<PAGE>
 
                                                                   EXHIBIT 10.34

                   GUARANTY BY PARAGON HEALTH NETWORK, INC.

          GUARANTY dated as of October 31, 1997 made by PARAGON HEALTH NETWORK,
INC. (f/k/a "Living Centers of America, Inc."), a Delaware corporation (the
"Guarantor") and HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real estate
 ---------
investment trust (with its successor and assigns, "HRP").
                                                   ---  


                             W I T N E S S E T H :
                             - - - - - - - - - -

     WHEREAS, GranCare, Inc., a Delaware corporation ("GranCare") and the other
                                                       --------
GranCare Companies (as hereinafter defined) have entered into certain lease and
loan financings with HRP governed by the GranCare Documents (as hereinafter
defined);

     WHEREAS, pursuant to and subject to the terms and conditions of a Third
Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997
among the Guarantor, LCA Acquisition Sub, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Guarantor ("LCA Acquisition"), GranCare and
                                           ---------------
Apollo Management, L.P. on behalf of one or more of its managed investment
funds, GranCare shall become a wholly-owned subsidiary of the Guarantor through
the merger of LCA Acquisition with and into GranCare and those certain other
transactions defined as the "Transactions" in the Joint Proxy Statement dated
September 26, 1997 by the Guarantor and GranCare (the "Transactions");
                                                       ------------

     WHEREAS, the Guarantor and GranCare have requested that HRP consent to the
Transactions and to make certain modifications to the GranCare Documents in
connection therewith;

     WHEREAS, HRP is willing to so consent and agree, subject to the terms and
conditions of a certain Restructure and Asset Exchange Agreement dated as of
even date herewith (the "Restructure Agreement") among AMS Properties, Inc. and
                         ---------------------
GCI Health Care Centers, Inc., each a Delaware corporation and a wholly-owned
subsidiary of GranCare ("AMS Properties"and "GCIHCC," respectively), and HRP;
                         --------------      ------

     WHEREAS, it is a condition to the effectiveness of the Restructure
Agreement that, among other things, the Guarantor deliver this Guaranty in favor
of HRP;

     WHEREAS, by virtue of the Transactions and the related modifications to the
GranCare Documents contemplated by the Restructure Agreement, the GranCare
Companies will benefit substantially from, among other things, increased access
to capital;

     NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
<PAGE>
 
                                      -2-


1.   Defined Terms. Unless otherwise defined herein, terms which are defined in
     -------------
the Restructure Agreement and used herein are so used as so defined. In
addition, the following terms shall have the meanings set forth below:

          "Applicable Law" shall mean any law of any governmental authority,
           --------------
     whether domestic or foreign, including without limitation all federal and
     state laws, to which the Person in question is subject or by which it or
     any of its property is bound, and including without limitation any: (a)
     administrative, executive, judicial, legislative or other action, code,
     consent decree, constitution, decree, directive, enactment, finding,
     guideline, injunction, interpretation, judgment, law, order, ordinance,
     policy statement, proclamation, promulgation, regulation, requirement,
     rule, rule of law, rule of public policy, settlement agreement, statute, or
     writ, of any governmental authority, domestic or foreign, whether or not
     having the force of law; (b) common law or other legal or quasi-legal
     precedent; or (c) arbitrator's, mediator's or referee's award, decision,
     finding or recommendation, or, in any case, any particular section, part or
     provision thereof

          "GranCare Documents" shall mean, collectively, any agreement, note,
           ------------------
     lease, master lease, mortgage, security agreement, pledge agreement,
     assignment, guaranty or other agreement or instrument now or hereafter
     executed by one or more of the GranCare Companies with, in favor of or for
     the benefit of, HRP or any Affiliate thereof (including, without
     limitation, any and all other documents executed in connection with,
     relating to, evidencing or creating collateral or security in favor of or
     for the benefit of HRP or any Affiliate thereof), and any agreement, note,
     mortgage, security agreement, pledge agreement, assignment, guaranty or
     other agreement or instrument hereafter executed by one or more of the
     GranCare Companies in connection with any extension, renewal, refunding or
     refinancing thereof, as any of the same may hereafter from time to time be
     amended, modified or supplemented.

