8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): March 8, 2007

REHABCARE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-19294	51-0265872
(State or other jurisdiction	(Commission File Number)	(I.R.S. Employer
of incorporation)		Identification No.)

7733 Forsyth Boulevard
Suite 2300
St. Louis, Missouri	63105
(Address of principal executive offices)	(Zip Code)

(314) 863-7422

(Company’s telephone number, including area code)

Not applicable

(Former name or former address if changed since last report)

				Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions.
o			Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02		Results of Operations and Financial Condition
		The information in Exhibit 99.1 is incorporated herein by reference.
Item 7.01		Regulation FD Disclosure
		The information in Exhibit 99.2 is incorporated herein by reference.
Item 9.01		Financial Statements and Exhibits
(d)		Exhibits
		The following exhibits are furnished pursuant to Item 2.02 and 7.01 hereof and should not be deemed to be “filed” under the Securities Exchange Act of 1934:
	99.1	Press release dated March 8, 2007, announcing our fourth quarter and full year 2006 revenues and results of operations.
	99.2	The script for a conference call held by the registrant on March 8, 2007

SIGNATURES

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

Dated: March 8, 2007

REHABCARE GROUP, INC.

By: /s/	Jay W. Shreiner
	Jay W. Shreiner
	Senior Vice President and
	Chief Financial Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release dated March 8, 2007, announcing our fourth quarter and full year 2006 revenues and results of operations.
99.2	The script for a conference call held by the registrant on March 8, 2007

EX-99

Exhibit 99.2

REHABCARE CONFERENCE CALL SCRIPT

March 8, 2007

INTRODUCTION BY CONFERENCE OPERATOR

INTRODUCTION OF MANAGEMENT BY FINANCIAL DYNAMICS

This conference call contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include but are not limited to, our ability to consummate acquisitions and other partnering relationships at reasonable valuations; our ability to integrate acquisitions and partnering relationships within the expected timeframes and to achieve the revenue, cost savings and earnings levels from such acquisitions and relationships at or above the levels projected; our ability to comply with the terms of our borrowing agreements; changes in governmental reimbursement rates and other regulations or policies affecting reimbursement for the services provided by us to clients and/or patients; the operational, administrative and financial effect of our compliance with other governmental regulations and applicable licensing and certification requirements; our ability to attract new client relationships or to retain and grow existing client relationships through expansion of our service offerings and the development of alternative product offerings; the future financial results of any unconsolidated affiliates; the adequacy and effectiveness of our operating and administrative systems; our ability to attract and the additional costs of attracting and retaining administrative, operational and professional employees; shortages of qualified therapists and other healthcare personnel;

1

significant increases in health, workers compensation and professional and general liability costs; litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations; competitive and regulatory effects on pricing and margins; our ability to effectively respond to fluctuations in our census levels and number of patient visits; the proper functioning of our information systems; natural disasters and other unexpected events which could severely damage or interrupt our systems and operations; and general and economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs.

JOHN SHORT

INTRODUCTION AND WELCOME

Good morning and thank you for joining us today. I’m John Short, President and CEO of the Company. Joining me from management are: Tom Davis, Executive Vice President and Chief Development Officer; Pat Henry, Executive Vice President; Mary Pat Welc, Senior Vice President; Jay Shreiner, Chief Financial Officer; Don Adam, Senior Vice President, Acquisitions; David Groce, Senior Vice President and General Counsel; Jeff Zadoks, Corporate Controller; and Betty Cammarata, Director of Investor Relations. We will be available during the question and answer period following our formal remarks.

The fourth quarter was a period of significant operational challenge and organizational change as we continued integrating Symphony Health Services, LLC, our largest acquisition to date. Our Contract Therapy, Freestanding Hospitals and Other Healthcare Services divisions achieved

2

significant increases in revenue quarter-over-quarter and year-over-year. As a result of the addition of Symphony and our rapidly growing hospital segment, our Company-wide revenue increased 47.6 percent over last year to $182.2 million in the quarter.

I’ll give you some highlights of the quarter as they pertain to our operating segments.

Freestanding Hospital Division

We are continuing to expand our Freestanding Hospital division. We have announced our plans with Methodist Medical Center to develop a 50-bed LTACH in Peoria, Illinois subject to obtaining a Certificate of Need.

Recently, we broke ground on a new LTACH hospital in North Kansas City in cooperation with North Kansas City Hospital and Liberty Hospital. This facility is expected to open in the spring of 2008. Construction for the Central Texas Rehab Hospital, our joint venture with the Seton family of hospitals in Austin, Texas, is well underway with opening expected in July of 2007. Yesterday we signed our joint venture agreement with St. Luke’s Hospital to build a 35-bed rehab hospital in St. Louis.Combined with our ongoing joint venture with Howard Regional Hospital in Kokomo, Indiana, we have five joint venture projects in various stages of development. Our pipeline of potential joint ventures remains robust with six letters of intent and several additional opportunities under review. Based on our existing pipeline, in 2007, we anticipate opening one rehab hospital and one LTACH with substantial construction completed on a second LTACH.

3

Post Acute Continuum Market Development

Focusing on our 87 strategic markets is critical to enhancing our ability to increase productivity, reduce labor costs and increase margins. We have taken steps to enhance the management and support infrastructure in these markets by:

• Assigning recruiters and staffing coordinators to oversee the assignment of our existing therapists and the sourcing and hiring of new therapists to reduce our need for contract labor.

