<PAGE>   1

                                  EXHIBIT 10.2

                  Employment Agreement between Living Centers
                       of America, Inc. and James P. Dorn
<PAGE>   2
                              EMPLOYMENT AGREEMENT





         THIS AGREEMENT is between the undersigned individual ("Employee") and
LC MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living
Centers of America, Inc. ("LCA").

                                R E C I T A L S:

         A.      LCA, through its operating subsidiaries, is an operator of
long-term health care centers, Progressive Care Centers providing subacute
care, Alzheimer's care centers, assisted living centers, retirement apartments,
centers and programs for people with mental retardation and developmental
disabilities, and a company providing pharmaceutical services and supplies.

         B.      LCA and LC Management have a proprietary interest in its
business methods, opportunities, operations and systems which include, but are
not limited to, internal financial and operating reports and data, strategic
plans, business acquisition and development opportunities, policy and procedure
manuals, management information programs and systems, financial forms and
information, supplier and vendor information, accounting forms and procedures,
personnel policies and information on the needs of residents, clients and
patients and their families, and the financial condition of LCA all of which
information ("Corporation Information") not publicly disclosed is considered by
LCA and LC Management and recognized by Employee to be confidential.

         C.      LC Management intends to employ or continue to employ Employee
in a position where Employee will have access to this Corporate Information,
and therefore, LCA will be vulnerable to unfair post-employment competition by
Employee.





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         D.      In consideration of the severance and other employment
benefits provided for herein, Employee is willing to enter into this Agreement
with LC Management as a condition of employment.

         NOW, THEREFORE, intending to be legally bound, the parties agree as
follows effective the day and date set opposite their signatures below:

                                   ARTICLE 1.

                               Term of Employment

         Employee acknowledges that LC Management has the right to terminate
Employee's employment at any time for any reason whatsoever; provided, however,
that any termination by LC Management for reasons other than "good and
sufficient cause," as defined in Article 2., Paragraph E below, shall result in
the severance benefits described in Article 2 below, to become due in
accordance with the terms of this Agreement.  Employee further acknowledges
that the severance payments made and other benefits provided by LC Management
are in full satisfaction of any claims that Employee may have against LC
Management resulting from LC Management's exercise of its right to terminate
Employee's employment, except for those fringe benefits which are intended to
survive termination such as the rights to receive payments pursuant to
retirement plans and similar rights.

                                   ARTICLE 2.

                               Severance Benefits

         If Employee's employment with LC Management is terminated by LC
Management for any reason other than "good and sufficient cause," Employee
shall be entitled to the following severance benefits:





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          A.     Severance Pay:  Employee shall receive severance payments
equivalent to Employee's base salary in effect at the time of termination for
the number of months set forth below:


<TABLE>
<CAPTION>
                        Years of Living Centers Continuous Service

                              Completed from Last Hire Date
                              -----------------------------
  <S>     <C>     <C>     <C>     <C>      <C>    <C>      <C>    <C>   <C>
  1       2       3       4        5       6       7        8     9     10 or more

<CAPTION>
                                 Months of Severance Pay
                                 -----------------------
  <S>     <C>     <C>     <C>      <C>     <C>    <C>      <C>    <C>    <C>
  6       8       10      12       14      16      18      20     22     24
</TABLE>


          B.              Other Severance Benefits:

         (1)     Group medical and life insurance coverages shall continue
under then prevailing terms as long as severance payments are being made to
Employee.  Deductions for Employee's share of the premiums will be made from
Employee's severance payments.  Group medical coverage provided during such
period shall be applied against LC Management's obligation to continue group
medical coverage under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA").  Upon termination of group medical and life insurance coverage,
Employee may convert, at his cost, to individual policies.

         (2)     Employee shall receive payment at the Employee's then
prevailing rate, for Employee's earned, but unused, and accrued vacation days
through the date of termination.

         (3)     Employee's eligibility to receive or participate in all other
benefit and compensation plans, including, but not limited to Management
Incentive Bonus, Long Term Disability, Retirement Savings, and Stock Option
Plans, shall terminate as of the effective





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date of Employee's termination except as provided otherwise hereunder or under
the terms of a particular benefit or compensation plan.

