<PAGE>
 
                              EMPLOYMENT AGREEMENT

     Employment Agreement dated as of February 12, 1998 between Robert V.
Napier (the "Executive") and Paragon Health Network, Inc., a Delaware
corporation (the "Company").

     WHEREAS, the Company desires to employ the Executive as a Senior Vice
President and Chief Information Officer, and the Executive desires to accept
such employment, for the term and upon the other conditions hereinafter set
forth; and

     WHEREAS, as a condition of entering into this Agreement, the Executive
agrees to waive the Executive's rights, if any, against the Company and any
predecessor company (including GranCare, Inc.) under (i) any employment
agreement and (ii) any other plan, arrangement or agreement of any kind that
provides any form of severance payments; and

     WHEREAS, the parties desire to enter into this Agreement setting forth the
terms and conditions of the employment relationship of the Executive with the
Company;

     NOW, THEREFORE, the parties agree as follows:

     1.  Employment  The Company hereby employs the Executive, and the Executive
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hereby accepts employment with the Company, upon the terms and subject to the
conditions set forth herein.

     2.  Term  This Agreement shall commence on the date hereof (the "Effective
         ----                                                                  
Date") and continue for the two-year period (the "Term") terminating on the
second anniversary of the Effective Date, or upon the Executive's earlier death,
disability or other termination of employment pursuant to Section 11; provided,
however, that commencing on the second anniversary of the Effective Date and on
each anniversary thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such anniversary,
either party hereto shall have notified the other party hereto in writing that
such extension shall not take effect.

     3.  Position. During the Term, the Executive shall serve as Senior Vice
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President and Chief Information Officer of the Company or in such other
executive position in the Company as the Executive shall approve.

     4.  Duties and Reporting Relationship.  During the Term, the Executive
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shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee.  The Executive shall also perform such other executive and
administrative duties (not inconsistent with the position of Senior Vice
President and Chief Information Officer) as the Executive may reasonably be
expected to be capable of performing on behalf of the Company, as may from time
to time be authorized or directed by the Board. The
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Executive agrees to be employed by the Company in all such capacities for the
Term, subject to all the covenants and conditions hereinafter set forth.

     5.  Place of Performance.  The Executive shall perform his duties and
         --------------------                                             
conduct his business at the principal executive offices of the Company, except
for required travel on the Company's business.

     6.  Salary and Annual Bonus.
         ----------------------- 

          (a)  Base Salary. The Executive's base salary hereunder shall be
               -----------   
               $270,000.00 a year, payable monthly and prorated for any partial
               year of employment. The Board shall review such base salary at
               least annually and make such adjustment from time to time as it
               may deem advisable, but the base salary shall not at any time be
               less than $270,000.00 a year.

          (b)  Annual Bonus. The Company shall provide the Executive with an
               ------------                                                 
               opportunity to earn upon achievement of target performance, an
               annual bonus equal to fifty percent (50%) of his base salary (the
               "Target Bonus"), with a minimum bonus of between fifty percent
               (50%) of Target Bonus upon achievement of threshold performance
               and an opportunity to earn up to one hundred fifty percent (150%)
               of the Target Bonus for performance in excess of the targets.

     7.  Vacation, Holidays and Sick Leave.  During the Term, the Executive
         ---------------------------------                                 
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior vice presidents.

     8.  Business Expenses. The Executive shall be reimbursed for all ordinary
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and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.

     9.  Pension and Welfare Benefits.  During the Term, the Executive shall be
         ----------------------------                                          
eligible to participate fully in all health benefits, insurance programs,
pension and retirement plans and other employee benefit and compensation
arrangements available to vice presidents of the Company generally.

     10.  Stock Options  The Company, pursuant to the terms of its stock option
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plan, may grant to the Executive, stock options to purchase a number of shares
of common stock.

     11.  Termination of Employment.
          ------------------------- 

          (a)   General.  The Executive's employment hereunder may be terminated
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                without any breach of this Agreement only under the following
                circumstances.

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          (b)  Death or Disability.
               ------------------- 

               (i)  The Executive's employment hereunder shall automatically
                    terminate upon the death of the Executive.

               (ii) If, as a result of the Executive's incapacity due to
                    physical or mental illness, the Executive is unable to
                    perform the essential functions of his job for any one
                    hundred eighty (180) days (whether or not consecutive)
                    during any eighteen (18) month period, and no reasonable
                    accommodation can be made that will allow Executive to
                    perform his essential functions, the Company may terminate
                    the Executive's employment hereunder for any such incapacity
                    (a "Disability").