• Developing campus recruiting plans with schools we have targeted within those particular markets. In 2006 we hired 262 students to full or part time positions in conjunction with our traditional recruiting efforts. In 2007, we plan to build on this success and expect to fill 500 or about 18 percent of our full time therapist hires through campus recruiting activities. Developing this additional channel for recruiting is extremely important as we saw our average time to fill open positions increase by 4 days during 2006 to 49 days.

• Refocusing our business development activities on growth in the 87 strategic markets where we have critical mass.

Symphony Integration Plan

We are ahead of our plans for harvesting the $10 to $14 million in annual cost savings and operating efficiencies from our Symphony acquisition. We achieved an annualized $6.1 million of synergies during the second half of 2006. This result was accomplished primarily through a net headcount reduction of 85 employees and by limiting incremental costs in our St. Louis-based corporate functions.

4

We are well into the roll out of our handheld point-of-service technology. We plan to have the technology in place at all RehabWorks’ sites by June 30, 2007. As expected, we have experienced declines in productivity within this division as our therapists learn and become proficient at using the new technology and related processes. We anticipate that these productivity declines will continue throughout the first and second quarters as we complete the implementation and improve significantly during the remainder of the year.

Contract Therapy

For the fourth quarter of 2006 we had an operating loss, inclusive of corporate overhead allocations, of $1.3 million in the contract therapy division. To improve our margins in 2007, we are focusing on:

• Continuing our review of low margin contracts with the objective of improving productivity, raising rates and exiting unprofitable business.

• Reducing our reliance on contract labor through recruiting enhancements including the expansion of our campus relations initiatives.

• Revising the division’s sales criteria for new contracts and focusing sales efforts on the division’s 87 strategic markets. This may reduce the division’s backlog and openings in 2007.

• Reorganizing the division’s operations to provide more focused oversight and training to its site level managers, and

• Completing the roll out of the RehabCare technology platform to all RehabWorks sites by the end of the second quarter.

We believe that this segment can return to its historical 5-6 percent operating margins for the year of 2008.

5

Hospital Rehabilitation Services

We have continued to successfully implement mitigation strategies to limit the negative impact of the 75% Rule on ARU admissions to under 3 percent, which is significantly better performance than the industry as a whole. For the fourth quarter of 2006, our same-store 75% Rule qualifying admissions increased by 3.8 percent from the prior year while our total same store ARU admissions were down 2.8 percent from the fourth quarter of 2005. On a full year basis, 75% Rule qualifying admissions increased by 5.0 percent while total same store ARU admissions declined 2.9 percent. On average, our units are currently operating at the 65% compliance level.

Several initiatives to improve HRS margins are being implemented including:

• Increasing the number of operating units.

• Reorganizing management of the division to provide more oversight and training to field operations.

• Improving performance of the division’s medical directors and aggressive management of the denial process.

• Re-focusing on performance of the hospital-based outpatient segment.

Other Healthcare Services

We’re pleased with the results from our Other Healthcare Services division. During 2006, Phase 2 Consulting added 32 new clients, the most new clients since 1996, five of which were referrals from RehabCare field managers. Two referrals from Phase 2 consultants have resulted in ARU contracts.

6

Polaris Consulting and VTA Management are collaborating in joint product development to introduce full therapy management services in New York. We anticipate continued growth in revenue and earnings from this division in 2007.

Clinical and Research and Development

In our ongoing efforts to increase the supply of therapists, we, along with other industry leaders, have co-founded the Allied Health Research Institute. Our support of this organization provides us with the opportunity to work directly with leading academic programs to increase opportunities for individuals desiring to enter the therapy professions and the opportunity to share clinical information to support research efforts.

Legislative and Regulatory Update

Our legislative and regulatory agenda continues to focus on the next phase of the 75% Rule, the proposed CMS rule on LTACHs, and the Part B exception process related to therapy caps. Beginning in July of this year, the compliance threshold for inpatient rehabilitation hospitals moves to 65% and then to 75% in July of 2008. New legislation has recently been brought before Congress calling for the threshold to remain at 60%.

On January 25th of this year, CMS issued a proposed rule that, among other things, would extend the existing 25% admission restriction to all LTACHs. Under this rule, no LTACH provider would be able to accept more than 25% of its admissions from any one acute care provider. Our Louisiana Specialty Hospital in New Orleans is currently exempt from the 25% restriction and would be required to comply with the limitation should the proposed rule become final. We are working with other leaders in the LTACH sector and the other

7

“grandfathered” LTACHs to oppose the rule. We, and the others with whom we are working, are speaking out about the adverse effect the rule would have on patient access to needed care in local markets served by LTACHs.

As a result of legislation passed last December, the exception process for therapy caps was extended through December 31, 2007. New legislation would need to be enacted by this date in order to avoid returning to an arbitrary therapy cap. We are working with Congressional leaders to make the exception process permanent.

I’ll now turn the call over to Jay Shreiner, who will review our financial results for the quarter.

Thank you, John,

Consolidated net revenues for the fourth quarter of 2006 of $182.2 million were flat compared to the prior quarter.

