. Treasury notes		24,727		-			-			24,727			-
		24,727		73,464			-			98,191			-
Available-for-sale equity securities		15,688		-			-			15,688			-
Money market funds		16,472		-			-			16,472			-
Certificates of deposit		-		14,864			-			14,864			-
Total available-for-sale investments		56,887		88,328			-			145,215			-
Deposits held in money market funds		100		4,126			-			4,226			-
	$	56,987	$	92,454		$	-		$	149,441		$	-
Liabilities:
Contingent consideration liability	$	-	$	-		$	(4,943	)	$	(4,943	)	$	-
Interest rate swaps		-		(2,718	)		-			(2,718	)		-
	$	-	$	(2,718	)	$	(4,943	)	$	(7,661	)	$	-
Non-recurring:
Assets:
Property and equipment	$	-	$	-		$	650,222		$	650,222		$	(31,029	)
Goodwill		-		-			361,310			361,310			(261,129	)
Intangible assets - Kindred at Home		-		-			19,010			19,010			(3,534	)
Intangible assets - Hospitals		-		-			641			641			(3,559	)
Hospitals available for sale		-		-			-			-			(43,308	)
	$	-	$	-		$	1,031,183		$	1,031,183		$	(342,559	)
Liabilities	$	-	$	-		$	-		$	-		$	-

The Company’s available-for-sale investments held by Cornerstone consist of debt securities, money market funds and certificates of deposit. These available-for-sale investments and the insurance subsidiary’s cash and cash equivalents of $46.6 million as of December 31, 2017 and $170.3 million as of December 31, 2016, classified as insurance subsidiary investments, are maintained for the payment of claims and expenses related to professional liability and workers compensation risks. In connection with the Insurance Restructuring, the Company liquidated a significant portion of its insurance subsidiary investments and released cash back to the parent company to repay debt and increase cash reserves.

The Company also has available-for-sale investments totaling $1.4 million as of December 31, 2017 and $1.7 million as of December 31, 2016 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 money market funds is based upon quoted market prices and are 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 are 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 2017 or 2016.

The Company’s deposits held in money market funds consist primarily of cash and cash equivalents for the Company’s 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 December 31, 2017, the fair value of the contingent consideration liability was $3.4 million. The change in fair value for the year ended December 31, 2017 consists of $1.8 million in payments and $0.2 million in accrued interest included in interest expense in the accompanying 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 asset or 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. See Note 15.

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 fourth quarter of 2017, the Company recorded a hospital division reporting unit goodwill impairment charge of $236.3 million in connection with its annual impairment test performed as of October 1, 2017. The impairment was required after cash flow projections and related mitigation strategies were refined after completing the first full year of operations under the LTAC Legislation. The refinement of the projections and mitigation strategies were finalized over the last three months of 2017 in connection with the preparation of the Company’s annual budget for 2018. The Company also tested the carrying value of its hospital division intangible assets and property and equipment and determined impairment charges of $3.2 million for a Medicare license and $0.8 million for property and equipment were also 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.

During the year ended December 31, 2017, the Company also recorded asset impairment charges of $1.3 million related to a hospital certificate of need ($0.7 million) and a Medicare certification for an IRF ($0.6 million) as part of the annual indefinite-lived intangible assets impairment review at May 1, 2017. The fair value of the certificate of need was measured using Level 3 inputs, such as operating cash flows. The fair value of the Medicare certification was measured using a pending offer, a Level 3 input.

During the year ended December 31, 2017, the Company recorded an asset impairment charge of $0.4 million related to a valuation adjustment for a building within the Kindred at Home division. The fair value of the building was measured using Level 3 inputs, primarily replacement cost.

During the year ended December 31, 2017, the Company recorded an asset impairment charge of $1.3 million related to the SNF Divestiture which is recorded in discontinued operations. The fair value of property and equipment was measured using Level 3 inputs, primarily replacement costs.

During the fourth quarter of 2016, the Company recorded an asset impairment charge of $3.6 million related to previously acquired home health and hospice Medicare certifications, certificates of need and a trade name, as part of the annual indefinite-lived intangible assets impairment review at October 1, 2016. The fair value of the assets was measured using Level 3 unobservable inputs, such as projected revenue and operating cash flows.

During the year ended December 31, 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. 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 year ended December 31, 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 related to the Curahealth Disposal. The fair value of the assets was measured using a Level 3 input of the offer pending from Curahealth at September 30, 2016. The properties were subsequently sold during the fourth quarter of 2016. 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. The fair value of property and equipment was measured in the first quarter of 2016 using Level 3 inputs, primarily replacement costs.

During the year ended December 31, 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 $22.5 million which is recorded in discontinued operations. The fair value of the assets was measured using Level 3 inputs, such as operating cash flows and replacement costs.

During the year ended December 31, 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 which is recorded in discontinued operations. The fair value of the assets was measured based upon pending offers, a Level 3 input.

During the year ended December 31, 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, 2016. The fair value of the certificates of need was measured using Level 3 inputs, such as operating cash flows.

Each of the impairment charges discussed above reflects the amount by which the carrying value of the assets exceeded its estimated fair value at each impairment date.

As of December 31, 2017, the Company had ownership ranging from 40% to 99% in various partnerships. During 2017 and 2015, the Company did not complete any buyouts of noncontrolling interests. During 2016, the Company completed a full joint venture buyout of a noncontrolling interest as detailed in the table below (in thousands). In accordance with the authoritative guidance of noncontrolling interests, this payment has been accounted for as an equity transaction.

The accompanying condensed consolidating financial information has been prepared and presented pursuant to the Securities and Exchange Commission Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” The Company’s Notes due 2020, Notes due 2022 and Notes due 2023 are fully and unconditionally guaranteed by substantially all of the Company’s domestic 100% owned subsidiaries. The Company’s Notes due 2020 and the Notes due 2023, which were issued during 2014, were senior unsecured obligations of the Escrow Issuer, which, prior to the Gentiva Merger, was a non-guarantor subsidiary of the Company. In connection with the Gentiva Merger, the Escrow Issuer was merged with and into the Company, with the Company assuming the Notes due 2020 and Notes due 2023. See Note 15. The equity method has been used with respect to the parent company’s investment in subsidiaries.

The following condensed consolidating financial data present the financial position of the parent company/issuer, the guarantor subsidiaries and the non-guarantor subsidiaries as of December 31, 2017 and December 31, 2016, and the respective results of operations and cash flows for the three years ended December 31, 2017.

	Year ended December 31, 2017
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	5,360,982		$	673,141		$	-		$	6,034,123
Salaries, wages and benefits		-			3,061,104			257,781			-			3,318,885
Supplies		-			264,294			39,629			-			303,923
Building rent		-			204,358			53,158			-			257,516
Equipment rent		-			29,732			5,124			-			34,856
Other operating expenses		-			585,579			55,185			-			640,764
General and administrative expenses		-			936,899			132,865			-			1,069,764
Other income		-			(478	)		(2,982	)		-			(3,460	)
Litigation contingency expense		-			7,435			-			-			7,435
Impairment charges		-			279,829			101,350			-			381,179
Restructuring charges		-			84,112			749			-			84,861
Depreciation and amortization		-			95,286			9,519			-			104,805
Management fees		-			(8,767	)		8,767			-			-
Intercompany interest (income) expense from affiliates		(179,511	)		127,459			52,052			-			-
Interest expense (income)		242,398			(1,039	)		52			-			241,411
Investment income		-			(368	)		(3,131	)		-			(3,499	)
Equity in net loss of consolidating affiliates		635,465			-			-			(635,465	)		-
		698,352			5,665,435			710,118			(635,465	)		6,438,440
Loss from continuing operations before income taxes		(698,352	)		(304,453	)		(36,977	)		635,465			(404,317	)
Provision (benefit) for income taxes		-			(165,254	)		8,138			-			(157,116	)
Loss from continuing operations		(698,352	)		(139,199	)		(45,115	)		635,465			(247,201	)
Discontinued operations, net of income taxes:
Income (loss) from operations		-			(29,725	)		12,871			-			(16,854	)
Loss on divestiture of operations		-			(379,260	)		-			-			(379,260	)
Income (loss) from discontinued operations		-			(408,985	)		12,871			-			(396,114	)
Net loss		(698,352	)		(548,184	)		(32,244	)		635,465			(643,315	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(42,176	)		-			(42,176	)
Discontinued operations		-			-			(12,861	)		-			(12,861	)
		-			-			(55,037	)		-			(55,037	)
Loss attributable to Kindred	$	(698,352	)	$	(548,184	)	$	(87,281	)	$	635,465		$	(698,352	)
Comprehensive loss	$	(693,746	)	$	(548,142	)	$	(32,296	)	$	635,475		$	(638,709	)
Comprehensive loss attributable to Kindred	$	(693,746	)	$	(548,142	)	$	(87,333	)	$	635,475		$	(693,746	)