          (c)   Termination by the Company.  The Company may terminate the
                --------------------------                                
                Executive's employment hereunder at any time, whether or not for
                Cause. For purposes of this Agreement, "Cause" shall mean (i)
                the failure or refusal by the Executive to perform his duties
                hereunder (other than any such failure resulting from the
                Executive's incapacity due to physical or mental illness), which
                has not ceased within ten (10) days after a written demand for
                substantial performance is delivered to the Executive by the
                Company, which demand identifies the manner in which the Company
                believes that the Executive has not performed such duties, (ii)
                the engaging by the Executive in willful misconduct or an act of
                moral turpitude which is materially injurious to the Company,
                monetarily or otherwise (including, but not limited to, conduct
                which violates Section 15 hereof) or (iii) the conviction of the
                Executive of, or the entering of a plea of nolo contendere by,
                the Executive with respect to, a felony.

          (d)   Termination by the Executive. The Executive shall be entitled to
                ----------------------------                                    
                terminate his employment hereunder (A) for Good Reason, (B) if
                his health should become impaired to an extent that makes his
                continued performance of his duties hereunder hazardous to his
                physical or mental health, provided that the Executive shall
                have furnished the Company with a written statement from a
                qualified doctor to such effect and provided, further, that, at
                the Company's request, the Executive shall submit to an
                examination by a doctor selected by the Company and such doctor
                shall have concurred in the conclusion of the Executive's doctor
                or (C) without the Executive's express written consent, any
                failure by the Company to comply with any material provision of
                this Agreement, which failure has not been cured within ten (10)
                days after notice of such noncompliance has been given by the
                Executive to the Company. For purposes of this Agreement, "Good
                Reason" shall mean the occurrence following a Change in Control
                during the term of this Agreement, of any one of the following
                acts by the Company, or failures by the Company to act, unless,
                in the case of any act or failure to act described below, such

                                       3
<PAGE>
 
                act or failure to act is corrected prior to the Date of
                Termination specified in the Notice of Termination given in
                respect thereof:

               (i)   any material diminution in the Executive's authorities or
                     responsibilities (including reporting responsibilities)
                     which were in effect immediately prior to the Change in
                     Control or from his status, title, position or
                     responsibilities (including reporting responsibilities)
                     which were in effect following a Change in Control pursuant
                     to the Executive's consent to accept any such change; the
                     assignment to him of any duties or work responsibilities
                     which are inconsistent with such status, title, position or
                     work responsibilities; or any removal of the Executive
                     from, or failure to reappoint or reelect him to any of such
                     positions, except if any such changes are because of
                     Disability, retirement, death or Cause;

               (ii)  a reduction by the Company in the Executive's base salary
                     or Target Bonus as in effect on the date hereof or as the
                     same may be increased from time to time except for across-
                     the-board salary reductions similarly affecting all senior
                     executives of the Company and all senior executives of any
                     Person (as defined in Section 11(h)(i) below) in control of
                     the Company provided in no event shall any such reduction
                     reduce the Executive's base salary below $270,000.00;

               (iii) the relocation of the Executive's office at which he is to
                     perform his duties, to a location more than fifty (50)
                     miles from the location at which the Executive performed
                     his duties prior to the Change in Control, except for
                     required travel on the Company's business to an extent
                     substantially consistent with his business travel
                     obligations prior to the Change in Control;

               (iv)  the failure by the Company, without the Executive's
                     consent, to pay to the Executive any portion of the
                     Executive's current compensation;

               (v)   the failure by the Company to continue to provide the
                     Executive with benefits substantially similar in value to
                     the Executive in the aggregate to those enjoyed by the
                     Executive under any of the Company's pension, life
                     insurance, medical, health and accident, or disability
                     plans in which the Executive was participating immediately
                     prior to the Change in Control, unless the Executive
                     participates after the Change in Control in other
                     comparable benefit plans generally available to senior
                     executives of the Company and senior executives of any
                     Person in control of the Company;

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<PAGE>
 
               (vi) any purported termination of the Executive's employment
                    which is not effected pursuant to a Notice of Termination
                    satisfying the requirements of Section 11(f) below; for
                    purposes of this Agreement, no such purported termination
                    shall be effective.

The Executive's continued employment for 6 months following any act or failure
to act constituting Good Reason hereunder without the delivery of a Notice of
Termination shall constitute consent to, and a waiver of rights with respect to,
such act or failure to act.