Consolidated net earnings in the fourth quarter were $2.1 million or $0.12 per share on a fully diluted basis. The fourth quarter consolidated net earnings include an after tax impairment charge of approximately $1.5 million or $0.09 per fully diluted share for the write-off of an information systems project and $0.01 of after tax expense per diluted share for stock-based compensation. Sequentially, consolidated net earnings declined $0.2 million.

The effective tax rate in the fourth quarter of 2006 was 9.8 percent, bringing the effective tax rate for all of 2006 to 35.2 percent. Adjusting the full year 2006 effective tax rate to 35.2 percent compared to the Company’s previous estimate of 39.5 percent resulted in an increase in diluted EPS of $0.04 for the fourth quarter and full year of 2006.

8

The decline in the effective tax rate is primarily attributable to lower taxable income in high tax rate states and favorable resolution of certain previously accrued state tax exposures. We expect the effective tax rate to approximate 40.0 percent for 2007.

Net revenues for the Contract Therapy division were $103.4 million, a decrease of $4.3 million or 4.0 percent, sequentially. This decline was driven by a 1.8 percent reduction in the average number of locations operated during the quarter, a 2.2 percent decline in the average revenue per unit, and a higher percentage of our services being provided to lower revenue per minute Part A patients.

The division’s operating loss of $1.3 million in the fourth quarter of 2006 compares to an operating loss of $0.7 million, sequentially. Improvements in selling, general and administrative expenses were more than offset by a 1.1 percent increase in labor and benefit costs per minute of service and increased bad debt expense.

The division had a net reduction of 56 units during the quarter. 48 new locations were added and 104 units were closed. Of the 104 closures, 52 percent were for pricing, payment reasons or because they were unprofitable. The division’s backlog stood at 20 at the end of the quarter, down from 28 at the end of the prior quarter.

Fourth quarter HRS revenues were $43.8 million, a decline of 1.2 percent on a sequential basis, primarily resulting from a 1.2 percent decline in total inpatient discharges.

Operating earnings for the division were $7.3 million, an increase of $1.2 million or 19 percent over the $6.1 million of operating earnings in the third quarter. The improved

9

performance resulted from recovery in bad debts combined with lower selling, general and administrative expenses.

The division finished the quarter with 172 programs, a net decline of one program sequentially, which is comprised of seven openings and eight closures. ARUs at year-end totaled 115, a net decline of two units during the quarter. The division’s backlog was two at the end of the quarter, which included one ARU.

Our HRS business development activities generated the signing of two subacute rehab units and two outpatient units in the fourth quarter.

Freestanding Hospitals reported net revenues of $23.7 million, a 10.6 percent sequential improvement from third quarter 2006 net revenues of $21.4 million. On a same facility basis, net revenues increased 9.7 percent sequentially.

Operating earnings for the fourth quarter were break-even compared to $0.4 million in the previous quarter. Start-up costs were $0.9 million in both quarters. In addition to the start-up expenses, we incurred $0.3 million of operating losses during the ramp-up of the Amarillo facility following receipt of Medicare licensure.

Revenues from the Other Healthcare Services segment totaled $11.6 million, an increase of 16.1 percent sequentially due largely to greater staff placements in our VTA business. Operating earnings in the fourth quarter of 2006 for this segment were $1.0 million, a sequential increase of $0.6 million, resulting largely from our VTA therapist and nurse staffing business.

10

At December 31, the Company had $9.4 million in cash and cash equivalents. The Company had $113.5 million of borrowings against its revolving credit facility and $7.1 million in subordinated long-term debt. During the fourth quarter, we paid down $8.8 million in borrowings.

At December 31, 2006, our weighted average interest rate for borrowings against our credit facility was approximately 7.2 percent, which included a 175 basis point spread above LIBOR. We anticipate our interest rate spread will be 200 basis points above LIBOR during the first quarter.

Days sales outstanding increased sequentially to 77.9 days from 77.1 days resulting from a three day deterioration in the aging of contract therapy accounts receivable, partially offset by a nine day improvement in the freestanding hospitals accounts receivable.

Cash flows from operations for the quarter were $15.4 million and capital expenditures were $5.2 million. Capital expenditures included spending on our Amarillo hospital facility and the roll out of point-of-service technology to former RehabWorks locations.

Now I will turn the call back over to John.

JOHN SHORT

Thank you, Jay.

Closing Remarks

As we enter our 25^th year of operation, we will continue to concentrate on improving our margins especially in our

11

contract therapy division, completing our integration of Symphony, growing our freestanding operations and paying down our debt.

I thank our over 16,500 colleagues for their support and look forward to sharing our future successes with you.

With that, I would like to have our operator open the call for questions.

To be read following Questions and Answers –

As a reminder, this conference call is being webcast live on our web site, www.rehabcare.com and will be available for replay beginning at 1:00 PM Eastern time today.

12

EX-99

Exhibit 99.1

 

CONTACT: RehabCare Group, Inc.
	Jay W. Shreiner
	Chief Financial Officer
	Betty Cammarata, Dir-Investor Relations
	Press: David Totaro, Senior Vice
	President, Corporate Marketing &
	Communications
	(314) 863-7422 or
	Financial Dynamics
	Gordon McCoun/Theresa Kelleher
	Press: Sean Leous (212) 850-5600

FOR IMMEDIATE RELEASE

Thursday, March 8, 2007

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

• 11.5 percent sequential improvement in operating performance before impairment charge

• Strong revenue growth quarter-over-quarter and year-over-year due to acquisitions

• Freestanding hospital division continues to deliver solid revenue and operating performance

• Symphony integration and synergies ahead of plan, but Contract Therapy businesses achieve less than expected operating results

ST. LOUIS, MO, March 8, 2007--RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the quarter and year ended December 31, 2006. Comparative results for the quarter and year follow.