Condensed Consolidating Statement of Operations and Comprehensive Loss (Continued)

	Year ended December 31, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	5,625,662		$	768,982		$	(102,115	)	$	6,292,529
Salaries, wages and benefits		-			3,143,055			249,208			-			3,392,263
Supplies		-			299,919			43,146			-			343,065
Building rent		-			209,313			54,993			-			264,306
Equipment rent		-			34,372			5,557			-			39,929
Other operating expenses		-			597,226			59,566			-			656,792
General and administrative expenses		-			981,470			228,293			(102,115	)		1,107,648
Other income		-			(2,091	)		(2,975	)		-			(5,066	)
Litigation contingency expense		-			2,840			-			-			2,840
Impairment charges		-			193,057			121,672			-			314,729
Restructuring charges		-			94,108			2,018			-			96,126
Depreciation and amortization		-			122,522			9,297			-			131,819
Management fees		-			(8,862	)		8,862			-			-
Intercompany interest (income) expense from affiliates		(222,445	)		177,578			44,867			-			-
Interest expense (income)		234,630			(129	)		111			-			234,612
Investment income		-			(453	)		(2,655	)		-			(3,108	)
Equity in net loss of consolidating affiliates		656,019			-			-			(656,019	)		-
		668,204			5,843,925			821,960			(758,134	)		6,575,955
Loss from continuing operations before income taxes		(668,204	)		(218,263	)		(52,978	)		656,019			(283,426	)
Provision (benefit) for income taxes		(3,974	)		308,700			9,536			-			314,262
Loss from continuing operations		(664,230	)		(526,963	)		(62,514	)		656,019			(597,688	)
Discontinued operations, net of income taxes:
Income (loss) from operations		-			(25,111	)		18,919			-			(6,192	)
Loss on divestiture of operations		-			(6,744	)		-			-			(6,744	)
Income (loss) from discontinued operations		-			(31,855	)		18,919			-			(12,936	)
Net loss		(664,230	)		(558,818	)		(43,595	)		656,019			(610,624	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(34,847	)		-			(34,847	)
Discontinued operations		-			-			(18,759	)		-			(18,759	)
		-			-			(53,606	)		-			(53,606	)
Loss attributable to Kindred	$	(664,230	)	$	(558,818	)	$	(97,201	)	$	656,019		$	(664,230	)
Comprehensive loss	$	(660,025	)	$	(558,598	)	$	(43,255	)	$	655,459		$	(606,419	)
Comprehensive loss attributable to Kindred	$	(660,025	)	$	(558,598	)	$	(96,861	)	$	655,459		$	(660,025	)

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

	Year ended December 31, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Revenues	$	-		$	5,507,709		$	714,383		$	(102,874	)	$	6,119,218
Salaries, wages and benefits		-			3,000,718			232,329			-			3,233,047
Supplies		-			299,846			42,229			-			342,075
Building rent		-			206,717			50,504			-			257,221
Equipment rent		-			33,767			4,823			-			38,590
Other operating expenses		-			585,522			54,086			-			639,608
General and administrative expenses		-			1,092,613			221,048			(102,874	)		1,210,787
Other (income) expense		-			744			(3,102	)		-			(2,358	)
Litigation contingency expense		-			138,648			-			-			138,648
Impairment charges		-			24,757			-			-			24,757
Restructuring charges		-			12,618			-			-			12,618
Depreciation and amortization		-			120,238			9,008			-			129,246
Management fees		-			(19,904	)		19,904			-			-
Intercompany interest (income) expense from affiliates		(205,411	)		160,201			45,210			-			-
Interest expense		228,826			3,176			349			-			232,351
Investment income		-			(1,609	)		(1,147	)		-			(2,756	)
Equity in net loss of consolidating affiliates		79,183			-			-			(79,183	)		-
		102,598			5,658,052			675,241			(182,057	)		6,253,834
Income (loss) from continuing operations before income taxes		(102,598	)		(150,343	)		39,142			79,183			(134,616	)
Provision (benefit) for income taxes		(9,214	)		(50,084	)		7,584			-			(51,714	)
Income (loss) from continuing operations		(93,384	)		(100,259	)		31,558			79,183			(82,902	)
Discontinued operations, net of income taxes:
Income from operations		-			15,273			15,531			-			30,804
Gain on divestiture of operations		-			1,244			-			-			1,244
Income from discontinued operations		-			16,517			15,531			-			32,048
Net income (loss)		(93,384	)		(83,742	)		47,089			79,183			(50,854	)
Earnings attributable to noncontrolling interests:
Continuing operations		-			-			(26,044	)		-			(26,044	)
Discontinued operations		-			-			(16,486	)		-			(16,486	)
		-			-			(42,530	)		-			(42,530	)
Income (loss) attributable to Kindred	$	(93,384	)	$	(83,742	)	$	4,559		$	79,183		$	(93,384	)
Comprehensive income (loss)	$	(93,465	)	$	(83,286	)	$	46,890		$	78,926		$	(50,935	)
Comprehensive income (loss) attributable to Kindred	$	(93,465	)	$	(83,286	)	$	4,360		$	78,926		$	(93,465	)

	As of December 31, 2017
(In thousands)	Parent company/ issuer		Guarantor subsidiaries		Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	40,893	$	119,361		$	-		$	160,254
Insurance subsidiary investments		-		-		22,546			-			22,546
Accounts receivable, net		-		993,907		128,625			-			1,122,532
Inventories		-		17,714		4,002			-			21,716
Income taxes		-		3,467		1,079			-			4,546
Assets held for sale		-		16,555		780			-			17,335
Other		2,508		51,980		6,122			-			60,610
		2,508		1,124,516		282,515			-			1,409,539
Property and equipment, net		-		682,276		53,703			-			735,979
Goodwill		-		1,839,845		348,721			-			2,188,566
Intangible assets, net		-		558,827		45,511			-			604,338
Insurance subsidiary investments		-		-		28,988			-			28,988
Investment in subsidiaries		3,405,029		-		-			(3,405,029	)		-
Intercompany receivable		-		691,980		-			(691,980	)		-
Deferred tax assets		-		-		1,036			(1,036	)		-
Other		5,699		112,808		146,800			-			265,307
	$	3,413,236	$	5,010,252	$	907,274		$	(4,098,045	)	$	5,232,717
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	133,031	$	58,796		$	-		$	191,827
Salaries, wages and other compensation		-		334,729		17,450			-			352,179
Due to third party payors		-		35,269		52			-			35,321
Professional liability risks		-		46,274		14,493			-			60,767
Accrued lease termination fees		-		7,610		-			-			7,610
Other accrued liabilities		73,840		172,402		17,735			-			263,977
Long-term debt due within one year		14,034		-		604			-			14,638
		87,874		729,315		109,130			-			926,319
Long-term debt		3,146,594		-		378			-			3,146,972
Intercompany payable		55,442		-		636,538			(691,980	)		-
Professional liability risks		-		142,479		134,350			-			276,829
Deferred tax liabilities		-		37,917		-			(1,036	)		36,881
Deferred credits and other liabilities		-		434,105		63,849			-			497,954
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		123,326		3,666,436		(261,407	)		(3,405,029	)		123,326
Noncontrolling interests		-		-		224,436			-			224,436
		123,326		3,666,436		(36,971	)		(3,405,029	)		347,762
	$	3,413,236	$	5,010,252	$	907,274		$	(4,098,045	)	$	5,232,717