            (e) Voluntary Resignation. Should the Executive wish to resign from
                ---------------------                                          
                his position with the Company or terminate his employment for
                other than Good Reason during the Term, the Executive shall give
                sixty (60) days written notice to the Company ("Notice Period"),
                setting forth the reasons and specifying the date as of which
                his resignation is to become effective. During the Notice
                Period, the Executive shall cooperate fully with the Company in
                achieving a smooth transition of the Executive's duties and
                responsibilities to such person(s) as may be designated by the
                Company. The Company reserves the right to accelerate the Date
                of Termination by giving the Executive notice and payment of
                amounts due to the Executive under Section 6(a) and, to the
                extent applicable, Section 6(b) for the balance of the Notice
                Period. The Company's obligation to continue to employ the
                Executive or to continue payment of the amounts described in the
                preceding sentence shall cease immediately if: (1) the Executive
                has not satisfied his obligations to cooperate fully with a
                smooth transition or (2) the Company has grounds to terminate
                the Executive's employment immediately for Cause.

            (f) Notice of Termination. Any purported termination of the
                ---------------------                                  
                Executive's employment by the Company or by the Executive shall
                be communicated by written Notice of Termination to the other
                party hereto in accordance with Section 19. "Notice of
                Termination" shall mean a notice that shall indicate the
                specific termination provision in this Agreement relied upon and
                shall set forth in reasonable detail the facts and circumstances
                claimed to provide a basis for termination of the Executive's
                employment under the provision so indicated.


            (g) Date of Termination. "Date of Termination" shall mean (i) if the
                -------------------                                             
                Executive's employment is terminated because of death, the date
                of the Executive's death, (ii) if the Executive's employment is
                terminated for Disability, the date Notice of Termination is
                given, (iii) if the Executive's employment is terminated
                pursuant to Subsection (c), (d) or (e) hereof or for any other
                reason (other than death or Disability), the date specified in
                the Notice of Termination which shall not be less than sixty
                (60) days from the date such Notice of Termination is given.

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<PAGE>
 
            (h) Change in Control. For purposes of this Agreement, a Change in
                -----------------                                             
                Control of the Company shall have occurred if

               (i)   any "Person" (as defined in Section 3(a)(9) of the
                     Securities Exchange Act of 1934 (the "Exchange Act") as
                     modified and used in Sections 13(d) and 14(d) of the
                     Exchange Act (other than (1) the Company or any of its
                     subsidiaries, (2) any trustee or other fiduciary holding
                     securities under an employee benefit plan of the Company or
                     any of its subsidiaries, (3) an underwriter temporarily
                     holding securities pursuant to an offering of such
                     securities, (4) any corporation owned, directly or
                     indirectly, by the stockholders of the Company in
                     substantially the same proportions as their ownership of
                     the Company's common stock or (5) Apollo Management, LP,
                     any of its affiliates and any investments funds managed by
                     it (collectively, "Apollo"), is or becomes the "beneficial
                     owner" (as defined in Rule 13d-3 under the Exchange Act),
                     directly or indirectly, of securities of the Company
                     representing more than 50% of the combined voting power of
                     the Company's then outstanding voting securities;

               (ii)  during any period of not more than two (2) consecutive
                     years, not including any period prior to the date of this
                     Agreement, individuals who at the beginning of such period
                     constitute the Board, and any new director (other than a
                     director designated by a person (other than Apollo) who has
                     entered into an agreement with the Company to effect a
                     transaction described in clause (i), (iii), or (iv) of this
                     Section 1l(h)) whose election by the Board or nomination
                     for election by the Company's stockholders was (A) made
                     pursuant to the Stockholders Agreement affecting the
                     Company dated November 4, 1997 or (B) approved by a vote of
                     at least two-thirds (2/3) of the directors then still in
                     office who either were directors at the beginning of the
                     period or whose election or nomination for election was
                     previously so approved, cease for any reason to constitute
                     at least a majority thereof;


               (iii) the stockholders of the Company approve a merger or
                     consolidation of the Company with any other corporation,
                     other than both (A) a merger or consolidation which would
                     result in the voting securities of the Company outstanding
                     immediately prior thereto continuing to represent (either
                     by remaining outstanding or by being converted into voting
                     securities of the surviving or parent entity) 50% or more
                     of the combined voting power of the voting securities of
                     the Company or such surviving or parent entity outstanding
                     immediately after such merger or consolidation or (B) a
                     merger or consolidation in which no person acquires 50% or
                     more of the combined voting power of the Company's then
                     outstanding securities; or

                                       6
<PAGE>
 
               (iv) the stockholders of the Company approve a plan of complete
                    liquidation of the Company or an agreement for the sale or
                    disposition by the Company of all or substantially all of
                    the Company's assets (or any transaction having a similar
                    effect) other than such a sale or disposition to Apollo.