	Quarter Ended						Full Year Ended
Amounts in millions,	December 31,						December 31,
except per share data		2006			2005			2006			2005
Consolidated Operating Revenues	$	182.2		$	123.4		$	614.8		$	454.3
Consolidated Operating Earnings (a)(c)(d)		4.7			3.5			21.0			33.3
Consolidated Net Earnings (Loss) (a)(b)(c)(d)		2.1			(31.8	)		7.3			(17.0	)
Consolidated Diluted Earnings (Loss) per Share		0.12			(1.89	)		0.42			(1.01	)
Contract Therapy Operating Revenues		103.4			61.2			331.6			232.2
Contract Therapy Operating Earnings (Loss)		(1.3	)		3.4			(2.6	)		12.7
HRS Inpatient Operating Revenues		32.0			34.8			130.8			141.2
HRS Outpatient Operating Revenues		11.8			11.9			49.0			48.7
HRS Operating Revenues		43.8			46.7			179.8			189.9
HRS Operating Earnings (c)		7.3			2.2			23.7			22.5
Freestanding Hospitals Operating Revenues		23.7			12.9			77.1			21.7
Freestanding Hospitals Operating Earnings (Loss)		—			(0.7	)		0.6			(0.6	)
Other Healthcare Services Operating Revenues		11.6			2.7			26.9			10.9
Other Healthcare Services Operating Earnings (Loss)		1.0			(0.1	)		1.4			(0.1	)
Equity in After Tax Loss of Affiliates (b)		—			(33.8	)		(3.0	)		(36.6	)

(a) Includes pretax stock-based compensation expense of $0.2 million and $1.7 million, or approximately $0.1 million and $1.0 million after tax, for the quarter and year ended December 31, 2006, respectively.

(b) Includes after tax losses on RehabCare’s equity investment in InteliStaf of $2.8 million for the year ended December 31, 2006 and $33.7 million and $36.5 million for the quarter and year ended December 31, 2005, respectively.

(c) Includes a pretax impairment charge on VitalCare intangible assets of $4.2 million for the quarter and year ended December 31, 2005.

(d) Includes a fourth quarter 2006 pretax write-off of $2.4 million associated with internally developed software, a $0.2 million second quarter 2006 reversal of restructuring charges and a $1.2 million fourth quarter 2005 charge for a legal settlement related to our former Healthcare Staffing division. These amounts have not been allocated to the operating earnings of our business segments.

Page 2

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

John H. Short, Ph.D., president and chief executive officer, commented, “Our operating revenues for the quarter increased 48 percent over the prior year primarily as a result of the inclusion of revenue from the Symphony Health Services acquisition, and the continued growth in our Freestanding Hospital business. We showed sequential improvement in profitability before an impairment charge, despite the challenges in absorbing the Symphony business which are affecting results in our Contract Therapy (CT) business.”

“We continue to be highly focused on the successful integration of Symphony and progress there remains on track. The realization of savings in back office costs is running ahead of schedule, and our dedication to the rapid implementation of new technology into the over 400 RehabWorks sites to improve our staff utilization and overall efficiency is moving along at a steady pace. We are on track to complete the roll out by the end of the second quarter. We are well on our way to achieving the expected $10 to $14 million in annual cost savings and productivity gains once the roll out of our technology is complete and we continue to generate operating efficiencies.”

Dr. Short continued, “We maintained the momentum in our Freestanding Hospital division, opening our eighth hospital during the fourth quarter and generated 113 percent growth in same store contribution year-over-year. We are confident that the continued growth of our Freestanding Hospital division, both organically and through acquisitions and joint ventures, will be an anchor for both our continuum of care and our strategic markets.”

Financial Overview of Fourth Quarter

Net revenues for the fourth quarter 2006 were $182.2 million compared to $123.4 million from the year ago quarter, an increase of 47.6 percent. Acquisitions accounted for $56.9 million of the year-over-year increase in revenue. The overall revenue increase reflects the acquisition of Symphony, the start-ups of Arlington Rehabilitation Hospital in Arlington, Texas in December 2005 and Northwest Texas Rehabilitation Hospital in Amarillo, Texas in October 2006 and the 2006 acquisitions of New Orleans, Louisiana based Louisiana Specialty Hospital in June and Midland, Texas based RehabCare Rehabilitation Hospital – Permian Basin in July. These increases were partially offset by $2.9 million lower revenues in the Hospital Rehabilitation Services division.

Consolidated net earnings were $2.1 million in the fourth quarter 2006 compared to net losses of $31.8 million in the fourth quarter 2005. Earnings (loss) per share on a fully diluted basis for the fourth quarter 2006 were $0.12 compared to $(1.89) for the same period last year.

-MORE-

Page 3

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

Consolidated net earnings for the fourth quarter of 2006 include a pretax charge of $2.4 million or $0.09 per diluted share after tax related to the write-off of an information systems project. During the fourth quarter and full year ended December 31, 2006, the Company recognized pretax stock-based compensation expense of approximately $0.2 million and $1.7 million, or approximately $0.01 and $0.06 per diluted share after tax, respectively.

