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Reported Results of $0.35 Per Diluted Share Include Charges of $0.05 Per Share Primarily Related to Cost Saving Activities

Company Maintains Annual Earnings Guidance Range

LOUISVILLE, Ky.--(BUSINESS WIRE)--May. 1, 2012-- Kindred Healthcare, Inc. (the “Company”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 2012. The Company’s consolidated financial statements include the operating results of RehabCare Group, Inc. (“RehabCare”) since the closing of the acquisition on June 1, 2011.

First Quarter Highlights:

• Consolidated revenues rose 33% to $1.6 billion
  -- RehabCare acquisition added $364 million in current period revenues

• RehabCare synergy plan continues to track toward $70 million annual goal
• Hospital results were bolstered by the RehabCare acquisition, volume growth and cost efficiencies
  -- Reported admissions grew 40% from last year; same-facility admissions grew 2%
  -- Operating income grew 48% to $161 million

• Despite growth in nursing center admissions and improved cost management, reimbursement pressures and declining lengths of stay drove operating declines
  -- Nursing center revenues declined 4% from last year’s first quarter
  -- Operating income declined 25% to $66 million

• While recent Medicare changes impaired rehabilitation division’s operating margins compared to last year, operating margins improved from the fourth quarter of 2011
  --Successful RehabCare integration activities continue
• Home health and hospice division reported significant revenue and operating income growth

First Quarter Results

Continuing Operations

Consolidated revenues for the first quarter ended March 31, 2012 rose 33% to $1.6 billion compared to $1.2 billion in the first quarter last year. Income from continuing operations for the first quarter of 2012 totaled $18.1 million or $0.35 per diluted share compared to $22.3 million or $0.55 per diluted share in the first quarter last year.

First quarter 2012 operating results included certain pretax charges of $4.6 million related to costs incurred in connection with the closing of a regional office and a long-term acute care (“LTAC”) hospital and transaction-related costs, the effect of which reduced income from continuing operations by $2.8 million or $0.05 per diluted share.

First quarter 2011 operating results included certain charges that reduced income from continuing operations by $4.0 million or $0.10 per diluted share.

Discontinued Operations

During the past few years, the Company has entered into transactions related to the divestiture of unprofitable businesses. For accounting purposes, the historical operating results of these businesses have been classified as discontinued operations in the Company’s consolidated statement of operations for all historical periods.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of the Company, remarked, “We reported a good start to the year, having successfully stabilized our operations following the significant Medicare reimbursement cuts that took effect in the fourth quarter of 2011. Each of our four operating divisions is focused on the achievement of our clinical and financial goals for 2012 as we continue to execute on our strategic operating plan. Our first quarter results are consistent with our annual earnings expectations and reflect early success in our operating efficiency initiatives and continued realization of synergies in connection with the RehabCare acquisition.”

With respect to the Company’s ongoing development activities, Mr. Diaz noted, “During the first quarter, the Company opened a new 46-bed free-standing inpatient rehabilitation hospital in suburban Houston and signed contracts to manage two acute rehabilitation units. We also acquired a previously leased hospital in southern California for $50 million and deposited $17 million toward the purchase of another leased hospital in Cleveland. In addition, projects to expand and upgrade LTAC hospitals in Dayton, Ohio and Charleston, South Carolina, as well as the replacement of an inpatient rehabilitation hospital in Austin, Texas, are proceeding in line with our plans.”

Proposed Medicare Rule

On April 24, 2012, the Centers for Medicare and Medicaid Services (“CMS”) issued proposed regulations (the “2012 Proposed CMS Rule”) regarding Medicare reimbursement for LTAC hospitals for the fiscal year beginning October 1, 2012.

Included in the 2012 Proposed CMS Rule is (1) a market basket increase to the standard federal payment rate of 3.0%; (2) offsets to the standard federal payment rate mandated by the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act (collectively, the “ACA”) of: (a) 0.8% to account for the effect of a productivity adjustment, and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor of 0.99903 applied to the adjusted standard federal payment rate; (4) adjustments to area wage indexes; and (5) a decrease in the high cost outlier threshold per discharge to $15,728. Effective December 29, 2012, the 2012 Proposed CMS Rule also would (1) begin a three-year phase-in of a 3.75% budget neutrality adjustment which would reduce LTAC hospital rates by 1.3% in 2013; and (2) restore a payment reduction that would limit payments for very short stay outliers that would reduce the Company’s LTAC hospital payments by approximately 0.5%. The 2012 Proposed CMS Rule also (1) provides for a one-year extension of the existing moratorium on the “25 Percent Rule” pending the results of an ongoing research initiative to re-define the role of LTAC hospitals in the Medicare program, and (2) would allow for the expiration of the current moratorium on the development or expansion of LTAC hospitals on December 29, 2012.