	As of December 31, 2016
(In thousands)	Parent company/ issuer		Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-	$	25,767		$	111,294		$	-		$	137,061
Insurance subsidiary investments		-		-			108,966			-			108,966
Accounts receivable, net		-		1,022,850			149,228			-			1,172,078
Inventories		-		18,290			4,148			-			22,438
Income taxes		-		9,023			1,044			-			10,067
Assets held for sale		-		278,689			10,761			-			289,450
Other		-		56,054			7,639			-			63,693
		-		1,410,673			393,080			-			1,803,753
Property and equipment, net		-		557,761			60,859			-			618,620
Goodwill		-		1,977,003			450,071			-			2,427,074
Intangible assets, net		-		723,760			46,348			-			770,108
Insurance subsidiary investments		-		-			204,929			-			204,929
Intercompany		4,850,517		-			-			(4,850,517	)		-
Deferred tax assets		-		-			7,224			(7,224	)		-
Other		10,123		116,305			161,812			-			288,240
	$	4,860,640	$	4,785,502		$	1,324,323		$	(4,857,741	)	$	6,112,724
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	-	$	112,286		$	91,639		$	-		$	203,925
Salaries, wages and other compensation		-		339,600			57,886			-			397,486
Due to third party payors		-		41,320			-			-			41,320
Professional liability risks		-		3,401			61,883			-			65,284
Accrued lease termination fees		-		5,224			-			-			5,224
Other accrued liabilities		74,634		170,476			19,402			-			264,512
Long-term debt due within one year		26,406		-			1,571			-			27,977
		101,040		672,307			232,381			-			1,005,728
Long-term debt		3,214,607		-			455			-			3,215,062
Intercompany/deficiency in earnings of consolidated subsidiaries		732,442		4,281,685			568,832			(5,582,959	)		-
Professional liability risks		-		78,124			217,187			-			295,311
Deferred tax liabilities		-		209,032			-			(7,224	)		201,808
Deferred credits and other liabilities		-		219,701			133,593			-			353,294
Commitments and contingencies
Equity (deficit):
Stockholder's equity (deficit)		812,551		(675,347	)		(57,095	)		732,442			812,551
Noncontrolling interests		-		-			228,970			-			228,970
		812,551		(675,347	)		171,875			732,442			1,041,521
	$	4,860,640	$	4,785,502		$	1,324,323		$	(4,857,741	)	$	6,112,724

	Year ended December 31, 2017
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments			Consolidated
Net cash provided by (used in) operating activities	$	(50,748	)	$	268,325		$	(141,882	)	$	-		$	75,695
Cash flows from investing activities:
Routine capital expenditures		-			(67,222	)		(2,584	)		-			(69,806	)
Development capital expenditures		-			(25,895	)		-			-			(25,895	)
Acquisitions, net of cash acquired		-			(9,650	)		-			-			(9,650	)
Sale of assets, net of lease termination charges		-			(71,555	)		-			-			(71,555	)
Purchase of insurance subsidiary investments		-			-			(113,661	)		-			(113,661	)
Sale of insurance subsidiary investments		-			-			243,616			-			243,616
Net change in insurance subsidiary cash and cash equivalents		-			-			133,618			-			133,618
Net change in other investments		-			24,637			-			-			24,637
Return of contributed surplus from Cornerstone		-			43,000			-			(43,000	)		-
Other		-			7			-			-			7
Net cash provided by (used in) investing activities		-			(106,678	)		260,989			(43,000	)		111,311
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,369,700			-			-			-			1,369,700
Repayment of borrowings under revolving credit		(1,432,200	)		-			-			-			(1,432,200	)
Repayment of term loan		(14,034	)		-			-			-			(14,034	)
Repayment of other long-term debt		-			-			(1,045	)		-			(1,045	)
Payment of deferred financing costs		(413	)		-			-			-			(413	)
Issuance of Common Stock in connection with employee benefit plans		32			-			-			-			32
Payment of dividend for Mandatory Redeemable Preferred Stock		(12,372	)		-			-			-			(12,372	)
Dividends paid		(10,228	)		-			-			-			(10,228	)
Contributions made by noncontrolling interests		-			-			505			-			505
Distributions to noncontrolling interests		-			-			(61,226	)		-			(61,226	)
Payroll tax payments for equity awards issuance		-			(2,532	)		-			-			(2,532	)
Return of contributed surplus from Cornerstone		-			-			(43,000	)		43,000			-
Net change in intercompany accounts		150,263			(143,989	)		(6,274	)		-			-
Net cash provided by (used in) financing activities		50,748			(146,521	)		(111,040	)		43,000			(163,813	)
Change in cash and cash equivalents		-			15,126			8,067			-			23,193
Cash and cash equivalents at beginning of period		-			25,767			111,294			-			137,061
Cash and cash equivalents at end of period	$	-		$	40,893		$	119,361		$	-		$	160,254

	Year ended December 31, 2016
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by (used in) operating activities	$	(630	)	$	93,641		$	95,225		$	-	$	188,236
Cash flows from investing activities:
Routine capital expenditures		-			(88,875	)		(7,177	)		-		(96,052	)
Development capital expenditures		-			(14,060	)		(20,765	)		-		(34,825	)
Acquisitions, net of cash acquired		-			(78,840	)		-			-		(78,840	)
Acquisition deposits		-			18,489			-			-		18,489
Sale of assets		-			25,987			-			-		25,987
Purchase of insurance subsidiary investments		-			-			(97,740	)		-		(97,740	)
Sale of insurance subsidiary investments		-			-			95,488			-		95,488
Net change in insurance subsidiary cash and cash equivalents		-			-			877			-		877
Net change in other investments		-			(34,521	)		1,751			-		(32,770	)
Other		-			(255	)		-			-		(255	)
Net cash used in investing activities		-			(172,075	)		(27,566	)		-		(199,641	)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,643,300			-			-			-		1,643,300
Repayment of borrowings under revolving credit		(1,689,400	)		-			-			-		(1,689,400	)
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		(13,527	)		-			-			-		(13,527	)
Repayment of other long-term debt		-			-			(1,104	)		-		(1,104	)
Payment of deferred financing costs		(522	)		-			-			-		(522	)
Payment of dividend for Mandatory Redeemable Preferred Stock		(11,514	)		-			-			-		(11,514	)
Dividends paid		(40,738	)		-			-			-		(40,738	)
Contributions made by noncontrolling interests		-			-			14,514			-		14,514
Distributions to noncontrolling interests		-			-			(45,985	)		-		(45,985	)
Purchase of noncontrolling interests		-			-			(1,000	)		-		(1,000	)
Payroll tax payments for equity awards issuance		-			(3,166	)		-			-		(3,166	)
Net change in intercompany accounts		(85,069	)		89,135			(4,066	)		-		-
Net cash provided by (used in) financing activities		630			85,969			(36,891	)		-		49,708
Change in cash and cash equivalents		-			7,535			30,768			-		38,303
Cash and cash equivalents at beginning of period		-			18,232			80,526			-		98,758
Cash and cash equivalents at end of period	$	-		$	25,767		$	111,294		$	-	$	137,061

	Year ended December 31, 2015
(In thousands)	Parent company/ issuer			Guarantor subsidiaries			Non-guarantor subsidiaries			Consolidating and eliminating adjustments		Consolidated
Net cash provided by operating activities	$	21,963		$	84,605		$	69,682		$	-	$	176,250
Cash flows from investing activities:
Routine capital expenditures		-			(110,776	)		(11,155	)		-		(121,931	)
Development capital expenditures		-			(19,931	)		-			-		(19,931	)
Acquisitions, net of cash acquired		-			(511,683	)		(161,864	)		-		(673,547	)
Acquisition deposits		-			176,511			-			-		176,511
Sale of assets		-			8,735			-			-		8,735
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		-			-			(85,222	)		-		(85,222	)
Sale of insurance subsidiary investments		-			-			75,075			-		75,075
Net change in insurance subsidiary cash and cash equivalents		-			-			(12,271	)		-		(12,271	)
Proceeds from note receivable		-			25,000			-			-		25,000
Net change in other investments		-			(4,620	)		-			-		(4,620	)
Other		-			10,972			-			-		10,972
Net cash provided by (used in) investing activities		-			(425,792	)		1,178,001			-		752,209
Cash flows from financing activities:
Proceeds from borrowings under revolving credit		1,740,450			-			-			-		1,740,450
Repayment of borrowings under revolving credit		(1,631,850	)		-			-			-		(1,631,850	)
Proceeds from issuance of senior unsecured notes due 2020 and 2023		1,350,000			-			(1,350,000	)		-		-
Proceeds from issuance of term loan, net of discount		199,000			-			-			-		199,000
Repayment of Gentiva debt		-			(1,177,363	)		-			-		(1,177,363	)
Repayment of term loan		(12,010	)		-			-			-		(12,010	)
Repayment of other long-term debt		-			-			(6,752	)		-		(6,752	)
Payment of deferred financing costs		(3,446	)		-			-			-		(3,446	)
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		(10,887	)		-			-			-		(10,887	)
Dividends paid		(40,119	)		-			-			-		(40,119	)
Contributions made by noncontrolling interests		-			-			2,152			-		2,152
Distributions to noncontrolling interests		-			-			(42,458	)		-		(42,458	)
Change in intercompany accounts		(1,612,720	)		1,417,599			195,121			-		-
Payroll tax payments for equity awards issuance		-			(10,225	)		-			-		(10,225	)
Net cash provided by (used in) financing activities		(21,963	)		230,011			(1,201,937	)		-		(993,889	)
Change in cash and cash equivalents		-			(111,176	)		45,746			-		(65,430	)
Cash and cash equivalents at beginning of period		-			129,408			34,780			-		164,188
Cash and cash equivalents at end of period	$	-		$	18,232		$	80,526		$	-	$	98,758

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 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, customers 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, a therapy services company the Company acquired 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 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 the RehabCare CIA.