          C.     Change of Control of the Employer.  In addition to the
Severance Pay and Other Severance Benefits provided for in Paragraphs A and B,
immediately above, in the event of a "change of control" of LCA and either the
Employee's (a) involuntary termination or (b) "voluntary termination for good
cause in anticipation of, during or after a change of control";

         (1)     The Employee shall be entitled to receive a lump sum payment
from LC Management of an amount equal to twelve (12) month's salary, which
shall be the Employee's base salary in effect at the date of termination plus
Employee's base bonus for Employee's grade as of the date of termination as set
forth in LCA's policy statement on the Management Incentive Bonus Program; and

         (2)     All stock options granted to Employee under the Living Centers
of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of
the date of termination shall "vest" and become exercisable, as that term is
defined in the Option Plan, as of the termination date, and Employee shall
thereupon have all rights applicable thereto as set forth in the Option Plan
pertaining to Employee's Stock Options.

         For purposes of this Agreement, "voluntary termination for good cause
in anticipation of, during or after a change of control" shall mean Employee's
electing to terminate his employment with LC Management as a result of an
adverse change in title or working responsibilities of the Employee within the
six (6) month time period before and the twelve (12) month time period after a
"change of control."  For purposes of this Paragraph C,





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"change of control" is the occurrence of one or more of the following events:
(I) any person or entity, together with all associates of such person or
entity, becomes the owner, beneficial or otherwise, of 30% or more of the then
outstanding common stock of LCA, or (ii) during any two (2) year period,
directors of LCA serving at the beginning of such period cease for any reason
to constitute a majority of the directors serving, unless the election of at
least 75% of the new directors was approved by at least 75% of the directors in
office immediately prior to the election.

          D.     Right to Terminate Severance Pay and Benefits.  If Employee is
terminated by LC Management for reasons other than "good and sufficient cause,"
as that term is defined in Section E of this Article 2, Employee will receive
the severance payments and benefits described in Paragraphs A, B and C of this
Article 2.  Notwithstanding the foregoing, if Employee commences other
employment while receiving such severance payments and benefits said severance
payments and benefits shall cease as of the date Employee commences such other
employment, but in no event shall the severance payments and benefits provided
in Paragraphs A and B of this Article 2 be terminated prior to Employee's
receiving severance payments and benefits for a two (2) month period.  However,
if Employee commences other employment and the base salary Employee is paid in
the course of the other employment is less than the base salary Employee
received from LC Management at Employee's termination, LC Management shall pay
to Employee the difference in said base salaries each month for the remaining
number of months Employee would otherwise be entitled to severance pay as
provided in Section A of this Article 2 at the commencement of said other
employment, starting with the first full month after Employee commences said




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other employment.  Notwithstanding the foregoing, in the event of a "change of
control" of LCA and either the Employee's (a) involuntary termination or (b)
"voluntary termination for good cause in anticipation of, during or after a
change of control" and if Employee commences other employment while receiving
severance payments and benefits described in Paragraphs A, B and C of this
Article 2, said severance payments and benefits shall not cease as of the date
Employee commences such other employment, and shall continue pursuant to
Paragraph A of this Article 2.  LC Management reserves the right to terminate
all continuing severance payments and benefits described in Paragraphs A and B
of this Article 2 if Employee violates any of the non-disclosure covenants set
forth in Article 3 or any of the non-competition covenants set forth in Article
4 below.

         E.     "Good and Sufficient Cause" Defined.  Termination for
"good and sufficient cause" shall include termination for such things as fraud
or dishonesty, willful failure to perform assigned duties, willful violation of
LCA's Business Conduct Policy, or intentionally working against the best
interests of LCA.

         F.      Termination for Good and Sufficient Cause.  If Employee's
employment with LC Management is terminated by LC Management for "good and
sufficient cause" as that term is defined in Section E of this Article 2,
Employee will not receive the severance payments and benefits described in
Paragraphs A, B, C, and D of this Article 2.

         G.      Voluntary Termination by Employee.  If Employee voluntary
terminates his/her employment with LC Management Company, (and said termination
is other than "voluntary termination for good cause in anticipation of, during
or after a change of control"




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as defined in this agreement), Employee will not receive the severance payments
and benefits described in Paragraphs A, B, C, and D of this Article 2.