          (i)   Return of Property. When the Executive ceases to be employed by
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                the Company, the Executive will promptly surrender to the
                Company all Company property, including without limitation, all
                records and other documents obtained by him or entrusted to him
                during the course of his employment with the Company provided,
                however, that the Executive may retain copies of such documents
                as necessary for the Executive's personal records for federal
                income tax purposes.


     12.  Compensation During Disability; Death or Upon Termination.
          --------------------------------------------------------- 

          (a)   During any period that the Executive fails to perform his duties
                hereunder as a result of incapacity due to physical or mental
                illness ("Disability Period"), the Executive shall continue to
                receive his base salary at the rate then in effect for such
                period until his employment is terminated pursuant to Section
                1l(b)(ii) hereof, provided that payments so made to the
                Executive during the Disability Period shall be reduced by the
                sum of the amounts, if any, payable to the Executive with
                respect to such period under disability benefit plans of the
                Company or under the Social Security disability insurance
                program, and which amounts were not previously applied to reduce
                any such payment.

          (b)   If the Executive's employment is terminated by his death or
                Disability, the Company shall pay (i) any base salary due to the
                Executive under Section 6(a) through the date of such
                termination and (ii) an amount equal to the Target Bonus he
                would have received for the fiscal year that ends on or
                immediately after the Date of Termination, assuming the Company
                achieved the lowest target level for which a bonus is paid under
                the plan described in Section 6(b), prorated for the period
                beginning on the first day of the fiscal year in which occurs
                the Date of Termination through the Date of Termination. In
                addition, if the Executive's employment is terminated by his
                death, the Company shall continue to pay to his estate his
                salary for an additional six months at the rate then in effect.

          (c)   If the Executive's employment is terminated by the Company for
                Cause or by the Executive for other than Good Reason, the

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<PAGE>
 
                Company shall pay the Executive his base salary through the Date
                of Termination at the rate in effect at the time Notice of
                Termination is given, and the Company shall have no further
                obligations to the Executive under this Agreement.

          (d)   If following a Change in Control (A) the Company terminates the
                Executive's employment without Cause, or (B) the Executive
                terminates his employment for Good Reason, then

                (i)   the Company shall pay the Executive his base salary
                      through the Date of Termination at the rate in effect at
                      the time Notice of Termination is given and all other
                      unpaid amounts, if any, to which the Executive is entitled
                      as of the Date of Termination under any compensation plan
                      or program of the Company, at the time such payments are
                      due;

                (ii)  in lieu of any further salary payments to the Executive
                      for periods subsequent to the Date of Termination, the
                      Company shall pay as liquidated damages to the Executive
                      an aggregate amount equal to the product of (A) the sum of
                      (1) the Executive's base salary at the rate in effect of
                      the Date of Termination and (2) the average of the annual
                      bonuses actually paid to the Executive by the Company with
                      respect to the two (2) fiscal years which immediately
                      precede the year of the Term which the Date of Termination
                      occurs provided if there was bonus or bonuses paid to the
                             --------                                          
                      Executive with respect only to one fiscal year that
                      immediately precedes the year within the Term in which the
                      Date of Termination occurs, then such single year's bonus
                      or bonuses shall be utilized in the calculation pursuant
                      to this clause (2), provided, further, that for purposes
                                          -----------------
                      of this Agreement, if the Date of Termination occurs
                      before the end of the first fiscal year that ends after
                      the Effective Date, the amount of the bonus paid by the
                      Company to the Executive shall be deemed to be the Target
                      Bonus and (B) the number two (2);

                (iii) the Company shall pay the Executive an amount equal to the
                      prorated Target Bonus that would have been paid for the
                      period beginning on the first day of the fiscal year in
                      which the Date of Termination occurs;

                (iv)  the Company shall continue coverage for the Executive, on
                      the same terms and conditions as would be applicable if
                      the Executive were an active Employee, under the Company's
                      life insurance, medical, health and similar welfare
                      benefit plans (other then group disability benefits) for a
                      period of twenty-four (24) months. Benefits otherwise
                      receivable by the Executive pursuant to this Section
                      12(d)(iv) shall be reduced to the extent comparable
                      benefits are actually received by the Executive from a
                      subsequent employer during the period during which the
                      Company is required to provide such benefits, and the
                      Executive shall report any such benefits actually received
                      by him to the Company; and