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. The Company settled indemnification disputes totaling $5.8 million during 2017.

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, 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 actions 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.

A purported wage and hour class action lawsuit is currently pending against the Company in federal district court for the Northern District of California. This lawsuit pertains to alleged errors made by the Company with respect to minimum wage and overtime payments resulting from a piece-rate payment system. The Company tentatively settled this lawsuit in December 2017 for $12 million, subject to final court approval. The Company is responsible for $7.5 million of the tentative settlement amount, as well as legal expenses, with insurance funding the remaining $4.5 million. In connection with this lawsuit, the Company recorded a $2.0 million loss provision in the first quarter of 2017, an additional $3.0 million loss provision in the third quarter of 2017, and an additional $2.5 million in the fourth quarter of 2017, for a total loss reserve of $7.5 million. The Company continues to deny the allegations made in this lawsuit and will defend this action and any related claims vigorously.

Minimum staffing lawsuits—Various states in which the Company operates 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”) was previously pending against certain of the Company’s current and former officers and directors in circuit court for Jefferson County, Kentucky. The Complaint also named the Company as a nominal defendant. The Complaint alleged that the named current and former officers and directors 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, policies, 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 Complaint was settled in January 2018 in exchange for the Company’s agreement to pay plaintiff $950,000 in fees and expenses. The Company previously recorded a loss reserve of $1.0 million in the third quarter of 2017 related to this matter. The Company continues to deny the allegations made in the Complaint.

Six purported class action complaints related to the Merger have been filed on behalf of putative classes of the Company’s public stockholders (the “Merger Complaints”). Four of these complaints were filed in the United States District Court for the District of Delaware: Sehrgosha v. Kindred Healthcare, Inc., et al., filed on February 8, 2018; Carter v. Kindred Healthcare, Inc., et al., filed on February 14, 2018; Rosenfeld v. Kindred Healthcare, Inc., et al., filed on February 15, 2018; and Einhorn v. Kindred Healthcare, Inc., et al., filed on February 21, 2018. The remaining two complaints were filed in the United States District Court for the Western District of Kentucky: Tompkins v. Kindred Healthcare, Inc., et al., filed on February 9, 2018; and Buskirk v. Kindred Healthcare, Inc., et al., filed on February 13, 2018. The Company and individual members of the Board are named as defendants in each of the actions. The Tompkins action also names as defendants TPG, WCAS, Humana, Parent, HospitalCo Parent and Merger Sub. The Merger Complaints generally allege that the defendants violated the Securities Exchange Act of 1934, as amended, by failing to disclose material information in the Company’s preliminary proxy statement filed on February 5, 2018. The Merger Complaints seek, among other things, injunctive relief prohibiting the stockholder vote to approve the Merger and unspecified compensatory damages and attorneys’ fees. The Company denies the allegations made in the Merger Complaints and will defend these actions 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 the Company’s 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 its liability.

The following table represents summary quarterly consolidated financial information (unaudited) for the years ended December 31, 2017 and 2016:

	2017 (a)
	First			Second			Third			Fourth
Revenues	$	1,539,490		$	1,535,831		$	1,477,820		$	1,480,982
Net income (loss):
Income (loss) from continuing operations		10,323			(104,395	)		(17,710	)		(135,419	)
Discontinued operations, net of income taxes:
Income (loss) from operations		5,059			5,061			(14,291	)		(12,683	)
Loss on divestiture of operations		(6,166	)		(294,039	)		(49,663	)		(29,392	)
Loss from discontinued operations		(1,107	)		(288,978	)		(63,954	)		(42,075	)
Net income (loss)		9,216			(393,373	)		(81,664	)		(177,494	)
Earnings attributable to noncontrolling interests:
Continuing operations		(10,483	)		(10,791	)		(10,960	)		(9,942	)
Discontinued operations		(4,481	)		(4,954	)		(3,162	)		(264	)
		(14,964	)		(15,745	)		(14,122	)		(10,206	)
Loss attributable to Kindred		(5,748	)		(409,118	)		(95,786	)		(187,700	)
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations		-			(1.32	)		(0.32	)		(1.65	)
Discontinued operations:
Income (loss) from operations		-			-			(0.20	)		(0.15	)
Loss on divestiture of operations		(0.07	)		(3.36	)		(0.57	)		(0.33	)
Loss from discontinued operations		(0.07	)		(3.36	)		(0.77	)		(0.48	)
Net loss		(0.07	)		(4.68	)		(1.09	)		(2.13	)
Diluted:
Income (loss) from continuing operations		-			(1.32	)		(0.32	)		(1.65	)
Discontinued operations:
Income (loss) from operations		-			-			(0.20	)		(0.15	)
Loss on divestiture of operations		(0.07	)		(3.36	)		(0.57	)		(0.33	)
Loss from discontinued operations		(0.07	)		(3.36	)		(0.77	)		(0.48	)
Net loss		(0.07	)		(4.68	)		(1.09	)		(2.13	)
Shares used in computing earnings (loss) per common share:
Basic		87,085			87,506			87,597			87,902
Diluted		87,085			87,506			87,597			87,902
Market prices:
High		9.90			11.75			11.90			10.15
Low		6.58			7.60			5.50			5.75

	2016 (a)
	First			Second			Third			Fourth
Revenues	$	1,604,214		$	1,609,169		$	1,564,060		$	1,515,086
Net income (loss):
Income (loss) from continuing operations		21,980			30,227			(648,015	)		(1,880	)
Discontinued operations, net of income taxes:
Income (loss) from operations		3,275			7,170			(23,292	)		6,655
Gain (loss) on divestiture of operations		262			(83	)		-			(6,923	)
Income (loss) from discontinued operations		3,537			7,087			(23,292	)		(268	)
Net income (loss)		25,517			37,314			(671,307	)		(2,148	)
Earnings attributable to noncontrolling interests:
Continuing operations		(7,851	)		(8,847	)		(9,574	)		(8,575	)
Discontinued operations		(4,665	)		(4,678	)		(4,732	)		(4,684	)
		(12,516	)		(13,525	)		(14,306	)		(13,259	)
Income (loss) attributable to Kindred		13,001			23,789			(685,613	)		(15,407	)
Earnings (loss) per common share:
Basic:
Income (loss) from continuing operations		0.16			0.24			(7.57	)		(0.12	)
Discontinued operations:
Income (loss) from operations		(0.01	)		0.03			(0.32	)		0.02
Gain (loss) on divestiture of operations		-			-			-			(0.08	)
Income (loss) from discontinued operations		(0.01	)		0.03			(0.32	)		(0.06	)
Net income (loss)		0.15			0.27			(7.89	)		(0.18	)
Diluted:
Income (loss) from continuing operations		0.16			0.23			(7.57	)		(0.12	)
Discontinued operations:
Income (loss) from operations		(0.01	)		0.03			(0.32	)		0.02
Gain (loss) on divestiture of operations		-			-			-			(0.08	)
Income (loss) from discontinued operations		(0.01	)		0.03			(0.32	)		(0.06	)
Net income (loss)		0.15			0.26			(7.89	)		(0.18	)
Shares used in computing earnings (loss) per common share:
Basic		86,590			86,836			86,869			86,904
Diluted		87,249			87,500			86,869			86,904
Market prices:
High		12.65			15.66			12.55			10.69
Low		7.96			10.43			9.67			5.65

Delaware		61-1323993
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
680 South Fourth Street Louisville, Kentucky		40202-2412
(Address of principal executive offices)		(Zip Code)