The effective tax rate in the fourth quarter of 2006 was 9.8 percent to bring the effective tax rate for all of 2006 to 35.2 percent from the Company’s previous estimate of 39.5 percent. The decline in the effective tax rate is primarily attributable to a lower mix of taxable income in high tax rate states and due to the favorable resolution of certain previously accrued state tax exposures. Adjusting the full year 2006 effective tax rate to 35.2 percent resulted in an increase in diluted EPS of $0.04 for the fourth quarter and full year of 2006.

Consolidated net losses for the fourth quarter of 2005 include a $33.7 million loss, or $2.00 per diluted share, related to the Company’s equity investment in InteliStaf. The Company elected to abandon its remaining investment of $2.8 million in InteliStaf in the first quarter of 2006.

The Contract Therapy division’s net revenues for the fourth quarter of 2006 increased 69.0 percent to $103.4 million, compared to $61.2 million in the year ago quarter. The division’s operating loss for the quarter was $1.3 million compared to operating earnings in the prior year quarter of $3.4 million. As of December 31, 2006, the division operated in 1,197 locations versus 724 locations at December 31, 2005. The acquisition of Symphony’s RehabWorks’ operations, which added $41.8 million of revenue to the division, was the primary reason for the year-over-year fourth quarter increase in revenues and number of locations. Same store revenues for the legacy CT business grew at a rate of 3.3 percent.

Despite the substantial revenue growth, operating earnings for the division declined significantly year-over-year. This decline is partially attributable to operational challenges resulting from the integration of RehabWorks. Within the legacy CT business, revenue per minute of billable therapy service increased 2.2 percent from the prior year quarter, which was offset by a 1.4 percent decline in productivity, a 4.1 percent increase in wage and benefit rates and a 1.9 percent increase in contract labor usage.

RehabWorks’ labor and benefit costs per billable minute during the quarter were 15.5 percent higher than that of the legacy CT business primarily due to significantly higher contract labor usage, lower therapist productivity and higher therapist labor costs. The conversion and training of over one third of the RehabWorks facilities to RehabCare’s operating system in the fourth quarter also significantly contributed to RehabWorks’ higher labor costs. RehabWorks’ higher cost structure, however, is partially compensated for by a more favorable revenue mix that yields higher revenue per minute of billable therapy service than the legacy CT

-MORE-

Page 4

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

business. Fourth quarter 2006 combined division operating earnings were also impacted by the inclusion of redundant Symphony costs that had not yet been eliminated.

The Hospital Rehabilitation Services division’s fourth quarter net revenues decreased 6.3 percent to $43.8 million, compared to $46.7 million in the year ago quarter. As of December 31, 2006, HRS operated 172 programs compared to 179 at December 31, 2005. During the year, acute rehab units (ARUs) decreased from 120 to 115.

HRS operating revenues were lower due to an 8.0 percent decline in inpatient revenues and a 1.1 percent decline in outpatient revenues. The decline in inpatient revenues is attributable to a 6.8 percent year-over-year decline in average units operated and pricing pressure. Acute rehabilitation revenue also continues to be negatively impacted by the 75% Rule despite the one year delay in the phase-in of the implementation of the rule. While same store 75% Rule qualifying admissions increased by 3.8 percent from the prior year, total same store ARU admissions for the fourth quarter of 2006 were down 2.8 percent from the fourth quarter of 2005. On a full year basis, 75% Rule qualifying admissions increased by 5.0 percent while total same store ARU admissions declined 2.9 percent. On average, our units are currently operating at the 65% compliance level. In the outpatient business, same store revenue growth of 6.5 percent was not enough to offset an 8.9 percent decline in the average number of units operated during the quarter.

Year-over-year operating earnings for the division improved by $5.1 million to $7.3 million. Lower SG&A and bad debt expenses were partially offset by the effects of fewer same store ARU discharges and higher labor costs. Inpatient revenue per discharge increased 2.1 percent while inpatient labor and benefit costs per discharge, including contract labor, increased 5.9 percent compared to the year ago quarter. Average revenue per unit of outpatient service increased 4.1 percent while outpatient labor and benefit costs per unit of service increased 5.6 percent compared to the year ago quarter. Fourth quarter 2005 operating earnings also included a pretax impairment charge on VitalCare intangible assets of $4.2 million.

The Freestanding Hospital division’s net revenues for the fourth quarter of 2006 increased 84.1 percent to $23.7 million, compared to $12.9 million in the year ago quarter. This division was formed in August 2005 with the acquisition of four MeadowBrook hospitals and has since been expanded to a total of eight hospitals which were in operation during the fourth quarter of 2006. The eighth hospital, an inpatient rehabilitation facility in Amarillo, Texas, admitted its first patient in October 2006. Operating earnings for the quarter were break-even compared to an operating loss in the prior year quarter of $0.7 million. The division experienced a 22.2 percent increase in same store revenue year-over-year.

-MORE-

Page 5

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

The division’s significant operating improvements on a same store basis were dampened by $0.9 million of start-up costs incurred by the division during the fourth quarter of 2006. The start-up costs relate to the Amarillo, Texas rehabilitation hospital and the North Kansas City, Missouri joint venture. The Amarillo facility also incurred $0.3 million of losses during its ramp-up following receipt of its Medicare licensure. The Company defines start-up costs as net operating losses incurred prior to approval of Medicare licensure.