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<PAGE>
 
                (v)   the payments provided for in this Section 12(d) (other
                      than Section 12(d)(iv)) shall be made not later than the
                      thirtieth (30th) day following the Date of Termination,
                      provided, however, that if the amounts of such payments,
                      and the limitation on such payments set forth in Section
                      16 hereof, cannot be finally determined on or before such
                      day, the Company shall pay to the Executive on such day an
                      estimate, as determined in good faith by the Company, of
                      the minimum amount of such payments to which the Executive
                      is clearly entitled and shall pay the remainder of such
                      payments (together with interest at the rate provided in
                      section 1274(b)(2)(B) of the Code (as defined in Section
                      16)) as soon as the amount thereof can be determined but
                      in no event later than the sixtieth (60th) day after the
                      Date of Termination. In the event that the amount of the
                      estimated payments exceeds the amount determined by the
                      Company within six (6) months after payment to have been
                      due, such excess shall constitute a loan by the Company to
                      the Executive, payable no later than the thirtieth (30th)
                      business day after demand by the Company (together with
                      interest at the rate provided in section 1274(b)(2)(B) of
                      the Code). At the time that payments are made under this
                      Section 12(d), the Company shall provide the Executive
                      with a written statement setting forth the manner in which
                      such payments were calculated and the basis for such
                      calculations including, without limitation, any opinions
                      or other advice the Company has received from outside
                      counsel, auditors or consultants (and any such opinions or
                      advice which are in writing shall be attached to the
                      statement).

                (vi)  If the Executive continues to be employed by the Company
                      for one (1) year after a Change of Control and has not by
                      such time given Notice of Termination for Good Reason, the
                      Executive will have waived his right to exercise his
                      rights under Section 12(d) hereof with respect to any act
                      or failure to act which constitutes Good Reason.

          (e)   If the Executive terminates his employment under clause (C) of
                Section 11(d) hereof or, prior to any Change of Control, the
                Company terminates the Executive's employment without Cause,
                then

               (i)    the Company shall pay the Executive his base salary
                      through the Date of Termination at the rate in effect at
                      the time Notice of Termination is given and all other
                      unpaid amounts, if any, to which the Executive is entitled
                      as of the Date of

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<PAGE>
 
                     Termination under any compensation plan or program of the
                     Company, at the time such payments are due;

               (ii)  the Company shall pay to the Executive the greater of
                     either (A) the remaining amount of base salary owed for the
                     Term; or (B) an aggregate amount equal to the sum of (1)
                     nine (9) months of the Executive's base salary at the rate
                     in effect as of the Date of Termination plus (2) one (1)
                     additional month of the Executive's base salary at such
                     rate for each full year of service beyond the first
                     anniversary of this Agreement, not to exceed eighteen (18)
                     months of base salary payments; such amount to be paid in
                     substantially equal monthly installments during the period
                     commencing with the month immediately following the month
                     in which the Date of Termination occurs or in a lump sum
                     payment, as decided by the Company;

               (iii) the Company shall pay the Executive his Target Bonus
                     prorated for the period beginning on the first day of the
                     fiscal year in which occurs the Date of Termination through
                     the Date of Termination;

               (iv)  the Company shall continue coverage for the Executive, on
                     the same terms and conditions as would be applicable if the
                     Executive were an active employee, under the Company's life
                     insurance, medical, health, and similar welfare benefit
                     plans (other then group disability) for a period not to
                     exceed the number of months the Executive will be paid
                     under Section 12(e)(ii) beginning on the Date of
                     Termination;

               (v)   benefits otherwise receivable by the Executive pursuant to
                     clause (iv) of this Section 12(e) shall be reduced to the
                     extent comparable benefits are actually received by the
                     Executive from a subsequent employer during the period
                     which the Company is required to provide such benefits, and
                     the Executive shall report any such benefits actually
                     received by him to the Company;

               (vi)  the payments made to the Executive under Section 12(e)
                     hereof will be reduced by the amount of payments provided
                     for by any subsequent employer of the executive for a
                     position obtained after the Date of Termination.

          (f)   If the Executive experiences a termination under Section 12(d)
                or 12(e) hereof, until the Executive finds another full-time
                position or for 6 months, whichever is earlier, the Company
                shall provide the Executive with professional outplacement
                services of the Executive's choosing and shall reimburse the

                                       10
<PAGE>
 
                Executive documented incidental outplacement expenses directly
                related to the Executive's job search such as resume mailing,
                interview trips, and clerical support, subject to a maximum cost
                of $10,000 for such outplacement services and incidental
                expenses.  The Executive's choice of professional outplacement
                services is subject to the Company's reasonable prior approval.
                If the Company has not approved or disapproved of the
                Executive's choice within ten (10) business days of receiving
                notice of such choice, the Company will be deemed to have given
                is approval.  Any approval by the Company will be in writing and
                will state the basis for such disapproval.  The Executive will
                not be entitled to receive cash or lieu of the professional
                outplacement services provided pursuant to this Section.