Title of Each Class		Name of Each Exchange on which Registered
Common Stock, par value $0.25 per share		New York Stock Exchange

		Page
PART I
Item 1.	Business	5
Item 1A.	Risk Factors	37
Item 1B.	Unresolved Staff Comments	56
Item 2.	Properties	56
Item 3.	Legal Proceedings	56
Item 4.	Mine Safety Disclosures	57
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	58
Item 6.	Selected Financial Data	60
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	90
Item 8.	Financial Statements and Supplementary Data	91
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	91
Item 9A.	Controls and Procedures	91
Item 9B.	Other Information	91
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	92
Item 11.	Executive Compensation	93
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93
Item 13.	Certain Relationships and Related Transactions, and Director Independence	93
Item 14.	Principal Accounting Fees and Services	93
PART IV
Item 15.	Exhibits and Financial Statement Schedules	94
Item 16.	Form 10-K Summary	94

	12/31/12		12/31/13		12/31/14		12/31/15		12/31/16		12/31/17
Kindred Healthcare, Inc.	$	100.00	$	185.40	$	174.57	$	117.43	$	81.33	$	101.87
S&P Composite Index		100.00		132.39		150.51		152.59		170.84		208.14
S&P 1500 Health Care Index		100.00		142.19		177.44		190.59		186.68		228.63

Period	Total number of shares (or units) purchased (1)		Average price paid per share (or unit) (2)		Total number of shares (or units) purchased as part of publicly announced plans or programs		Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (1)
Month #1 (October 1 - October 31)		12,508	$	6.40		-		-
Month #2 (November 1 - November 30)		771		6.25		-		-
Month #3 (December 1 - December 31)		3,545		8.60		-		-
Total		16,824	$	6.86		-		-

	Sales price of Common Stock
2017	High		Low
First quarter	$	9.90	$	6.58
Second quarter	$	11.75	$	7.60
Third quarter	$	11.90	$	5.50
Fourth quarter	$	10.15	$	5.75

2016	High		Low
First quarter	$	12.65	$	7.96
Second quarter	$	15.66	$	10.43
Third quarter	$	12.55	$	9.67
Fourth quarter	$	10.69	$	5.65

Name	Age		Position
Benjamin A. Breier	46	President and Chief Executive Officer
Kent H. Wallace	62	Executive Vice President and Chief Operating Officer
Stephen D. Farber	48	Executive Vice President, Chief Financial Officer
Peter K. Kalmey	43	President, Hospital Division
David A. Causby	46	Executive Vice President and President, Kindred at Home
Jason Zachariah	40	President, Kindred Rehabilitation Services
William M. Altman	58	Executive Vice President, Strategy and Chief of Staff
Stephen R. Cunanan	53	Chief Administrative Officer and Chief People Officer
Joseph L. Landenwich	53	General Counsel and Corporate Secretary

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31, 2017, 2016 and 2015	F-3
Consolidated Statement of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015	F-4
Consolidated Balance Sheet, December 31, 2017 and 2016	F-5
Consolidated Statement of Equity for the years ended December 31, 2017, 2016 and 2015	F-6
Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015	F-7
Notes to Consolidated Financial Statements	F-8
Quarterly Consolidated Financial Information (Unaudited)	F-70

(a)(2) Index to Financial Statement Schedules: Financial Statement Schedule (a):
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016 and 2015	F-72

2.1*	Fourth Amended Joint Plan of Reorganization of Vencor, Inc. and Affiliated Debtors under Chapter 11 of the Bankruptcy Code (incorporated by reference to Exhibit 2.1 to Kindred’s Current Report on Form 8-K filed on March 19, 2001 (Comm. File No. 001-14057)).
2.2	Order Confirming the Fourth Amended Joint Plan of Reorganization of Vencor, Inc. and Affiliated Debtors under Chapter 11 of the Bankruptcy Code, as entered by the United States Bankruptcy Court for the District of Delaware on March 16, 2001 (incorporated by reference to Exhibit 2.2 to Kindred’s Current Report on Form 8-K filed on March 19, 2001 (Comm. File No. 001-14057)).
2.3*	Agreement and Plan of Merger, dated as of October 9, 2014, among Gentiva Health Services, Inc., Kindred Healthcare, Inc. and Kindred Healthcare Development 2, Inc. (incorporated by reference to Exhibit 2.1 to Kindred’s Current Report on Form 8-K filed on October 14, 2014 (Comm. File No. 001-14057)).
2.4*	Agreement and Plan of Merger, dated as of November 11, 2014, among Kindred Healthcare, Inc., RehabCare Development 6, Inc., Centerre Healthcare Corporation, the stockholders party thereto and Fortis Advisors LLC (incorporated by reference to Exhibit 2.1 to Kindred’s Current Report on Form 8-K filed on November 12, 2014 (Comm. File No. 001-14057)).
2.5*	Asset Purchase Agreement dated as of June 30, 2017 by and between Kindred Healthcare Operating, Inc. and BM Eagle Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 3, 2017 (Comm. File No. 001-14057)).
2.6*	Agreement and Plan of Merger, dated as of December 19, 2017, among Kindred Healthcare, Inc., Kentucky Hospital Holdings, LLC, Kentucky Homecare Holdings, Inc. and Kentucky Homecare Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on December 21, 2017 (Comm. File No. 001-14057)).
3.1	Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Kindred’s Registration Statement on Form 8-A filed on April 20, 2001 (Comm. File No. 001-14057)).
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Kindred’s Form 10-Q for the quarterly period ended March 31, 2002 (Comm. File No. 001-14057)).
3.3	Certificate of Correction, dated as of November 24, 2014 (incorporated by reference to Exhibit 3.2 to Kindred’s Current Report on Form 8-K filed on November 25, 2014 (Comm. File No. 001-14057)).
3.4	Certificate of Ownership and Merger merging Kindred Escrow Corp. II into Kindred Healthcare, Inc. (incorporated by reference to Exhibit 3.1 to Kindred’s Current Report on Form 8-K filed on February 3, 2015 (Comm. File No. 001-14057)).
3.5	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to Kindred’s Current Report on Form 8-K filed on October 30, 2015 (Comm. File No. 001-14057)).
3.6	Amendment to Amended and Restated Bylaws of Kindred Healthcare, Inc. (incorporated by reference to Exhibit 3.1 to Kindred’s Current Report on Form 8-K filed on December 21, 2017 (Comm. File No. 001-14057)).
4.1	Articles IV, IX, X and XII of the Restated Certificate of Incorporation of the Company (included in Exhibit 3.1).
4.2	Indenture relating to the 2022 Notes (including form of the 2022 note), dated as of April 9, 2014, among Kindred Healthcare, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to Kindred’s Current Report on Form 8-K filed on April 14, 2014 (Comm. File No. 001-14057)).
4.3	First Supplemental Indenture, dated as of January 30, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantors party thereto and Wells Fargo Bank, National Association, as trustee (2022 notes) (incorporated by reference to Exhibit 4.5 to Kindred’s Current Report on Form 8-K filed on February 3, 2015 (Comm. File No. 001-14057)).
4.4	Second Supplemental Indenture, dated as of February 2, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantors party thereto and Wells Fargo Bank, National Association, as trustee (2022 Notes) (incorporated by reference to Exhibit 4.3 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).