          "GranCare Companies" shall mean, collectively, GranCare, AMS
           ------------------
     Properties and GCIHCC, and their respective successors and assigns.

          "Consolidated Financials" shall mean, for any fiscal year or other
           -----------------------
     accounting period of the Guarantor and its consolidated Subsidiaries,
     annual audited and quarterly unaudited financial statements prepared on a
     consolidated basis, including the Guarantor's consolidated balance sheet
     and the related statements of income and cash flows, all in reasonable
     detail, and setting forth in comparative form the corresponding figures for
     the corresponding period in the preceding fiscal year, and prepared in
     accordance with GAAP consistently applied throughout the periods presented.


          "Default Rate" shall mean 4% per annum above the prime rate or base
           ------------
     rate on corporate loans at large U.S. money center commercial banks as
     published in The Wall Street Journal or, if publication of such rate shall
     be suspended or terminated, the annual rate of interest, determined daily
     and expressed as a percentage, from time to time announced by one of the
     five largest national-chartered banking institutions having their principal
     office in New York, New York and selected by HRP at the time such
     publication
<PAGE>
 
                                      -3-

     is suspended or terminated. Each change in the Interest Rate shall take
     effect simultaneously with the date of publication or announcement, as
     applicable, of each corresponding change in such prime rate or base rate.

          "Event of Default" shall have the meaning set forth in any GranCare
           ----------------
     Document.

          "Financial Officer's Certificate" shall mean a certificate of the
           -------------------------------
     chief financial officer, treasurer or other executive officer of the
     Guarantor, duly authorized, accompanying the financial statements required
     to be delivered by such Person pursuant to Section 14, in which such
     officer shall (a) certify that such statements have been properly prepared
     in accordance with GAAP and are true, correct and complete in all material
     respects and fairly present the consolidated financial condition of the
     Guarantor at and as of the dates thereof and the results of its and their
     operations for the periods covered thereby, and (b) certify that such
     officer has reviewed the GranCare Documents and has no knowledge of any
     material default by the Guarantor or any Subsidiary thereof in the
     performance or observance of any of the provisions of any GranCare Document
     or of any condition or event which constitutes an Event of Default under
     any GranCare Document or which with the passage of time or the giving of
     notice or both would become such an Event of Default.

          "Material Adverse Effect" means a material adverse effect on (a) the
           -----------------------
     business, operations, property or condition (financial or otherwise) of the
     Guarantor and its Subsidiaries taken as a whole, (b) the ability of the
     Guarantor to perform its obligations under this Guaranty, or (c) the
     validity or enforceability of this Guaranty, or the rights of HRP
     hereunder.

          "Obligations" shall mean the payment and performance of each and every
           -----------
     obligation and liability of any GranCare Company to HRP under any GranCare
     Document, whether now existing or hereafter arising or created, joint or
     several, direct or indirect, absolute or contingent, due or to become due,
     matured or unmatured, liquidated or unliquidated, arising by contract,
     operation of law or otherwise, and including, without limitation, (i) all
     principal, premium or prepayment fee and interest under any promissory note
     payable to HRP by any GranCare Company, (ii) all rent under any lease with
     HRP as landlord, and (iii) all fees and charges, and all costs and expenses
     payable under any GranCare Document.

          "Subsidiary" shall mean any corporation of which more than fifty
           ----------
     percent of the outstanding capital stock having ordinary voting power to
     elect a majority of the Board of Directors of such corporation
     (irrespective of whether or not at the time capital stock of any other
     class or classes of such corporation shall or might have voting power upon
     the occurrence of any contingency) is at the time directly or indirectly
     owned by Guarantor, or Guarantor and one or more other Subsidiaries, or by
     one or more Subsidiaries.