          (g)   If the Executive shall terminate his employment under clause (B)
                of Sections 11(d) or 11(e) hereof, the Company shall pay the
                Executive his base salary through the Date of Termination at the
                rate in effect at the time Notice of Termination is given, and
                the Company shall have no further obligations to the Executive
                under this Agreement.

          (h)   The Executive shall not be required to mitigate the amount of
                any payment provided for in this Section 12 by seeking other
                employment or otherwise, and, except as provided in Sections
                12(e) hereof, the amount of any payment or benefit provided for
                in this Section 12 shall not be reduced by any compensation
                earned by the Executive as the result of employment by another
                employer or by retirement benefits.

          (i)   Release. Prior to making any payment pursuant to Sections
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                12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii),
                whichever is applicable, the Company shall have the right to
                require the Executive to sign, and the Executive hereby agrees
                to sign, an agreement to be bound by the terms of Section 15 of
                this Agreement and a waiver of all claims the Executive
                may have (including any claims under the Age Discrimination in
                Employment Act), and the Company may withhold payment of such
                amount until the period during which the Executive may revoke
                such waiver (normally seven days) has elapsed.

     13.  Representations and Covenants.
          ----------------------------- 

          (a)   The Company represents and warrants that this Agreement has been
                authorized by all necessary corporate action of the Company and
                is a valid and binding agreement of the Company enforceable
                against it in accordance with its terms.

          (b)   The Executive represents and warrants that he is not a party to
                any agreement or instrument which would prevent him from
                entering into or performing his duties in any way under this
                Agreement. The Executive agrees and covenants that he will

                                       11
<PAGE>
 
                obtain, and submit to, such physical examinations as may be
                necessary to facilitate the Company obtaining an insurance
                policy for its benefit insuring the life of the Executive.

     14.  Successors: Binding Agreement.
          ----------------------------- 

          (a)   The Company will require any successor (whether direct or
                indirect, by purchase, merger, consolidation or otherwise) to
                all or substantially all of the business and/or assets of the
                Company to expressly assume and agree to perform this Agreement
                in the same manner and to the same extent that the Company would
                be required to perform it if no such succession had taken place.

          (b)   This Agreement is a personal contract and the rights and
                interests of the Executive hereunder may not be sold,
                transferred, assigned, pledged, encumbered, or hypothecated by
                him, except as otherwise expressly permitted by the provisions
                of this Agreement. This Agreement shall inure to the benefit of
                and be enforceable by the Executive and his personal or legal
                representatives, executors, administrators, successors, heirs,
                distributees, devisees and legatees. If the Executive should die
                while any amount would still be payable to him hereunder had the
                Executive continued to live, all such amounts, unless otherwise
                provided herein, shall be paid in accordance with the terms of
                this Agreement to his devisee, legatee or other designee or, if
                there is no such designee, to his estate.

     15.  Confidentiality and Non-Competition Covenants.
          --------------------------------------------- 

          (a)   The Executive covenants and agrees that he will not at any time
                during or at any time after the end of the Term, directly or
                indirectly, use for his own account, or disclose to any person,
                firm or corporation, other than authorized officers, directors
                and employees of the Company or its subsidiaries, Confidential
                Information (as hereinafter defined) that is treated as trade
                secrets by the Company and will not at any time during or for a
                period equal to the number of payments which are being made
                under Section 12(e) hereof directly or indirectly, use for his
                own account, or disclose to any person, firm or corporation,
                other than authorized officers, directors and employees of the
                Company or its subsidiaries, any other Confidential Information.
                As used herein, "Confidential Information" of the Company means
                information of any kind, nature or description which is
                disclosed to or otherwise known to the Executive as a direct or
                indirect consequence of his association with the Company, which
                information is not generally known to the public or in the
                business in which the Company is engaged or which information
                relates to specific investment opportunities within the scope of
                the Company's business which were considered by the Executive or
                the Company during the term of this Agreement. Confidential

                                       12
<PAGE>
 
                Information that is treated as confidential trade secrets by the
                Company shall include, but not be limited to, strategic
                operating plans and budgets, policy and procedure manuals,
                computer programs, financial forms and information, patient or
                resident lists and accounts, supplier information, accounting
                forms and procedures, personnel policies, information pertaining
                to the salaries, positions and performance reviews of the
                Company's employees, information on the methods of the Company's
                operations, research and data developed by or for the benefit of
                the Company and information relating to revenues, costs, profits
                and the financial condition of the Company. During the Term and
                for a period of two years following the termination of the
                Executive's employment, the Executive shall not induce any
                employee of the Company or its subsidiaries to terminate his or
                her employment by the Company or its subsidiaries in order to
                obtain employment by any person, firm or corporation affiliated
                with the Executive.