4.5	Third Supplemental Indenture, dated as of April 13, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantor party thereto and Wells Fargo Bank, National Association, as trustee (2022 Notes) (incorporated by reference to Exhibit 4.4 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).
4.6	Fourth Supplemental Indenture, dated as of June 5, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantor party thereto and Wells Fargo Bank, National Association, as trustee (2022 Notes) (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).
4.7	Indenture relating to the 2020 Notes (including form of the 2020 note), dated as of December 18, 2014, between Kindred Escrow Corp. II and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to Kindred’s Current Report on Form 8-K filed on December 18, 2014 (Comm. File No. 001-14057)).
4.8	First Supplemental Indenture, dated as of February 2, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantors party thereto and Wells Fargo Bank, National Association, as trustee (2020 Notes) (incorporated by reference to Exhibit 4.1 to Kindred’s Current Report on Form 8-K filed on February 3, 2015 (Comm. File No. 001-14057)).
4.9	Second Supplemental Indenture, dated as of April 13, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantor party thereto and Wells Fargo Bank, National Association, as trustee (2020 Notes) (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).
4.10	Third Supplemental Indenture, dated as of June 5, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantor party thereto and Wells Fargo Bank, National Association, as trustee (2020 Notes) (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).
4.11	Indenture relating to the 2023 Notes (including form of 2023 note), dated as of December 18, 2014, between Kindred Escrow Corp. II and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to Kindred’s Current Report on Form 8-K filed on December 18, 2014 (Comm. File No. 001-14057)).
4.12	First Supplemental Indenture, dated as of February 2, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantors party thereto and Wells Fargo Bank, National Association, as trustee (2023 notes) (incorporated by reference to Exhibit 4.2 to Kindred’s Current Report on Form 8-K filed on February 3, 2015 (Comm. File No. 001-14057)).
4.13	Second Supplemental Indenture, dated as of April 13, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantor party thereto and Wells Fargo Bank, National Association, as trustee (2023 Notes) (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).
4.14	Third Supplemental Indenture, dated as of June 5, 2015, among Kindred Healthcare, Inc., the Subsidiary Guarantor party thereto and Wells Fargo Bank, National Association, as trustee (2023 Notes) (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-Q for the quarterly period ended June 30, 2015 (Comm. File No. 001-14057)).
4.15	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.5 of Kindred’s Registration Statement on Form S-3 filed on November 17, 2014 (Comm. File No. 001-14057)).
10.1*	Fourth Amendment and Restatement Agreement dated as of June 14, 2016, by and among Kindred Healthcare, Inc., the Consenting Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 15, 2016 (Comm. File No. 001-14057)).
10.2	Amendment to the Fourth Amended and Restated ABL Credit Agreement dated as of September 27, 2017 by and among Kindred Healthcare, Inc., the Consenting Lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent (incorporated by reference to Exhibit 10.1 to Kindred’s Form 10-Q for the quarterly period ended September 30, 2017 (Comm. File No. 001-14057)).
10.3*	Sixth Amendment and Restatement Agreement dated as of March 14, 2017, by and among Kindred Healthcare, Inc., the Consenting Lenders (as defined therein) and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017 (Comm. File No. 001-14057)).
10.4	Form of Indemnification Agreement between the Company and certain of its officers and employees (incorporated by reference to Exhibit 10.31 to the Ventas, Inc. Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-10989)).
10.5	Form of Indemnification Agreement between the Company and each member of its Board of Directors (incorporated by reference to Exhibit 10.21 to Kindred’s Form 10-K for the year ended December 31, 2001 (Comm. File No. 001-14057)).

10.6**	Kindred Deferred Compensation Plan, Third Amendment and Restatement effective as of January 1, 2009 (incorporated by reference to Exhibit 10.4 to Kindred’s Form 10-Q for the quarterly period ended September 30, 2008 (Comm. File No. 001-14057)).
10.7**	Amendment No. 1 to the Third Amendment and Restatement of the Kindred Deferred Compensation Plan, effective as of December 21, 2011 (incorporated by reference to Exhibit 10.9 to Kindred’s Form 10-K for the year ended December 31, 2011 (Comm. File No. 001-14057)).
10.8**	Amendment No. 2 to the Third Amendment and Restatement of the Kindred Deferred Compensation Plan, effective as of January 1, 2013 (incorporated by reference to Exhibit 10.9 to Kindred’s Form 10-K for the year ended December 31, 2012 (Comm. File No. 001-14057)).
10.9**	Amendment No. 3 to the Third Amendment and Restatement of the Kindred Deferred Compensation Plan, effective as of August 1, 2014 (incorporated by reference to Exhibit 10.13 to Kindred’s Registration Statement on Form S-4 filed on December 15, 2014 (Commission File No. 333-200963)).
10.10**	Amendment No. 4 to the Third Amendment and Restatement of the Kindred Deferred Compensation Plan, effective as of January 1, 2016 (incorporated by reference to Exhibit 10.12 to Kindred’s Form 10-K for the year ended December 31, 2015 (Comm. File No. 001-14057)).
10.11**	Kindred Healthcare, Inc. Short-Term Incentive Plan (incorporated by reference to Annex A to Kindred’s Definitive Proxy Statement on Schedule 14A dated April 4, 2013 (Comm. File No. 001-14057)).
10.12**	Kindred Healthcare, Inc. Long-Term Incentive Plan (incorporated by reference to Annex B to Kindred’s Definitive Proxy Statement on Schedule 14A dated April 4, 2013 (Comm. File No. 001-14057)).
10.13**	Employment Agreement effective as of February 2, 2015 by and between Kindred Healthcare Operating, Inc. and Kent H. Wallace (incorporated by reference to Exhibit 10.1 to Kindred’s Current Report on Form 8-K filed on January 27, 2015 (Comm. File No. 001-14057)).
10.14**	Change-in-Control Severance Agreement effective as of February 2, 2015 by and between Kindred Healthcare Operating, Inc. and Kent H. Wallace (incorporated by reference to Exhibit 10.2 to Kindred’s Current Report on Form 8-K filed on January 27, 2015 (Comm. File No. 001-14057)).
10.15**	Employment Agreement dated as of May 17, 2012 by and between Kindred Healthcare Operating, Inc. and William M. Altman (incorporated by reference to Exhibit 10.6 to Kindred’s Form 10-Q for the quarterly period ended June 30, 2012 (Comm. File No. 001-14057)).
10.16**	Change-in-Control Severance Agreement dated as of November 13, 2009 by and between Kindred Healthcare Operating, Inc. and William M. Altman (incorporated by reference to Exhibit 10.29 to Kindred’s Form 10-K for the year ended December 31, 2009 (Comm. File No. 001-14057)).
10.17**	Employment Agreement dated as of January 1, 2016 by and between Kindred Healthcare Operating, Inc. and Joseph L. Landenwich (incorporated by reference to Exhibit 10.22 to Kindred’s Form 10-K for the year ended December 31, 2015 (Comm. File No. 001-14057)).
10.18**	Change-in-Control Severance Agreement dated as of November 13, 2009 by and between Kindred Healthcare Operating, Inc. and Joseph L. Landenwich (incorporated by reference to Exhibit 10.33 to Kindred’s Form 10-K for the year ended December 31, 2009 (Comm. File No. 001-14057)).
10.19**	Employment Agreement effective as of March 31, 2015, by and between Kindred Healthcare Operating, Inc. and Benjamin A. Breier (incorporated by reference to Exhibit 10.1 to Kindred’s Current Report on Form 8-K filed on October 31, 2014 (Comm. File No. 001-14057)).
10.20**	Change-in-Control Severance Agreement dated as of November 13, 2009 by and between Kindred Healthcare Operating, Inc. and Benjamin A. Breier (incorporated by reference to Exhibit 10.35 to Kindred’s Form 10-K for the year ended December 31, 2009 (Comm. File No. 001-14057)).
10.21**	Employment Agreement dated as of February 3, 2014 by and between Kindred Healthcare Operating, Inc. and Stephen D. Farber (incorporated by reference to Exhibit 10.1 to Kindred’s Form 10-Q for the quarterly period ended March 31, 2014 (Comm. File No. 001-14057)).
10.22**	Change-in-Control Severance Agreement dated as of February 3, 2014 by and between Kindred Healthcare Operating, Inc. and Stephen D. Farber (incorporated by reference to Exhibit 10.2 to Kindred’s Form 10-Q for the quarterly period ended March 31, 2014 (Comm. File No. 001-14057)).