2.   Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees
     --------
to HRP the prompt and complete payment and performance by the GranCare Companies
(and each of them),
<PAGE>
 
                                      -4-

when due (whether at stated maturity, by acceleration or otherwise), of the
Obligations. The Guarantor further agrees to pay any and all reasonable expenses
(including, without limitation, all reasonable fees and disbursements of counsel
to HRP) which may be paid or incurred by HRP in enforcing any of its rights
under this Guaranty. This Guaranty is a guaranty of payment and not of
collectibility and is absolute and in no way conditional or contingent. The
Guarantor's liability hereunder is direct and unconditional and may be enforced
after nonpayment or nonperformance by any GranCare Company of any Obligation
without requiring HRP to resort to any other Person (including without
limitation such GranCare Company) or any other right, remedy or collateral. This
Guaranty shall remain in full force and effect until the Obligations are paid in
full following the termination of all GranCare Documents (the "Termination
                                                               -----------
Date").
----

3.   Costs and Expenses of Collection. The Guarantor agrees, as principal
     --------------------------------
obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in
immediately available funds, all costs and expenses (including, without
limitation, all court costs and all reasonable fees and disbursements of counsel
to HRP) incurred or expended by HRP in connection with the enforcement of this
Guaranty, together with interest on such amounts from the time such amounts
become due until payment at the Default Rate. It shall be a condition of the
obligations of Guarantor to pay any fees and expenses payable by it under this
Guaranty that HRP shall have, or shall have caused to have, provided the
Guarantor with a writing describing such fees and/or expenses in reasonable
detail.

4.   Right of Setoff. Regardless of the adequacy of any collateral or other
     ---------------
means of obtaining repayment of the Obligations, HRP is hereby authorized,
without notice to the Guarantor or compliance with any other condition precedent
now or hereafter imposed by Applicable Law (all of which are hereby expressly
waived to the extent permitted by Applicable Law) and to the fullest extent
permitted by Applicable Law, to set off and apply any securities, deposits or
other property belonging to the Guarantor now or hereafter held by HRP against
the obligations of the Guarantor under this Guaranty, whether or not HRP shall
have made any demand under this Guaranty, at any time and from time to time
after the occurrence of a Event of Default under and as defined in any GranCare
Document, in such manner as HRP in its sole discretion may determine, and the
Guarantor hereby grants HRP a continuing security interest in such securities,
deposits and property for the payment and performance of such obligations. 

5.   Subrogation and Contribution. Until the Obligations shall have been paid
     ----------------------------
and performed in full after the Termination Date, the Guarantor irrevocably and
unconditionally suspends and subordinates any and all rights to which it may be
entitled, by operation of law or otherwise, to be subrogated, with respect to
any payment made by the Guarantor hereunder, to the rights of HRP against any
GranCare Company, or otherwise to be reimbursed, indemnified or exonerated by
any GranCare Company in respect thereof or to receive any payment, in the nature
of contribution or for any other reason, from any other guarantor of the
Obligations with respect to any payment made by the Guarantor hereunder. Until
the Obligations shall have been paid and performed in full, the Guarantor waives
any defense it may have based upon any election of remedies by HRP which impairs
the Guarantor's subrogation rights or the Guarantor's rights to proceed against
any GranCare Company for reimbursement (including without limitation any loss of
rights the Guarantor may suffer by reason of any rights, powers or remedies of
such
<PAGE>
 
                                      -5-

GranCare Company in connection with any anti-deficiency laws or any other laws
limiting, qualifying or discharging any indebtedness to HRP). Until the
Obligations shall have been paid, performed and satisfied in full after the
Termination Date, the Guarantor further suspends and subordinates any right to
enforce any remedy which HRP now has or may in the future have against any
GranCare Company, any other guarantor or any other Person and any benefit of, or
any right to participate in, any security whatsoever now or in the future held
by HRP.