          (b)   The Executive covenants and agrees that any information,
                materials, ideas, discoveries, techniques or programs developed
                or discovered by the Executive in connection with the
                performance of his duties hereunder shall remain the sole and
                exclusive property of the Company and, to the extent it
                constitutes Confidential Information, shall be subject to the
                covenants contained in the preceding paragraph.

          (c)   The Executive covenants and agrees that during the Term and, if
                the Executive's employment is terminated by the Executive for
                other than Good Reason, for a period of two (2) years following
                the termination of the Executive's employment, the Executive
                shall not, directly or indirectly, own an interest in, operate,
                join, control, or participate as a partner, director, principal,
                officer, or agent of, enter into the employment of, or act as a
                consultant to, in any case in which he has control or
                supervision over a significant portion of any entity (i) whose
                principal business is the operation of one or more skilled
                nursing facilities or (ii) which operates a skilled nursing
                business that is material in relation to the Company's
                comparable business and (iii) in either case, which derives at
                least 10% of its skilled nursing facility revenue from
                facilities which are located within 35 miles of centers or
                facilities operated by the Company. Notwithstanding anything
                herein to the contrary, the foregoing provisions of this Section
                15(c) shall not prevent the Executive from acquiring securities
                representing not more than 5% of the outstanding voting
                securities of any publicly held corporation.

          (d)   Without limiting the right of the Company to pursue all other
                legal and equitable remedies available for violation by the
                Executive of the covenants contained in this Section 15, it is
                expressly agreed by the Executive and the Company that such

                                       13
<PAGE>
 
                other remedies cannot fully compensate the Company for any such
                violation and that the Company shall be entitled to injunctive
                relief, without the necessity of proving actual monetary loss,
                to prevent any such violation or any continuing violation
                thereof. Each party intends and agrees that if in any action
                before any court or agency legally empowered to enforce the
                covenants contained in this Section 15, any term, restriction,
                covenant or promise contained herein is found to be unreasonable
                and accordingly unenforceable, then such term, restriction,
                covenant or promise shall be deemed modified to the extent
                necessary to make it enforceable by such court or agency. The
                covenants contained in Section 15 shall survive the conclusion
                of the Executive's employment by the Company.

     16.  Prohibition on Parachute Payments.
          --------------------------------- 

          (a)   Notwithstanding any other provisions of this Agreement, any
                payment or benefit received or to be received by the Executive
                in connection with a Change in Control of the Company or the
                termination of the Executive's employment (whether pursuant to
                the terms of this Agreement or any other plan, arrangement or
                agreement with the Company, any person whose actions result in a
                Change in Control or any Person affiliated with the Company or
                such Person) (all such payments and benefits, including, without
                limitation, base salary and bonus payments, being hereinafter
                called "Total Payments") would not be deductible (in whole or in
                part), by the Company, an affiliate or any Person making such
                payment or providing such benefit as a result of section 280G of
                the Internal Revenue Code of 1986, as amended (the "Code"),
                then, to the extent necessary to make such portion of the Total
                Payments deductible (and after taking into account any reduction
                in the Total Payments provided by reason of section 280G of the
                Code in such other plan, arrangement or agreement), (A) such
                cash payments shall first be reduced (if necessary, to zero),
                and (B) all other non-cash payments by the Company to the
                Executive shall next be reduced (if necessary, to zero). For
                purposes of this limitation (i) no portion of the Total Payments
                the receipt or enjoyment of which the Executive shall have
                effectively waived in writing prior to the Date of Termination
                shall be taken into account, (ii) no portion of the Total
                Payments shall be taken into account which in the opinion of tax
                counsel selected by the Company's independent auditors and
                reasonably acceptable to the Executive does not constitute a
                "parachute payment" within the meaning of section 280G(b)(2) of
                the Code, including by reason of section 280G(b)(4)(A) of the
                Code, (iii) such payments shall be reduced only to the extent
                necessary so that the Total Payments (other than those referred
                to in clauses (i) or (ii)) in their entirety constitute
                reasonable compensation for services actually rendered within
                the meaning of section 280G(b)(4)(B) of the Code or are
                otherwise not subject to disallowance as deductions, in the
                opinion of the tax counsel referred to in clause (ii); and (iv)

                                       14
<PAGE>
 
                the value of any non-cash benefit or any deferred payment or
                benefit included in the Total Payments shall be determined by
                the Company's independent auditors in accordance with the
                principles of sections 280G(d)(3) and (4) of the Code.

