Kindred Healthcare first quarter consolidated revenues increase 33% to $1.6 billion

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).