6.   Effect of Bankruptcy Stay.  If acceleration of the time for payment or
     -------------------------
performance of any of the Obligations is stayed upon the insolvency, bankruptcy
or reorganization of any GranCare Company or any other Person or otherwise, all
such amounts otherwise subject to acceleration shall nonetheless be payable by
the Guarantor under this Guaranty forthwith upon demand.

7.   Receipt of GranCare Documents, etc.  The Guarantor confirms, represents and
     ----------------------------------
warrants to HRP that (i) it has received true and complete copies of all
existing GranCare Documents from the GranCare Companies (giving effect to the
Closing under the Restructure Agreement), has read the contents thereof and
reviewed the same with legal counsel of its choice; (ii) no representations or
agreements of any kind have been made to the Guarantor which would limit or
qualify in any way the terms of this Guaranty; (iii) this Guaranty is executed
at the GranCare Companies' request and not at the request of HRP; (iv) HRP has
made no representation to the Guarantor as to the creditworthiness of any
GranCare Company; and (v) the Guarantor has established adequate means of
obtaining from each GranCare Company on a continuing basis information regarding
such GranCare Company's financial condition.  The Guarantor agrees to keep
adequately informed from such means of any facts, events, or circumstances which
might in any way affect the Guarantor's risks under this Guaranty, and the
Guarantor further agrees that HRP shall have no obligation to disclose to the
Guarantor any information or documents acquired by HRP in the course of its
relationship with the GranCare Companies.

8.   Amendments, etc. with Respect to the Obligations.  The obligations of the
     ------------------------------------------------
Guarantor under this Guaranty shall remain in full force and effect without
regard to, and shall not be released, altered, exhausted, discharged or in any
way affected by any circumstance or condition (whether or not any GranCare
Company shall have any knowledge or notice thereof), including without
limitation (a) any amendment or modification of or supplement to any GranCare
Document, or any obligation, duty or agreement of the GranCare Companies or any
other Person thereunder or in respect thereof; (b) any assignment or transfer in
whole or in part of any of the Obligations; any furnishing, acceptance, release,
nonperfection or invalidity of any direct or indirect security or guaranty for
any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of any
GranCare Document, or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of any such instrument (whether by operation of
law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to any
GranCare Company or any other Person or any of their respective properties or
creditors or any resulting release or discharge of any Obligation (including
without limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or for
the benefit of any GranCare Company; (f) the merger or
<PAGE>
 
                                      -6-

consolidation of any GranCare Company with or into any other Person or of any
other Person with or into any GranCare Company; (g) the voluntary or involuntary
sale or other disposition of all or substantially all the assets of any GranCare
Company or any other Person; (h) the voluntary or involuntary liquidation,
dissolution or termination of any GranCare Company or any other Person; (i) any
invalidity or unenforceability, in whole or in part, of any term hereof or of
any GranCare Document, or any obligation, duty or agreement of any GranCare
Company or any other Person thereunder or in respect thereof; (j) any provision
of any applicable law or regulation purporting to prohibit the payment or
performance by any GranCare Company or any other Person of any Obligation; (k)
any failure on the part of any GranCare Company or any other Person for any
reason to perform or comply with any term of any GranCare Document or any other
agreement; or (l) any other act, omission or occurrence whatsoever, whether
similar or dissimilar to the foregoing. The Guarantor authorizes each GranCare
Company, each other guarantor in respect of the Obligations and HRP at any time
in its discretion, as the case may be, to alter any of the terms of any of the
Obligations.