         H.      Parachute Payment.  If the Employee is liable for the payment
of any excise tax (the "Basic Excise Tax") because of Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor or
similar provision, with respect to any payments or benefits received or to be
received from LC Management or any successor to LC Management, whether provided
under this Agreement or otherwise, LC Management shall pay the Employee an
amount (the "Special Reimbursement") which, after payment by the Employee (or
on the Employee's behalf) of any federal, state and local taxes applicable
thereto, including, without limitation, any further excise tax under such
Section 4999 of the Code, on, with respect to or resulting from the Special
Reimbursement, equals the net amounts of the Basic Execise Tax.

         I.      Survival.  The provisions of this Article 2 shall survive the
termination of Employee's employment with LC Management.

                                   ARTICLE 3

                            Non-Disclosure Agreement

         Employee acknowledges and recognizes that in the course of Employee's
employment, Employee has had and will continue to have or will have access to
Corporate Information; and that LC Management may provide and confide to
Employee Corporation Information, techniques and methods of operation developed
at great expense by LCA, all of which Employee recognizes to be unique assets
of LCA.  Employee agrees that Employee shall not, during or after the term of
employment, directly or indirectly, in any manner utilize,




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<PAGE>   9
appropriate, disclose, communicate, divulge, copy or relate to any person,
firm, corporation, association or other entity, except where required by law,
or use or make use of any such Corporate Information, any such techniques or
methods of operation; data of any kind; or any information relating to
strategic plans, revenues, costs, profits or the financial condition of LCA,
which is not generally known to the public or recognized as standard practice
in the industry in which LCA is or shall be engaged.  The provisions of this
Article 3 shall survive the termination of Employee's employment with LC
Management.

                                   ARTICLE 4

                           Non-Competition Agreement

         A.      Duration; Applicability.  Subject to the provisions of
Paragraphs B and E below, Employee agrees that for a period of two (2) years
following Employee's voluntary termination of Employee's employment with LC
Management (other than "voluntary termination for good cause in anticipation
of, during or after a change of control" as defined in this Agreement), or
Employee's termination by LC Management for "good and sufficient cause" as that
term is defined in Section E of Article 2 of this Agreement, employee shall
not, without LC Management's prior written permission, which may be withheld by
LC Management in its sole discretion, directly or indirectly, on Employee's
behalf or on behalf of any other person, firm, corporation, association or
other entity, engage in, or in any way be employed by, connected with,
concerned with, involved with, consult for or negotiate for, or acquire or
maintain any ownership interest in any business or activity which is the same,
similar to or competitive with that conducted by, or engaged in by the LCA
operating subsidiary, indicated on Schedule A, which is attached hereto and
incorporated by reference




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herein as if reproduced verbatim for which Employee primarily provided
services. Employee and LC Management agree that Employee, for purposes of the
application of Paragraph A of this Article 4, primarily provides services to
the LCA operating subsidiary listed on Schedule A.  If Employee's employment
with LC Management is terminated by LC Management for any reason other than
"good and sufficient cause" as that term is defined in Section E of Article 2
of this Agreement, the provisions of this Article 4 shall not apply to Employee
and shall not be enforced as against Employee.

         B.      Area.  The provisions set forth in Paragraph A. above shall
apply to any area within a 25 miles radius of any center, or facility, or
location operated by the operating subsidiary of LCA indicated on Schedule A
hereof.

         C.      Non-Piracy.  Employee further agrees that Employee shall not
for a period of two (2) years following the termination of Employee's
employment for any reason, directly or indirectly, or through third parties,
for himself or for others, at any time in any manner, induce or attempt to
influence any employees of any subsidiary of LCA to terminate their employment
with such subsidiary, nor shall Employee have an interest in, directly or
indirectly, any entity which shall, with Employee's direct or indirect
participation, induce or attempt to influence any employee of any subsidiary of
LCA to terminate their employment with such subsidiary.