In aggregate, based upon its review of the 2012 Proposed CMS Rule, the Company expects that LTAC Medicare payment rates will be flat in 2013 compared to current rates. The 2012 Proposed CMS Rule does not include the impact of a 2% sequestration payment reduction mandated by Congress that is expected to begin in February 2013.

Mr. Diaz commented that, “The tone and content of the proposed rule is constructive and sets the stage for a continued policy dialogue about the vital role that LTAC hospitals play in the healthcare continuum for the nation’s most medically complex patients. We are particularly encouraged that CMS research supports a path toward certification criteria for LTAC hospitals and we look forward to working with CMS, Congress, MedPAC and our peers to advance a comprehensive solution to policy issues that paves the way for future reforms and also produces Medicare savings.”

Commenting specifically on the proposed rule, Mr. Diaz stated, “We appreciate CMS’s proposal to phase in the one-time budget neutrality adjustment over three years in recognition that a full one-time cut would be destabilizing, particularly in light of an effective zero percent payment update and pending sequestration cuts of 2%. At the same time, we look forward to providing CMS with data demonstrating that the proposed budget neutrality adjustment of 3.75% is too high and is neither necessary nor warranted at that level to achieve budget neutrality.”

Earnings Guidance – Continuing Operations

The Company maintained its earnings guidance for 2012. The earnings guidance provided by the Company excludes the effect of (1) any costs associated with the closing of a regional office and a LTAC hospital, (2) any transaction-related charges, (3) any other reimbursement changes, (4) any acquisitions or divestitures, (5) any impairment charges, or (6) any repurchases of common stock.

The Company expects consolidated revenues for 2012 to approximate $6.3 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization and rent, is expected to range from $868 million to $884 million. Rent expense is expected to approximate $432 million, while depreciation and amortization should approximate $199 million. Net interest expense is expected to approximate $107 million. The Company expects to report income from continuing operations for 2012 between $73 million to $83 million or $1.35 to $1.55 per diluted share (based upon diluted shares of 52.5 million).

The Company also indicated that it expects cash flows from operations in 2012 to range from $240 million to $260 million. Routine capital expenditures in 2012 are expected to range from $130 million to $140 million, including approximately $16 million of expenditures to complete the information systems integration of RehabCare. The Company’s expected routine capital expenditures also include approximately $11 million to upgrade the clinical information systems in its hospital, nursing center and home health businesses.

In addition, the projects related to the replacement, expansion and upgrade of its hospitals in Dayton, Ohio, Charleston, South Carolina, and Austin, Texas, will be completed at an aggregate additional cost of approximately $23 million through 2013 (these expenditures are not included in the routine capital spending estimates discussed above).

Webcast of Conference Call

As previously announced, investors and the general public can access a live webcast of the first quarter 2012 conference call through a link on the Company’s website at www.kindredhealthcare.com. The conference call will be held May 2, 2012 at 10:00 a.m. (Eastern Time).

A telephone replay of the conference call will be available at approximately 1:00 p.m. on May 2 by dialing (719) 457-0820, access code: 3349972. The replay will be available through May 11.

Forward-Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding the Company’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as “anticipate,” “approximate,” “believe,” “plan,” “estimate,” “expect,” “project,” “could,” “should,” “will,” “intend,” “may” and other similar expressions, are forward-looking statements.