9.   Guarantor as Principal. If for any reason the GranCare Companies, or any of
     ----------------------
them, or any other Person is under no legal obligation to discharge any
Obligation, or if any other moneys included in the Obligations have become
unrecoverable from the GranCare Companies, or any of them, or any other Person
by operation of law or for any other reason, including, without limitation, the
invalidity or irregularity in whole or in part of any Obligation or of any
GranCare Document, the legal disability of any GranCare Company or any other
obligor in respect of Obligations, any discharge of or limitation on the
liability of any GranCare Company or any other Person or any limitation on the
method or terms of payment under any Obligation, or of any GranCare Document,
which may now or hereafter be caused or imposed in any manner whatsoever
(whether consensual or arising by operation of law or otherwise), this Guaranty
shall nevertheless remain in full force and effect and shall be binding upon the
Guarantor to the same extent as if the Guarantor at all times had been the
principal obligor on all Obligations.

10.  Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the extent
     -----------------------------
not prohibited by applicable law, all presentments, demands for performance,
notice of nonperformance, protests, notices of protests and notices of dishonor
in connection with the Obligations or any GranCare Document, including but not
limited to (a) notice of the existence, creation or incurring of any new or
additional obligation or of any action or failure to act on the part of any
GranCare Company, HRP, any endorser or creditor of any GranCare Company or any
other Person; (b) any notice of any indulgence, extensions or renewals granted
to any obligor with respect to the Obligations; (c) any requirement of diligence
or promptness in the enforcement of rights under any GranCare Document, or any
other agreement or instrument directly or indirectly relating thereto or to the
Obligations; (d) any enforcement of any present or future agreement or
instrument relating directly or indirectly thereto or to the Obligations; (e)
notice of any of the matters referred to in Section 9 above; (f) any defense of
                                            ---------
any kind which the Guarantor may now have with respect to his liability under
this Guaranty; (g) any right to require HRP, as a condition of enforcement of
this Guaranty, to proceed against any GranCare Company or any other Person or to
proceed against or exhaust any security held by HRP at any time or to pursue any
other right or remedy in HRP's power before proceeding against the Guarantor;
(h) any defense that may arise by reason of the incapacity, lack of authority,
death or disability of any other Person or
<PAGE>
 
                                      -7-

Persons or the failure of HRP to file or enforce a claim against the estate (in
administration, bankruptcy, or any other proceeding) of any other Person or
Persons; (i) any defense based upon an election of remedies by HRP; (j) any
defense arising by reason of any "one action" or "anti-deficiency" law or any
other law which may prevent HRP from bringing any action, including a claim for
deficiency, against the Guarantor, before or after HRP's commencement of
completion of any foreclosure action, either judicially or by exercise of a
power of sale; (k) any defense based upon any lack of diligence by HRP in the
collection of any Obligation; (l) any duty on the part of HRP to disclose to the
Guarantor any facts HRP may now or hereafter know about any GranCare Company or
any other obligor in respect of Obligations; (m) any defense arising because of
an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code;
(n) any defense based on any borrowing or grant of a security interest under
Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or
arising out of any defense which any GranCare Company or any other Person may
have to the payment or performance of the Obligations (including but not limited
to failure of consideration, breach of warranty, fraud, payment, accord and
satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy,
statute of limitations, lender liability and usury). Guarantor acknowledges and
agrees that each of the waivers set forth herein on the part of the Guarantor is
made with Guarantor's full knowledge of the significance and consequences
thereof and that, under the circumstances, the waivers are reasonable. If any
such waiver is determined to be contrary to Applicable Law such waiver shall be
effective only to the extent no prohibited by such Applicable Law.

11.  Reinstatement. This Guaranty shall continue to be effective, or be
     -------------
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations is rescinded or must otherwise be restored or returned by
HRP upon the insolvency, bankruptcy, dissolution, liquidation or reorganization
of any GranCare Company or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for, any GranCare
Company or any substantial part of its property, or otherwise, all as though
such payments had not been made.

12.  Payments. The Guarantor hereby agrees that the Obligations will be paid to
     --------
HRP without set-off or counterclaim in U.S. Dollars at the office of HRP located
at 400 Centre Street, Newton, Massachusetts 02158, or to such other location as
HRP shall notify the Guarantor.