Other Healthcare Services

Revenues from our Other Healthcare Services segment increased 16.1 percent sequentially to $11.6 million due largely to greater staff placement in our VTA Management Services business and new client growth from our two consulting businesses, Phase 2 Consulting and the Polaris Consulting Group. Operating earnings of $1.0 million were higher by $0.6 million sequentially also as a result of strong cost management programs instituted in all of the segment’s businesses.

Symphony Integration and Synergies

As previously reported, the Company expects to harvest $10-14 million of annualized cost savings and operational efficiencies by the end of 2007. To date, the integration and cost savings plans are ahead of schedule and the plan to close Symphony’s corporate office by June 30, 2007 is on track. Annualized net cost savings were approximately $6.1 million during the six months ended December 31, 2006. The net cost savings were achieved principally through headcount reductions in Symphony’s corporate offices offset by limited incremental cost additions in the Company’s corporate departments.

Balance Sheet

At December 31, 2006 the Company had approximately $9.4 million in cash and cash equivalents, $113.5 million in outstanding debt under its revolving credit facility and $7.1 million in subordinated long-term debt related to various acquisitions. During the fourth quarter of 2006, the Company paid down approximately $8.8 million in long term debt. Days sales outstanding increased sequentially from 77.1 days at September 30, 2006 to 77.9 days at December 31, 2006. The increase is due to an increase in Contract Therapy receivables partially offset by improvement in Freestanding Hospital receivables.

For the year 2006, the Company generated cash from operations of $19.5 million and expended approximately $14.9 million for capital expenditures for equipment, facility build-outs and information systems. The Company also expended approximately $136.0 million in cash, net of cash acquired, for the acquisition of new businesses.

-MORE-

Page 6

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

Legislative Update

In the fourth quarter, Congress provided relief to the industry by continuing the current auto-exception process for the Part B Therapy Caps through December, 2007 which benefits our contract therapy business. Congress also rescinded a proposed 5.1 percent physician fee schedule reduction which benefits our contract therapy and outpatient businesses as it relates to Part B services.

The Senate recently introduced Bill 543 calling for a permanent freeze to the implementation of the 75% Rule for inpatient rehabilitation hospitals at the 60% level and codifying the way fiscal intermediaries determine medical necessity. A companion bill in the House is anticipated.

In 2004, CMS established the 25% Rule for long-term acute care hospitals (LTACHs). Under the rule, reimbursement to LTACHs under the higher LTACH Prospective Payment System (PPS) payment schedule for patients admitted from a co-located hospital is limited to 25% of the patients referred from such co-located hospital. Reimbursement for patients that exceed the 25% level would be on the lower inpatient prospective payment system (IPPS) payment schedule. The Company’s LTACH in New Orleans, Louisiana has been statutorily exempt from that rule. On January 25, 2007, CMS issued a proposed new rule that would apply the 25% Rule to all LTACHs, including the nineteen that have been previously statutorily exempt. The Company vigorously opposes the new rule proposal. As a result of the proposed rule, during 2007 the Company could experience an impairment charge for some or all of the value of its $5.4 million intangible asset assigned to the statutory exemption.

2007 Margin Improvement Initiatives

The Company will not be providing annual revenue and earnings per share guidance for 2007. The following is a brief update of the most significant initiatives being implemented:

Contract Therapy

We believe that this segment can return to our historical 5-6% operating margins for the year of 2008. Several initiatives are being implemented including:

• Continuing our review of low margin contracts with the objective of improving productivity, raising rates and exiting unprofitable business.

• Reducing our reliance on contract labor through recruiting enhancements including the expansion of our campus relations initiatives.

-MORE-

Page 7

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

• Revising the division’s sales criteria for new contracts and focusing sales efforts on the division’s 87 strategic markets. This may reduce the division’s backlog and openings in 2007.

• Reorganizing the division’s operations to provide more focused oversight and training to its site level managers.

• Completing the roll out of the RehabCare point-of-service technology platform to all RehabWorks sites by the end of the second quarter. This will continue to unfavorably impact productivity during this period.

Hospital Rehabilitation Services

We believe this segment will experience some modest growth in discharges in 2007. The division is currently operating at the 65% compliance threshold. Several initiatives are being implemented including:

• Increasing the number of operating units.

• Reorganizing management of the division to provide more oversight and training to field operations.

• Improving performance of the division’s medical directors and aggressive management of the denial process.

• Re-focusing on performance of the hospital-based outpatient segment.

Freestanding Hospitals

We anticipate mature facility EBITDA margins before corporate overhead of 17-19 percent. Several initiatives are being implemented including:

• Opening one rehab hospital and one LTACH with substantial construction completed on a second LTACH in the second half of 2007. The start-up costs associated with these openings will impact second half operating profits.        

• Developing three to five new joint venture projects.

Other Healthcare Services

• We anticipate continued growth in revenue and earnings in 2007.

Conclusion

Dr. Short concluded, “2006 has been a year of significant growth for RehabCare, albeit with some near term challenges that we are aggressively addressing to improve our market position and operating performance.

-MORE-

Page 8

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

We are encouraged by the sequential improvement in profitability before the asset impairment charge. As we move into 2007, we will be focused on improving our margins, cash flow, and reducing debt.”