          (b)   If it is established pursuant to a final determination of a
                court or an Internal Revenue Service proceeding that,
                notwithstanding the good faith of the Executive and the Company
                in applying the terms of this Section 16, the aggregate
                "parachute payments" paid to or for the Executive's benefit are
                in an amount that would result in any portion of such "parachute
                payments" not being deductible by reason of section 280G of the
                Code, then the Executive shall have an obligation to pay the
                Company upon demand an amount equal to the sum of (i) the excess
                of the aggregate "parachute payments" paid to or for the
                Executive's benefit over the aggregate "parachute payments" that
                could have been paid to or for the Executive's benefit without
                any portion of such "parachute payments" not being deductible by
                reason of section 280G of the Code; and (ii) interest on the
                amount set forth in clause (i) of this sentence at the rate
                provided in section 1274(b)(2)(B) of the Code from the date of
                the Executive's receipt of such excess until the date of such
                payment.

     17.  Entire Agreement.  This Agreement contains all the understandings
          ----------------                                                 
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, previously entered into by them with respect thereto. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.

     18.  Amendment or Modification. Waiver.  No provision of this Agreement may
          ---------------------------------                                     
be amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by any party hereto of any breach by another party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.

     19.  Notices.  Any notice to be given hereunder shall be in writing and
          -------                                                           
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:

               To Executive at:    Robert V. Napier
                                   8528 Elk Run Drive
                                   Clarkston, Michigan 48348

               To the Company at:  Paragon Health Network, Inc.
                                   One Ravinia Drive, Suite 1500

                                       15
<PAGE>
 
                                   Atlanta, Georgia 30346

          Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.

     20.  Severability. If any provision of this Agreement or the application of
          ------------                                                          
any such provision to any party or circumstances shall be determined by any
court of competent jurisdiction to be invalid and unenforceable to any extent,
the remainder of this Agreement or the application of such provision to such
person or circumstances other than those to which it is so determined to be
invalid and unenforceable, shall not be affected thereby, and each provision
hereof shall be validated and shall be enforced to the fullest extent permitted
by law.

     21.  Survivorship.  The respective rights and obligations of the parties
          ------------                                                       
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.

     22.   Governing Law: Attorney's Fees.
           ------------------------------ 

          (a)   This Agreement will be governed by and construed in accordance
                with the laws of the State of Georgia, without regard to its
                conflicts of laws principles.

          (b)   The prevailing party in any dispute arising out of this
                Agreement shall be entitled to be paid its reasonable attorney's
                fees incurred in connection with such dispute from the other
                party to such dispute.

     23.  Dispute Resolution.  The Executive and the Company shall not initiate
          ------------------                                                   
legal proceedings relating in any way to this Agreement or to the Executive's
employment or termination from employment with the Company until thirty (30)
days after the party against whom the claim is made ("respondent") receives
written notice from the claiming party of the specific nature of any purported
claims and the amount of any purported damages attributable to each such claim.
The Executive and the Company further agree that if respondent submits the
claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty (30) day period, the claiming
party may not institute arbitration or other legal proceedings against
respondent until the earlier of: (a) the completion of good-faith mediation
efforts or (b) 90 days after the date on which the respondent received written
notice of the claimant's claim(s); provided, however, that nothing in this
Section 23 shall prohibit the Company from pursuing injunctive or other
equitable relief against the Executive prior to, contemporaneous with, or
subsequent to invoking or participating in these dispute resolution processes.
The Company shall pay the cost of the mediator.

                                       16
<PAGE>
 
     24.  Headings.  All descriptive headings of sections and paragraphs in this
          --------                                                              
Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.

     25.  Withholdings.  All payments to the Executive under this Agreement
          ------------                                                     
shall be reduced by all applicable withholding required by federal, state or
local tax laws.

     26.  Counterparts.  This Agreement may be executed in counterparts, each of
          ------------                                                          
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

               PARAGON HEALTH NETWORK, INC.


               BY:   /s/ Susan Thomas Whittle
                     --------------------------------------
               NAME: Susan Thomas Whittle
                     --------------------------------------
               TITLE: Senior Vice President and General Counsel 
                     ------------------------------------------


               EXECUTIVE
               /s/ Robert V. Napier
               --------------------------------------------    
               Robert V. Napier

                                       17