13.  Representations and Warranties. The Guarantor represents and warrants that:
     ------------------------------

          (1)  Corporate Existence. The Guarantor is a corporation duly
               -------------------
     incorporated and validly existing under the laws of the jurisdiction of its
     incorporation, and is duly licensed or qualified as a foreign corporation
     in all states wherein the nature of its property owned or business
     transacted by it makes such licensing or qualification necessary, except
     where the failure to be licensed or to so qualify could not have a Material
     Adverse Effect. 

          (2)  No Violation. The execution, delivery and performance of this
               ------------
     Guaranty and each other Restructure Document to which the Guarantor is a
     party will not contravene any provision of law, statute, rule or regulation
     to which the Guarantor or any GranCare Company is subject or any judgment,
     decree, franchise, order or permit applicable to the
<PAGE>
 
                                      -8-

     Guarantor, or conflict or be inconsistent with or result in any breach of,
     any of the terms, covenants, conditions or provisions of, or constitute a
     default under, or result in the creation or imposition of (or the
     obligation to create or impose) any lien or security interest upon any of
     the property or assets of the Guarantor pursuant to the terms of any
     agreement or instrument to which the Guarantor is party or by which its
     assets are bound, or violate any provision of the respective corporate
     charters or bylaws of the Guarantor.

          (3)  Corporate Authority and Power. The execution, delivery and
               -----------------------------
     performance of this Guaranty and each other Restructure Document to which
     the Guarantor is a party is within the corporate powers of the Guarantor
     and has been duly authorized by all necessary corporate action.

          (4)  Enforceability. This Guaranty and each other Restructure Document
               --------------
     to which the Guarantor is a party have been duly executed and delivered by
     the Guarantor, and this Guaranty and each such Restructure Document
     constitutes the valid and binding obligation of the Guarantor enforceable
     against the Guarantor in accordance with its terms, except as
     enforceability may be limited by applicable bankruptcy, insolvency,
     reorganization, moratorium or similar laws affecting the enforcement of
     creditors' rights generally and except as enforceability may be subject to
     general principles of equity, whether such principles are applied in a
     court of equity or at law.

          (5)  Governmental Approvals. No order, permission, consent, approval,
               ----------------------
     license, authorization, registration or validation of, or filing with, or
     exemption by, any governmental authority is required to authorize, or is
     required in connection with, the execution, delivery and performance of
     this Guaranty or any other Restructure Document to which the Guarantor is a
     party, or the taking of any action contemplated hereby or thereby.

          (6)  Litigation. The Guarantor has no notice or knowledge of any
               ----------
     action, suit or proceeding pending or threatened against or affecting it at
     law or in equity or before or by any governmental department, court,
     commission, board, bureau, agency or instrumentality, domestic or foreign,
     or before any arbitrator of any kind that would, if adversely determined,
     have a Material Adverse Effect.

          (7)  Financial Statements. The consolidated financial statements of
               --------------------
     the Guarantor contained in the joint proxy statement dated September 26,
     1997 filed in connection with the Transactions, fairly present, in
     accordance with GAAP, the consolidated financial condition of the Guarantor
     and its Subsidiaries as of their dates of presentation, and the
     consolidated results of their operations and their consolidated cash flows
     for the respective fiscal period then ended.

14.  Covenants. The Guarantor hereby covenants and agrees with HRP that, from
     ---------
and after the date of this Guaranty until the Obligations are paid in full and
all GranCare Documents have been terminated:
<PAGE>
 
                                      -9-


     (1)  Notices. The Guarantor shall promptly give notice to HRP of any
          -------
Default or Event of Default under any GranCare Document.