About RehabCare Group

Established in 1982 and headquartered in St. Louis, MO, RehabCare (www.rehabcare.com) is a leading provider of rehabilitation program management services in partnership with nearly 1,400 hospitals and skilled nursing facilities in 43 states, the District of Columbia and Puerto Rico. The company also operates freestanding rehabilitation hospitals and long-term acute care hospitals across the country. RehabCare is pleased to be included in the Russell 2000 and Standard and Poor’s Small Cap 600 Indices.

A listen-only simulcast of RehabCare’s fourth quarter conference call will be available on the Company’s web site at www.rehabcare.com, under For Our Investors, Webcasts, and online at www.earnings.com, beginning at 10:00 Eastern time today. An online replay will be available until March 29, 2007. A telephonic replay of the call will be available beginning at approximately 1:00 P.M. Eastern time today and ending at midnight on March 29, 2007. The dial-in number for the replay is (630) 652-3041 and the access code is 16800688.

This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include but are not limited to, our ability to consummate acquisitions and other partnering relationships at reasonable valuations; our ability to integrate acquisitions and partnering relationships within the expected timeframes and to achieve the revenue, cost savings and earnings levels from such acquisitions and relationships at or above the levels projected; our ability to comply with the terms of our borrowing agreements; changes in governmental reimbursement rates and other regulations or policies affecting reimbursement for the services provided by us to clients and/or patients; the operational, administrative and financial effect of our compliance with other governmental regulations and applicable licensing and certification requirements; our ability to attract new client relationships or to retain and grow existing client relationships through expansion of our service offerings and the development of alternative product offerings; the future financial results of any unconsolidated affiliates; the adequacy and effectiveness of our operating and administrative systems; our ability to attract and the additional costs of attracting and retaining administrative, operational and professional employees; shortages

-MORE-

Page 9

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS

of qualified therapists and other healthcare personnel; significant increases in health, workers compensation and professional and general liability costs; litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations; competitive and regulatory effects on pricing and margins; our ability to effectively respond to fluctuations in our census levels and number of patient visits; the proper functioning of our information systems; natural disasters and other unexpected events which could severely damage or interrupt our systems and operations; and general and economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs.

-MORE-

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS               Page 10

I. Condensed Consolidated Statements of Earnings
(Unaudited; amounts in thousands, except per share data)
	Three Months Ended						Full Year Ended
	December 31,						December 31,
		2006			2005			2006			2005
Operating revenues	$	182,247		$	123,438		$	614,793		$	454,266
Costs & expenses
Operating		150,140			94,492			497,694			343,230
Selling, general & administrative:
Divisions		11,360			9,402			42,413			35,852
Corporate		9,501			8,737			37,034			27,051
Depreciation & amortization		4,191			3,060			14,537			10,655
Impairment of assets		2,351			4,211			2,351			4,211
Restructuring		—			—			(191	)		—
Total costs & expenses		177,543			119,902			593,838			420,999
Operating earnings, net		4,704			3,536			20,955			33,267
Other income (expense), net		1			27			(50	)		59
Interest expense, net		(2,411	)		(123	)		(5,031	)		(375	)
Earnings before income taxes, equity in net loss of affiliates and minority interests		2,294			3,440			15,874			32,951
Income taxes		(225	)		(1,394	)		(5,589	)		(13,345	)
Equity in net loss of affiliates		(17	)		(33,826	)		(3,029	)		(36,588	)
Minority interests		11			—			24			—
Net earnings (loss)	$	2,063		$	(31,780	)	$	7,280		$	(16,982	)
Diluted earnings (loss) per share	$	0.12		$	(1.89	)	$	0.42		$	(1.01	)
Weighted average diluted shares outstanding		17,289			16,821			17,243			16,751

II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
	Unaudited
	December 31,		December 31,
	2006		2005
Assets
Cash and cash equivalents	$	9,430	$	28,103
Accounts receivable, net		153,688		85,541
Deferred tax assets		6,065		6,359
Other current assets		8,932		7,295
Total current assets		178,115		127,298
Property and equipment, net		31,833		27,495
Excess of cost over net assets acquired, net		167,440		94,960
Intangible assets		36,950		7,560
Investments in unconsolidated affiliates		3,295		6,324
Other assets		10,663		9,288
	$	428,296	$	272,925
Liabilities & Stockholders’ Equity
Current portion of long-term debt	$	5,559	$	3,408
Payables & accruals		86,574		63,226
Total current liabilities		92,133		66,634
Long-term debt, less current portion		115,000		4,059
Other non-current liabilities		10,298		3,984
Minority interest		86		—
Stockholders’ equity		210,779		198,248
	$	428,296	$	272,925

-MORE-

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS                         Page 11