10.23**	Employment Agreement dated as of June 3, 2013 by and between Kindred Healthcare Operating, Inc. and Stephen R. Cunanan (incorporated by reference to Exhibit 10.6 to Kindred’s Form 10-Q for the quarterly period ended June 30, 2013 (Comm. File No. 001-14057)).
10.24**	Change-in-Control Severance Agreement dated as of June 3, 2013 by and between Kindred Healthcare Operating, Inc. and Stephen R. Cunanan (incorporated by reference to Exhibit 10.7 to Kindred’s Form 10-Q for the quarterly period ended June 30, 2013 (Comm. File No. 001-14057)).
10.25**	Employment Agreement dated as of January 1, 2016 by and between Kindred Healthcare Operating, Inc. and Peter K. Kalmey (incorporated by reference to Exhibit 10.33 to Kindred’s Form 10-K for the year ended December 31, 2015 (Comm. File No. 001-14057)).
10.26**	Change-in-Control Severance Agreement dated as of January 1, 2016 by and between Kindred Healthcare Operating, Inc. and Peter K. Kalmey (incorporated by reference to Exhibit 10.34 to Kindred’s Form 10-K for the year ended December 31, 2015 (Comm. File No. 001-14057)).
10.27**	Amended and Restated Employment Agreement dated as of February 1, 2015 by and between Kindred Healthcare Operating, Inc. and David A. Causby (incorporated by reference to Exhibit 10.40 to Kindred’s Form 10-K for the year ended December 31, 2014 (Comm. File No. 001-14057)).
10.28**	Change-in-Control Severance Agreement dated as of February 2, 2016 by and between Kindred Healthcare Operating, Inc. and David A. Causby (incorporated by reference to Exhibit 10.38 to Kindred’s Form 10-K for the year ended December 31, 2015 (Comm. File No. 001-14057)).
10.29**	Employment Agreement dated as of August 15, 2016 by and between Kindred Healthcare Operating, Inc. and Jason P. Zachariah (incorporated by reference to Exhibit 10.1 to Kindred’s Form 10-Q for the quarterly period ended September 30, 2016 (Comm. File No. 001-14057)).
10.30**	Change-in-Control Severance Agreement dated as of August 15, 2016 by and between Kindred Healthcare Operating, Inc. and Jason P. Zachariah (incorporated by reference to Exhibit 10.2 to Kindred’s Form 10-Q for the quarterly period ended September 30, 2016 (Comm. File No. 001-14057)).
10.31	Second Amended and Restated Master Lease Agreement No. 5, dated as of November 11, 2016, among Kindred Healthcare, Inc., Kindred Healthcare Operating, Inc. and Ventas Realty, Limited Partnership (incorporated by reference to Exhibit 10.5 to Kindred’s Current Report on Form 8-K filed on November 14, 2016) (Comm. File No. 001-14057)).
10.32	Agreement Regarding Master Leases No. 3, dated as of November 11, 2016, among Kindred Healthcare, Inc., Kindred Healthcare Operating, Inc. and Ventas Realty, Limited Partnership (incorporated by reference to Exhibit 10.1 to Kindred’s Current Report on Form 8-K filed on November 14, 2016).
10.33#	Amendment No. 1 to Second Amended and Restated Master Lease Agreement No. 5, dated as of November 7, 2017.
10.34	Amendment No. 2 to the Second Amended and Restated Master Lease Agreement No. 5 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 21, 2017 (Comm. File No. 001-14057)).
10.35	Agreement and Plan of Reorganization between the Company and Ventas, Inc. (incorporated by reference to Appendix A to Kindred’s Registration Statement on Form 10 filed on April 23, 1998 (Comm. File No. 001-14057)).
10.36**	Kindred Healthcare, Inc. 2001 Equity Plan for Non-Employee Directors (Amended and Restated) (incorporated by reference to Exhibit 10.69 to Kindred’s Form 10-K for the year ended December 31, 2008 (Comm. File No. 001-14057)).
10.37**	Form of Kindred Healthcare, Inc. Non-Qualified Stock Option Grant Agreement under the 2001 Equity Plan for Non-Employee Directors (Amended and Restated) (incorporated by reference to Exhibit 10.70 to Kindred’s Form 10-K for the year ended December 31, 2008 (Comm. File No. 001-14057)).
10.38**	Form of Amendment No. 1 to Non-Discretionary Non-Qualified Stock Option Grant Agreement under the 2001 Equity Plan for Non-Employee Directors (Amended and Restated) (incorporated by reference to Exhibit 10.72 to Kindred’s Form 10-K for the year ended December 31, 2008 (Comm. File No. 001-14057)).
10.39**	Kindred Stock Incentive Plan, Amended and Restated (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 4, 2017 (Comm. File No. 001-14057)).
10.40**	Form of Restricted Share Award Agreement under the Kindred Stock Incentive Plan, Amended and Restated (incorporated by reference to Exhibit 10.1 to Kindred’s Current Report on Form 8-K filed on July 25, 2014 (Comm. File No. 001-14057)).

10.41**	Form of Performance Unit Award Agreement under the Kindred Stock Incentive Plan, Amended and Restated (incorporated by reference to Exhibit 10.2 to Kindred’s Current Report on Form 8-K filed on July 25, 2014 (Comm. File No. 001-14057)).
10.42**	Kindred Healthcare, Inc. Equity Plan for Non-Employee Directors, Amended and Restated (incorporated by reference to Annex B to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 4, 2017 (Comm. File No. 001-14057)).
10.43**	Form of Kindred Healthcare, Inc. Restricted Share Award Agreement under the Kindred Healthcare, Inc. Equity Plan for Non-Employee Directors, Amended and Restated (incorporated by reference to Exhibit 10.71 to Kindred’s Form 10-K for the year ended December 31, 2008 (Comm. File No. 001-14057)).
10.44**	Form of Kindred Healthcare, Inc. Non-Qualified Stock Option Grant Agreement under the Kindred Healthcare, Inc. Equity Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.70 to Kindred’s Form 10-K for the year ended December 31, 2008 (Comm. File No. 001-14057)).
10.45**	Gentiva Health Services, Inc. 2004 Equity Incentive Plan, Amended and Restated (incorporated by reference to Exhibit 4.5 to Kindred’s Registration Statement on Form S-8 dated February 2, 2015 (Comm. File No. 333-201831)).
10.46**	Amendment No. 1 to the Gentiva Health Services, Inc. 2004 Equity Incentive Plan, Amended and Restated (incorporated by reference to Exhibit 4.6 to Kindred’s Registration Statement on Form S-8 dated February 2, 2015 (Comm. File No. 333-201831)).
10.47**	Amendment No. 2 to the Gentiva Health Services, Inc. 2004 Equity Incentive Plan, Amended and Restated (incorporated by reference to Exhibit 4.7 to Kindred’s Registration Statement on Form S-8 dated February 2, 2015 (Comm. File No. 333-201831)).
10.48**	Amendment No. 3 to the Gentiva Health Services, Inc. 2004 Equity Incentive Plan, Amended and Restated (incorporated by reference to Exhibit 4.8 to Kindred’s Registration Statement on Form S-8 dated February 2, 2015 (Comm. File No. 333-201831)).
10.49**	Kindred Healthcare, Inc. Director Fee Deferral Plan, effective as of January 1, 2016 (incorporated by reference to Exhibit 10.84 to Kindred’s Form 10-K for the year ended December 31, 2016 (Comm. File No. 001-14057)).
10.50	Corporate Integrity Agreement, effective as of January 11, 2016, by and between the Office of Inspector General of the Department of Health and Human Services, RehabCare Group, Inc. and Kindred Healthcare, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 12, 2016 (Comm. File No. 001-14057)).
10.51	Separation Agreement, dated as of December 19, 2017, among Kindred Healthcare, Inc., Kentucky Hospital Holdings, LLC, Kentucky Homecare Holdings, Inc. and Kentucky Hospital Merger Sub, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 21, 2017 (Comm. File No. 001-14057)).
21#	List of Subsidiaries.
23.1#	Consent of Independent Registered Public Accounting Firm.
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.

Date: February 28, 2018	KINDRED HEALTHCARE, INC.

		By:	/s/ Benjamin A. Breier
			Benjamin A. Breier President and Chief Executive Officer

Signature	Title	Date
/s/ Joel Ackerman Joel Ackerman	Director	February 28, 2018
/s/ Jonathan D. Blum Jonathan D. Blum	Director	February 28, 2018
/s/ Paul J. Diaz Paul J. Diaz	Director	February 28, 2018
/s/ Heyward R. Donigan Heyward R. Donigan	Director	February 28, 2018
/s/ Richard Goodman Richard Goodman	Director	February 28, 2018
/s/ Christopher T. Hjelm Christopher T. Hjelm	Director	February 28, 2018
/s/ Frederick J. Kleisner Frederick J. Kleisner	Director	February 28, 2018
/s/ Sharad Mansukani, M.D. Sharad Mansukani, M.D.	Director	February 28, 2018
/s/ Lynn Simon, M.D. Lynn Simon, M.D.	Director	February 28, 2018
/s/ Phyllis R. Yale Phyllis R. Yale	Chair of the Board	February 28, 2018
/s/ Benjamin A. Breier Benjamin A. Breier	Director, President and Chief Executive Officer (Principal Executive Officer)	February 28, 2018
/s/ Stephen D. Farber Stephen D. Farber	Executive Vice President, Chief Financial Officer (Principal Financial Officer)	February 28, 2018
/s/ John J. Lucchese John J. Lucchese	Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)	February 28, 2018