     (2)  Financial Statements. The Guarantor shall furnish the following
          --------------------
statements to HRP:

          (1)  within forty-five (45) days after each of the first three
     quarters of any Fiscal Year, the Consolidated Financials for such fiscal
     quarter, in each case accompanied by the Financial Officer's Certificate;

          (2)  within ninety (90) days after the end of each Fiscal Year, the
     Consolidated Financials for such Fiscal Year, in each case certified by
     Ernst & Young LLP or any other independent certified public accountant of
     national reputation, and accompanied by the Financial Officer's
     Certificate;

          (3)  promptly after the sending or filing thereof, copies of all
     reports which the Guarantor sends to its security holders generally, and
     copies of all periodic reports which the Guarantor files with the SEC or
     any stock exchange on which its shares are listed or traded;

          (4)  at any time and from time to time upon not less than thirty (30)
     days notice from HRP, the Guarantor will furnish to HRP any Consolidated
     Financials or any other financial reporting information required to be
     filed by HRP with any securities and exchange commission, the SEC or any
     successor agency, or any other governmental authority, or required pursuant
     to any order issued by any court governmental authority or arbitrator in
     any litigation to which HRP is a party, for purposes of compliance
     therewith; and

          (5)  promptly upon notice from HRP, such other information concerning
     the business, financial condition and affairs of the Guarantor as HRP may
     reasonably request from time to time.

HRP may at any time, and from time to time, provide any lender to HRP with
copies of any of the foregoing statements.

     (3)  Reports. The Guarantor shall promptly provide to HRP such
          -------
certificates, reports and other documents required of the Guarantor hereunder
and the Guarantor shall cause each GranCare Company to provide such
certificates, reports and other documents required of it under the GranCare
Documents.

     (4)  Legal Existence. The Guarantor shall do or cause to be done all things
          ---------------
necessary to preserve and keep in full force and effect its corporate existence
(subject as provided in Section 14.(f) hereof).
                        -------------- 
<PAGE>
 
                                      -10-


     (5)  Compliance. The Guarantor shall , and shall cause each of its
          ----------
Subsidiaries to, comply in all material respects with all Applicable Laws in
respect of the conduct of its business and the ownership of its property
(including, without limitation, applicable statutes, rules, regulations, orders
and restrictions relating to environmental, safety and other similar standards
or controls), except where the failure to comply, either individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.

     (6)  Merger; Sale of Assets, Etc. HRP agrees that, notwithstanding anything
          ---------------------------
to the contrary in any GranCare Document, the Guarantor and any of its
Affiliates (specifically excluding AMS Properties and GCIHCC), or any successors
of any of the foregoing, may, without any consent or approval of HRP, enter into
mergers, consolidations, acquisitions, asset sales, sales of minority or
majority interests in the Guarantor or such Affiliate or any other transactions
(including, without limitation, any change of control, recapitalization or other
restructuring of the Guarantor or any of such Affiliates or successors);
provided, however, that the Guarantor (i) shall not liquidate, wind-up or
--------  -------
dissolve itself (or suffer any liquidation or dissolution) and (ii) may not
merge or consolidate with any Person, or convey, transfer or lease substantially
all of its assets unless:

          (1)  giving effect to such transaction, no Event of Default, or an
     event or condition that with the giving of notice or lapse of time or both
     would become an Event of Default, would occur under and as defined in any
     GranCare Document; and

          (2)  the successor formed by such consolidation or the survivor of
     such merger or the Person that acquires by conveyance, transfer or lease
     substantially all of the assets of the Guarantor, as the case may be, shall
     be a corporation organized and existing under the laws of the United States
     or any State thereof (including the District of Columbia), and, if the
     Guarantor is not such corporation, (i) such corporation shall have executed
     and delivered to HRP its assumption of the due and punctual performance and
     observance of each covenant and condition of this Guaranty to the same
     extent and with the same effect as though such corporation was a party
     hereto and was named and defined as the "Guarantor" herein and (ii) shall
     have caused to be delivered to HRP an opinion of outside counsel to such
     corporation to the effect that all agreements or instruments effecting such
     assumption are enforceable in accordance with their terms and comply with
     the terms hereof.