III. Operating Statistics
(Unaudited; dollars in thousands)
	Three Months Ended						Full Year Ended
	December 31,						December 31,
		2006			2005			2006			2005
Contract Therapy
Operating revenues	$	103,422		$	61,209		$	331,603		$	232,193
Operating expenses		89,694			48,619			282,871			185,268
Division SG&A		6,164			4,091			21,826			16,121
Corporate SG&A (a)		6,883			3,938			22,812			13,953
Depreciation and amortization		1,953			1,117			6,661			4,190
Operating earnings (loss)	$	(1,272	)	$	3,444		$	(2,567	)	$	12,661
Average number of locations		1,251			765			1,018			749
End of period number of locations		1,197			724			1,197			724
Hospital Rehabilitation Services (HRS)
Operating revenues
Inpatient	$	32,008		$	34,805		$	130,758		$	141,152
Outpatient		11,808			11,935			49,040			48,680
Total	$	43,816		$	46,740		$	179,798		$	189,832
Operating expenses		30,268			31,702			126,604			129,921
Division SG&A		3,482			3,919			15,125			16,227
Corporate SG&A (a)		1,534			3,300			9,668			11,304
Depreciation and amortization		1,229			1,452			4,740			5,631
Impairment of intangible assets		-			4,211			-			4,211
Operating earnings	$	7,303		$	2,156		$	23,661		$	22,538
Average number of programs
Inpatient		136			146			137			145
Outpatient		39			43			41			42
Total		175			189			178			187
End of period number of programs
Inpatient		133			138			133			138
Outpatient		39			41			39			41
Total		172			179			172			179
Freestanding Hospitals
Operating revenues	$	23,672		$	12,860		$	77,101		$	21,706
Operating expenses		21,501			12,170			67,955			19,944
Division SG&A		482			774			1,983			1,380
Corporate SG&A (a)		790			188			3,676			243
Depreciation and amortization		874			477			2,844			793
Operating earnings (loss)	$	25		$	(749	)	$	643		$	(654	)
End of period number of facilities		8			5			8			5
Other Healthcare Services
Operating revenues (b)	$	11,578		$	2,692		$	26,859		$	10,891
Operating earnings (loss)		1,021			(95	)		1,400			(58	)

(a) During the quarter and full year ended December 31, 2006, the Company incurred $216 and $1,697 of stock-based compensation expense. These costs have been allocated to the divisions as part of corporate SG&A.

(b) Includes intercompany revenues, at market rates, of $241 and $568 for the quarter and full year ended December 31, 2006, respectively, and $63 and $356 for the quarter and full year ended December 31, 2005, respectively.

-MORE-

REHABCARE REPORTS FOURTH QUARTER AND YEAR-END 2006 RESULTS                Page 12

IV. Key Statistics

(Unaudited; dollars in thousands, except per share data)

		Q1			Q2			Q3			Q4
		3/31/06			6/30/06			9/30/06			12/31/06
		Actual			Actual			Actual			Actual
CONSOLIDATED P&L STATEMENT
Operating revenues	$	121,718		$	127,666		$	183,162		$	182,247
Costs and expenses:
Operating expenses		97,240			101,074			149,240			150,140
Selling, general and administrative:
Divisions		9,156			9,690			12,207			11,360
Corporate		8,549			8,080			10,904			9,501
Depreciation and amortization		2,904			2,957			4,485			4,191
Impairment of assets		-			-			-			2,351
Restructuring		-			(191	)		-			-
Total costs and expenses		117,849			121,610			176,836			177,543
Operating earnings	$	3,869		$	6,056		$	6,326		$	4,704
Other income (expense), net		(39	)		13			(25	)		1
Interest expense, net		(68	)		(153	)		(2,399	)		(2,411	)
Earnings before income taxes, equity in net
loss of affiliates and minority interests		3,762			5,916			3,902			2,294
Income taxes		(1,486	)		(2,337	)		(1,541	)		(225	)
Equity in loss of affiliates		(2,841	)		(102	)		(69	)		(17	)
Minority interests		-			3			10			11
TOTAL NET EARNINGS		(565	)		3,480			2,302			2,063
Diluted earnings per share	$	(0.03	)	$	0.20		$	0.13		$	0.12
HOSPITAL REHABILITATION SERVICES
INPATIENT DIVISION
Acute
Average Number of Programs		120			120			119			117
Revenue	$	31,105		$	30,321		$	30,145		$	29,493
Patient Days		142,880			141,433			141,381			139,647
Discharges		11,671			11,607			11,546			11,337
Subacute (includes VitalCare)
Average Number of Programs		18			16			17			19
Revenue	$	2,502		$	2,305		$	2,372		$	2,515
Patient Days		38,398			32,323			32,295			31,371
Discharges		843			658			690			757
OUTPATIENT DIVISION
Average Number of Programs		42			43			40			39
Revenue	$	12,844		$	12,567		$	11,821		$	11,808
Patient Visits		299,003			292,203			272,800			266,237
TOTAL HOSPITAL REHABILITATION SERVICES
Operating Earnings	$	5,525		$	4,698		$	6,135		$	7,303
Operating Earnings Margin		11.9	%		10.4	%		13.8	%		16.7	%
CONTRACT THERAPY DIVISION
Average Number of Facilities		749			790			1,274			1,251
Revenue	$	57,438		$	63,053		$	107,690		$	103,422
Operating Earnings	$	(1,334	)	$	703		$	(664	)	$	(1,272	)
Operating Earnings Margin		-2.3	%		1.1	%		-0.6	%		-1.2	%
Average Revenue per Facility	$	76.7		$	79.8		$	84.5		$	82.7
FREESTANDING HOSPITALS
Revenue	$	15,153		$	16,880		$	21,396		$	23,672
Operating Earnings	$	(322	)	$	502		$	438		$	25
Patient Days		13,179			15,048			19,723			21,503
Discharges		725			820			1,091			1,255

-END-