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

In addition to the factors set forth above, other factors that may affect the Company’s plans or results include, without limitation, (a) the impact of healthcare reform, which will initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, including reforms resulting from the ACA. Healthcare reform is affecting certain of the Company’s businesses and the Company expects that it will impact all of them in some manner. There is also the possibility that implementation of the provisions expanding health insurance coverage or the entire ACA will be delayed, revised or eliminated as a result of court challenges and efforts to repeal or amend the law. The U.S. Supreme Court has heard oral argument on the constitutionality of the ACA and is expected to reach a decision in 2012. These court proceedings, the 2012 presidential election and pending efforts in the U.S. Congress to repeal, amend or retract funding for various aspects of the ACA create additional uncertainty about the ultimate impact of the ACA, or any portions of the ACA that survive the constitutional challenge, on the Company and the healthcare industry. Due to the substantial regulatory changes that will need to be implemented by CMS and others, the numerous processes required to implement these reforms, and pending judicial review of the ACA, the Company cannot predict which healthcare initiatives will be implemented at the federal or state level, the timing of any such reforms, or the effect such reforms or any other future legislation or regulation will have on the Company’s business, financial position, results of operations and liquidity, (b) the impact of the 2012 Proposed CMS Rule which, among other things, would reduce Medicare reimbursement to the Company’s LTAC hospitals in 2013 and beyond by imposing a budget neutrality adjustment and modifying the short stay outlier rules, (c) the impact of final rules issued by CMS on July 29, 2011 which significantly reduced Medicare reimbursement to nursing centers and changed payments for the provision of group therapy services effective October 1, 2011, (d) the impact of the Budget Control Act of 2011 which will automatically reduce federal spending by approximately $1.2 trillion split evenly between domestic and defense spending. At this time, the Company believes this will result in an automatic 2% reduction on each claim submitted to Medicare beginning February 1, 2013, (e) changes in the reimbursement rates or the methods or timing of payment from third party payors, including commercial payors and the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for LTAC hospitals, including potential changes in the Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for the Company’s LTAC hospitals, nursing and rehabilitation centers, inpatient rehabilitation hospitals and home health and hospice operations, and the expiration of the Medicare Part B therapy cap exception process, (f) the effects of additional legislative changes and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry, (g) the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (which was extended by the ACA), including the ability of the Company’s hospitals to adjust to potential LTAC certification, medical necessity reviews and the moratorium on future hospital development, (h) the impact of the Company’s significantly increased levels of indebtedness as a result of the RehabCare acquisition on the Company’s funding costs, operating flexibility and ability to fund ongoing operations, development capital expenditures or other strategic acquisitions with additional borrowings, (i) the Company’s ability to successfully pursue its development activities, including through acquisitions, and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations as and when planned, including the potential impact of unanticipated issues, expenses and liabilities associated with those activities, (j) the potential failure to retain key employees of RehabCare, (k) the failure of the Company’s facilities to meet applicable licensure and certification requirements, (l) the further consolidation and cost containment efforts of managed care organizations and other third party payors, (m) the Company’s ability to meet its rental and debt service obligations, (n) the Company’s ability to operate pursuant to the terms of its debt obligations, and comply with its covenants thereunder, and its ability to operate pursuant to its master lease agreements with Ventas, Inc. (NYSE:VTR), (o) the condition of the financial markets, including volatility and weakness in the equity, capital and credit markets, which could limit the availability and terms of debt and equity financing sources to fund the requirements of the Company’s businesses, or which could negatively impact the Company’s investment portfolio, (p) national and regional economic, financial, business and political conditions, including their effect on the availability and cost of labor, credit, materials and other services, (q) the Company’s ability to control costs, particularly labor and employee benefit costs, (r) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel, (s) the Company’s ability to attract and retain key executives and other healthcare personnel, (t) the increase in the costs of defending and insuring against alleged professional liability and other claims and the Company’s ability to predict the estimated costs related to such claims, including the impact of differences in actuarial assumptions and estimates compared to eventual outcomes, (u) the Company’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability and other claims, (v) the Company’s ability to successfully dispose of unprofitable facilities, (w) events or circumstances which could result in the impairment of an asset or other charges, such as the impact of the Medicare reimbursement regulations that resulted in the Company recording significant impairment charges in 2011, (x) changes in generally accepted accounting principles (“GAAP”) or practices, and changes in tax accounting or tax laws (or authoritative interpretations relating to any of these matters), and (y) the Company’s ability to maintain an effective system of internal control over financial reporting. Many of these factors are beyond the Company’s control. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

In addition to the results provided in accordance with GAAP, the Company has provided information in this release to compute certain non-GAAP measurements for the three months ended March 31, 2012 and 2011 before certain charges or on a core basis. A reconciliation of the non-GAAP measurements to the GAAP measurements is included in this press release.

As noted above, the Company’s earnings release includes a financial measure referred to as operating income, or earnings before interest, income taxes, depreciation, amortization and rent. The Company’s management uses operating income as a meaningful measure of operational performance in addition to other measures. The Company uses operating income to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, the Company believes this measurement is important because securities analysts and investors use this measurement to compare the Company’s performance to other companies in the healthcare industry. The Company believes that income from continuing operations is the most comparable GAAP measure. Readers of the Company’s financial information should consider income from continuing operations as an important measure of the Company’s financial performance because it provides the most complete measure of its performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based upon GAAP as an indicator of operating performance. A reconciliation of operating income to income from continuing operations provided in the Condensed Business Segment Data is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-150 private employer in the United States, is a healthcare services company based in Louisville, Kentucky with annual revenues of $6 billion and approximately 76,100 employees in 46 states. At March 31, 2012, Kindred through its subsidiaries provided healthcare services in 2,142 locations, including 120 long-term acute care hospitals, six inpatient rehabilitation hospitals, 224 nursing and rehabilitation centers, 26 sub-acute units, 52 hospice and home care locations, 100 inpatient rehabilitation units (hospital-based) and a contract rehabilitation services business, RehabCare, which served 1,614 non-affiliated facilities. Ranked as one of Fortune magazine’s Most Admired Healthcare Companies for four years in a row, Kindred’s mission is to promote healing, provide hope, preserve dignity and produce value for each patient, resident, family member, customer, employee and shareholder we serve. For more information, go to www.kindredhealthcare.com.