     (7)  Ownership of Stock of Tenant Entities. The Guarantor shall at all
          -------------------------------------
times, either directly or indirectly through one or more wholly-owned
Subsidiaries that have each executed and delivered to HRP a guaranty in
substantially the form of the Guaranty dated as of even date herewith by
GranCare in favor of HRP, be the beneficial and record owner of all the shares
of the outstanding capital stock of AMS Properties and GCIHCC.

15.  Severability. Any provision of this Guaranty which is prohibited or
     ------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition
<PAGE>
 
                                      -11-

or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

16.  Additional Guaranties. This Guaranty shall be in addition to any other
     ---------------------
guaranty or other security for the Obligations, and it shall not be prejudiced
or rendered unenforceable by the invalidity of any such other guaranty or
security.

17.  Paragraph Headings.  The paragraph headings used in this Guaranty are for
     ------------------
convenience of reference only and are not to affect the construction hereof or
be taken into consideration in the interpretation hereof.

18.  No Waiver; Cumulative Remedies, Documentation of Expenses. HRP shall not by
     ---------------------------------------------------------
any act (except by a written instrument pursuant to Paragraph 19 hereof), delay,
indulgence, omission or otherwise, be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of HRP, any right, power or privilege hereunder shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. A waiver by HRP of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which HRP would otherwise have on any future occasion. The
rights and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.

19.  Waivers and Amendments; Successors and Assigns. None of the terms or
     ----------------------------------------------
provisions of this Guaranty may be waived, amended, supplemented or otherwise
modified except by a written instrument executed by the Guarantor and HRP,
provided that any provision of this Guaranty may be waived by HRP in a letter or
agreement executed by HRP or by telecopy from HRP. This Guaranty shall be
binding upon the successors and assigns of the Guarantor and shall inure to the
benefit of HRP and its successors and assigns.

20.  WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE GUARANTOR
     ------------------------------------------------------------
HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL
IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.

     BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2)
<PAGE>
 
                                      -12-

IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY ANY SUCH COURT IN ANY
SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS
IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT THAT IT MAY LAWFULLY DO
SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR
OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT IS NOT
PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS
EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.

     THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.

21.  Notices.  All notices under this Guaranty shall be in writing, and shall be
     -------
delivered by hand, by a nationally recognized commercial overnight delivery
service, by first class mail or by telecopy, delivered, addressed or
transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158,
Attention:  President (telecopy no. 617-332-2261), with a copy to Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention:
Harry E. Ekblom, Esq. (telecopy no. 617-338-2880), and if to the Guarantor, at
its address or telecopy number set out below its signature in this Guaranty.
Such notices shall be effective:  in the case of hand deliveries, when received;
in the case of an overnight delivery service, on the next business day after
being placed in the possession of such delivery service, with delivery charges
prepaid; in the case of mail, three days after deposit in the postal system,
first class postage prepaid; and in the case of telecopy notices, when
electronic indication of receipt is received.  Either party may change its
address and telecopy number by written notice to the other delivered in
accordance with the provisions of this Section.

22.  Termination.  The obligations of Guarantor hereunder shall automatically
     -----------
terminate upon the indefeasible satisfaction in full of all Obligations after
the Termination Date.
<PAGE>
 
                                      -13-

     IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and delivered as of the date first above written.

                                   PARAGON HEALTH NETWORK, INC. (f/k/a 
                                   "Living Centers of America, Inc.")



                                   By  /s/ Boyd P. Gentry
                                      ----------------------------------  
                                    Name:  Boyd P. Gentry
                                    Title: Vice President and Treasurer

                                   Address for Notices:

                                    Paragon Health Network, Inc. 
                                    c/o GranCare, Inc.           
                                    Suite 1500                   
                                    One Ravinia Drive            
                                    Atlanta GA 30346             
                                    Attn: General Counsel