         D.      Remedies.  Employee acknowledges that in the event of any
violation or threatened violation by Employee of the provisions set forth in
Article 3 or this Article 4, LCA will sustain serious, irreparable, continuing
and substantial harm and damage to its business, the extent of which will be
difficult to determine and impossible to remedy by an




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action at law for money damages.  Accordingly, Employee agrees that, in the
event of such violation or threatened violation by Employee, LCA shall be
entitled to an injunction preventing such violation or threatened violation
before trial from any court of competent jurisdiction as a matter of course in
addition to and not in lieu of any and all such other legal and equitable
remedies as may be available to LCA.  Should any court of competent
jurisdiction determine, consistent with the established precedent of the forum
jurisdiction, that the public policy of such jurisdiction requires a more
limited restriction in geographic area, duration, nature of restricted
activities, or any combination thereof, it would be in furtherance of the
intentions of the parties hereto for the court to so interpret and construe the
terms of this Article 4 to apply only to the extent of such more limited
restrictions.

         E.      Survival.  The provisions of this Article 4 shall survive the
termination of Employee's employment with LC Management.

                                   ARTICLE 5

                                 Miscellaneous

         A.      Definition.  As used throughout this Agreement, "LC
Management" shall include all subsidiaries of LCA, affiliates, and any
corporation, joint venture, or other entity in which LCA or its subsidiaries or
affiliates has an equity interest in excess of ten percent (10%).

         B.      Gender.  Reference to the masculine gender shall include the
feminine gender.

         C.      Supersede.  This Agreement shall supersede and substitute for
any previous employment or severance agreement between Employee and LCA or LC
Management, and is entered into in consideration of the mutual undertakings of
the parties, the cancellation




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<PAGE>   12
of all previous agreements, and the release of the parties of their respective
rights and obligations under any previous employment or severance agreement,
excepting only such rights and obligations which by their nature are intended
to survive termination or cancellation of such employment agreement.

         D.      Hire Date.  Employee and LC Management acknowledge that for
purpose of Article 2, Employee's last hire date with LC Management is that date
provided in Schedule B hereof, which is attached hereto and incorporated by
reference herein as if reproduced verbatim.

         E.      Binding Effect.  The respective rights and obligations of LC
Management and the Employee under this Employment Agreement shall inure to the
benefit of and shall be binding upon LCA, LC Management and the Employee and
the respective successors and assigns of LCA and LC Management.  This
Employment Agreement shall not be assignable by the Employee, but shall inure
to the benefit of Employee's heirs, legal and personal representatives.  As
used herein, the term "successors and assigns" shall include any corporation or
corporations which acquire all or substantially all of the assets and
businesses of LCA whether by purchase, merger, consolidation or otherwise,
including without limitation a surviving corporation upon a "change in control"
as defined herein.

         F.      Arbitration.  Any dispute under this Employment Agreement,
except for those arising under Articles 3 and 4 hereof, shall be resolved by
arbitration.  The arbitration shall be conducted in Houston, Texas, under the
auspices of the American Arbitration Association and under its rules for
commercial arbitrations generally.  The prevailing party in such proceedings
shall be entitled to its costs and attorneys' fees.




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         G.      Applicable Law.  This Employment Agreement shall be
interpreted and construed in accordance with the laws of the State of Texas.

         It is understood and agreed that LCA will benefit from the covenants
and agreements of Employee hereunder, and, therefore by its execution hereof,
guarantees the performance by LC Management of its obligations and agreements
hereunder.

         IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed
this Employment Agreement in duplicate originals as of the date first above
written.





Date:    February 4, 1997                 By: /s/ James Dorn
     --------------------                 ----------------------------
                                                          "EMPLOYEE"


                                                LC MANAGEMENT COMPANY


Date:   February 4, 1997                  By: /s/ Boyd P. Gentry
     -------------------                     -----------------------


                                                         "LC  MANAGEMENT"

                                                LIVING CENTERS OF AMERICA, INC.


Date:   February 4, 1997                  By: /s/  Edward Kuntz
     -------------------                     -------------------------
                                                          "LCA"




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                                                                      SCHEDULE A





LCA Operating subsidiary for which Employee primarily provides services:
 
  LC Management Company
------------------------------  



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                                                                      SCHEDULE B





Employee's last hire date:    March 4, 1996         
                          -----------------------



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