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

	Retention			Transaction and other costs			Lease Termination costs			Total
Liability balance at December 31, 2015	$	-		$	-		$	-		$	-
Expense		4,042			2,997			12,777			19,816
Payments		(122	)		(2,577	)		-			(2,699	)
Other		-			-			-			-
Liability balance at December 31, 2016		3,920			420			12,777			17,117
Expense		19,698			61,345			265,539			346,582
Payments		(18,182	)		(56,165	)		(278,316	)		(352,663	)
Other		-			-			-			-
Liability balance at December 31, 2017	$	5,436		$	5,600		$	-		$	11,036

	Merger costs			Lease amendment fee			Total
Liability balance at December 31, 2016	$	-		$	-		$	-
Expense		9,989			5,000			14,989
Payments		(2,082	)		(5,000	)		(7,082	)
Liability balance at December 31, 2017	$	7,907		$	-		$	7,907

	Lease termination costs			Severance			Total
Liability balance at December 31, 2016	$	-		$	-		$	-
Expense		32,171			4,892			37,063
Payments		(526	)		(4,892	)		(5,418	)
Liability balance at December 31, 2017	$	31,645		$	-		$	31,645

	Lease termination costs			Severance and transaction costs			Total
Liability balance at December 31, 2015	$	-		$	-		$	-
Expense		50,377			5,641			56,018
Payments		(9,728	)		(5,626	)		(15,354	)
Liability balance at December 31, 2016		40,649			15			40,664
Expense		4,599			-			4,599
Payments		(11,303	)		(15	)		(11,318	)
Liability balance at December 31, 2017	$	33,945		$	-		$	33,945

	Severance, retention and other costs
Liability balance at December 31, 2015	$	-
Expense		4,164
Payments		(1,938	)
Liability balance at December 31, 2016		2,226
Expense		3,700
Payments		(4,300	)
Liability balance at December 31, 2017	$	1,626

Balance, December 31, 2014	$	-
Acquisition		6,814
Balance, December 31, 2015		6,814
Reductions due to the conclusion of income tax examinations		(1,001	)
Balance, December 31, 2016		5,813
Reductions due to the conclusion of income tax examinations		-
Balance, December 31, 2017	$	5,813

	Minimum payments
	Ventas		Other		Total
2018	$	110,319	$	128,494	$	238,813
2019		111,201		112,606		223,807
2020		112,231		96,762		208,993
2021		113,225		84,968		198,193
2022		114,179		69,687		183,866
Thereafter		219,505		306,920		526,425

	2017			2016
Term Loan Facility due 2021, net of unamortized original issue discount of $5.1 million at December 31, 2017 and $6.7 million at December 31, 2016	$	1,350,312		$	1,362,772
8.00% Notes due 2020		750,000			750,000
8.75% Notes due 2023		600,000			600,000
6.375% Notes due 2022		500,000			500,000
ABL Facility		-			62,500
Mandatory Redeemable Preferred Stock (see Note 16)		-			12,372
Capital lease obligations		312			580
Other		669			1,446
Debt issuance costs, net of accumulated amortization		(39,683	)		(46,631	)
Total debt, average life of 4 years (weighted average rate 6.7% for 2017 and 6.5% for 2016)		3,161,610			3,243,039
Amounts due within one year		(14,638	)		(27,977	)
Long-term debt	$	3,146,972		$	3,215,062

	Term Loan Facility due 2021		8.00% Notes due 2020		8.75% Notes due 2023		6.375% Notes due 2022		Capital lease obligations		Other		Total
2018	$	14,034	$	-	$	-	$	-	$	210	$	394	$	14,638
2019		14,034		-		-		-		102		257		14,393
2020		14,034		750,000		-		-		-		18		764,052
2021		1,313,326		-		-		-		-		-		1,313,326
2022		-		-		-		500,000		-		-		500,000
Thereafter		-		-		600,000		-		-		-		600,000
	$	1,355,428	$	750,000	$	600,000	$	500,000	$	312	$	669	$	3,206,409

	Purchase Contracts (equity component)			Mandatory Redeemable Preferred Stock (debt component)			Total
Price per Unit	$	798.42		$	201.58		$	1,000.00
Gross proceeds	$	137,727		$	34,773		$	172,500
Issuance costs		(4,938	)		(1,247	)		(6,185	)
	$	132,789		$	33,526		$	166,315
Balance sheet impact at issuance:
Long-term debt (deferred financing fees)	$	-		$	1,247		$	1,247
Current portion of long-term debt		-			10,887			10,887
Long-term debt		-			23,886			23,886
Capital in excess of par value		132,789			-			132,789

	Shares under option			Option price per share	Weighted average exercise price
Balances, December 31, 2016		1,054,081		$10.75 to $27.79	$	23.58
Exercised		(2,973	)	10.75 to 10.75		10.75
Canceled		(344,392	)	10.75 to 27.18		21.89
Balances, December 31, 2017		706,716		$10.75 to $27.79	$	24.45

	Options outstanding					Options exercisable
Range of exercise prices	Number outstanding at December 31, 2017		Weighted average remaining contractual life	Weighted average exercise price		Number exercisable at December 31, 2017		Weighted average exercise price
$10.75 to $15.06		80,276	2 years	$	11.92		80,276	$	11.92
$19.62		30,413	0.5 year		19.62		30,413		19.62
$26.08 to $27.79		596,027	0.8 year		26.39		596,027		26.39
		706,716	0.9 year	$	24.45		706,716	$	24.45

	Non-vested service-based restricted shares			Weighted average fair value at date of grant
Balances, December 31, 2016		2,015,624		$	14.31
Granted		2,287,697			9.38
Vested		(894,086	)		14.94
Canceled		(265,193	)		12.07
Balances, December 31, 2017		3,144,042		$	10.73

	Non-vested performance-based restricted shares			Weighted average fair value at date of grant
Balances, December 31, 2016		1,012,725
Granted		938,401		$	8.55
Vested		(88,940	)		11.67
Canceled		(440,096	)	$	11.30
Balances, December 31, 2017		1,422,090

	Non-vested service-based restricted stock units			Weighted average fair value at date of grant
Balances, December 31, 2016		77,124		$	18.22
Vested		(59,432	)		18.22
Balances, December 31, 2017		17,692		$	18.22

	2017		2016
Other current assets:
Prepaid assets	$	36,377	$	38,841
Other		24,233		24,852
		60,610		63,693
Other long-term assets:
Reinsurance and other recoverables	$	200,682	$	213,580
Other		64,625		74,660
		265,307		288,240
Other accrued liabilities:
Patient accounts	$	74,244	$	74,780
Accrued interest		73,839		71,919
Taxes other than income		26,375		32,359
Accrued acquisition and divestiture costs		24,872		2,569
Accrued room and board		16,064		15,888
Accrued litigation contingency		11,504		18,757
Other		37,079		48,240
		263,977		264,512
Deferred credits and other liabilities:
Accrued workers compensation	$	201,002	$	216,971
Sale-leaseback financing obligation related to the SNF Divestiture (see Note 6)		140,790		-
Accrued lease termination fees		52,354		39,059
Straight line rent accruals		51,222		57,528
Other		52,586		39,736
	$	497,954	$	353,294

Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency asset backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Decrease in carrying value of noncontrolling interests for purchase of noncontrolling interest in subsidiary	$	766
Decrease in Company's capital in excess of par value for purchase of noncontrolling interest in subsidiary		234
Total cash consideration paid in exchange for purchase of noncontrolling interest	$	1,000

			Additions
	Balance at beginning of period		Charged to cost and expenses		Other		Acquisitions			Deductions or payments			Balance at end of period
Allowance for loss on accounts receivable:
Year ended December 31, 2015	$	52,855	$	52,460	$	-	$	-		$	(42,419	)	$	62,896
Year ended December 31, 2016		62,896		40,804		-		-			(32,630	)		71,070
Year ended December 31, 2017		71,070		68,284		-		-			(42,455	)		96,899
Allowance for deferred taxes (a):
Year ended December 31, 2015	$	50,969	$	-	$	-	$	10,063		$	(14,356	)	$	46,676
Year ended December 31, 2016		46,676		385,752		-		(86	)		(9,188	)		423,154
Year ended December 31, 2017		423,154		115,921		-		-			(160,243	)		378,832