<PAGE>
 
                                                                     EXHIBIT 4.2

                  AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

          AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (the "Agreement"), dated
as of November 4, 1997, amended as of April 13, 1998 and amended and restated as
of November __, 1998 (the "Amended and Restated Agreement") by and among (i)
each of the stockholders listed on the signature pages attached hereto (together
with each other Person (defined below) who becomes a party to this Agreement in
accordance with the terms hereof, the "Stockholders"), and (ii) Mariner Post-
Acute Network, Inc. a Delaware corporation and the successor to Paragon Health
Network, Inc. (the "Company").

                              W I T N E S S E T H:

          WHEREAS, the Company and the Stockholders entered into that certain
Stockholders Agreement, dated as of November 4, 1997 (the "Original Stockholders
Agreement" and as amended as of April 13, 1998, the "Original Amended
Stockholders Agreement");

          WHEREAS, the transactions contemplated by the Original Stockholders
Agreement became effective (the "Effective Date") on the date of, and
simultaneously with, the closing under the Amended and Restated Agreement and
Plan of Merger, dated as of September 17, 1997 among the Company, Apollo
Management, L.P., on behalf of one or more managed investment funds, and Apollo
LCA Acquisition Corp. (the "Merger Agreement");

          WHEREAS, subsequent to the date of the Original Amended Stockholders
Agreement, the Board of Directors of the Company and the Stockholders have each
determined that it is in the best interests of each of the foregoing entities to
amend and restate the Original Amended Stockholders Agreement to give effect to
the terms and conditions set forth in this Agreement, it being understood and
agreed (i) with respect to any date or time period occurring and ending prior to
the date of this Agreement, the rights and obligations of the parties thereto
shall be governed by the Original Stockholders Agreement and the Original
Amended Stockholders Agreement, as applicable, which for such purposes shall
remain in full force and effect, and (ii) with respect to any date or time
period occurring or ending on or after the date of this Agreement, the rights
and obligations of the parties hereto shall be governed by this Agreement.

          WHEREAS, the Original Amended Stockholders Agreement may be amended
only in accordance with Section 7.1 thereof which requires a written instrument
executed by the Company (in accordance with the approval of two-thirds of the
entire Board of Directors of the Company, including a majority of the directors
who are not an Affiliate or an Associate (each as defined below) of any
Stockholder) and the holders of a majority of the Shares (as defined below) held
by the Stockholders including, so long as Apollo (as defined below) beneficially
owns at least 25% of the Shares held by Apollo on November 4, 1997, the consent
of Apollo, and if any amendment or modification would have a disproportionately
material 
<PAGE>
 
adverse effect on the rights or obligations of any Other Stockholder (as defined
below) or would otherwise unfairly discriminate against any Other Stockholder,
the consent of such Other Stockholder;

          WHEREAS, after giving effect to the transactions contemplated by the
Merger Agreement and the three-for-one stock split effective on December 30,
1997, on the date of this Amended and Restated Agreement, each Stockholder
beneficially owns the number of shares of common stock of the Company, par value
$.01 per share ("Common Stock") set forth under its name on the signature pages
attached hereto, and the Stockholders party to this Amended and Restated
Agreement collectively beneficially own all of the 17,627,798 shares of Common
Stock issued to the Stockholders (collectively, the "Shares"); and

          WHEREAS, the parties hereto desire to provide for certain rights and
obligations in respect to the Shares and the Company as hereinafter provided.

          NOW THEREFORE, the parties hereto agree as follows:


                                   ARTICLE I.

                                  DEFINITIONS

          SECTION I.1    Definitions. Capitalized terms used herein and not
otherwise defined herein have the meaning ascribed to them in the Merger
Agreement. In addition, the following terms shall have the meaning ascribed to
them below:

          "Affiliate" of a Person shall have the meaning set forth in Rule 12b-2
of the Exchange Act as in effect on the date of this Agreement, but shall not
include (i) any investment fund in which a Person has invested if the Person
does not otherwise control the investment fund or have, directly or indirectly,
voting or dispositive power over any securities owned by such fund, (ii) any
investor or limited partner of any Person who does not otherwise have voting or
dispositive power over securities owned by that Person and not controlled by
that Person, (iii) in the case of Apollo, any Person other than (A) Apollo
Advisors II, L.P., the sole general partner of each of the Apollo entities party
hereto, (B) Apollo Advisors IV, L.P., (C) Apollo Management, L.P., and (D) the
other investment partnerships or other entities of which Apollo Advisors II,
L.P., Apollo Advisors IV, L.P. or Apollo Management, L.P. is a general or
managing partner or member, (iv) in the case of Chase Equity Associates, L.P.,
any Person other than (A) Chase Capital Partners, its sole general partner, and
(B) the other investment partnerships or other entities of which Chase Capital
Partners is a general or managing partner or member, (v) in the case of
Healthcare Equity Partners, L.P. or Healthcare Equity QP Partners, any Person
other than (A) Beecken, Petty & Company, L.L.C., the sole general partner of
each of them, and (B) the other investment partnerships of which Beecken, Petty
& Company, L.L.C. is a general or managing partner or member, (vi) in the case
of Key Capital Corporation or Key Equity Partners 97, any Person other than (A)
any general partner 

                                     - 2 -
<PAGE>
 
of Key Equity Partners 97 and (B) any of the investment partnerships of which
any general partner of Key Equity Partners is a general or managing partner or
member, (vii) in the case of Drax Holdings L.P., any Person other than (A) any
general partner of Drax Holdings L.P. and (B) the other investment partnerships
or other entities of which any general partner of Drax Holdings L.P. is a
general or managing partner or member, or (viii) in the case of Walnut Growth
Partners Limited Partnership, any Person other than (A) any general partner of
Walnut Growth Partners Limited Partnership and (B) the other investment
partnerships or other entities of which any general partner of Walnut Growth
Partners Limited Partnership is a general or managing partner or member. It is
expressly intended that any Person who now or hereafter controls, directly or
indirectly, any Stockholder shall be subject to the terms of this Agreement as
if it were a Stockholder.

          "Apollo" means collectively Apollo Management, L.P., its legal
successors and assigns, and each Person who controls, or is controlled by,
Apollo Management, L.P. including, without limitation, the Stockholders
indicated as such on the Apollo signature page attached hereto.

          "Associate" shall mean an officer, director, partner (other than a
limited partner) or executive employee of, or exclusive consultant to, any
Person, but shall not include in the case of Apollo, Keith B. Pitts.

          "Beneficial ownership" by a Person of any Voting Securities shall be
determined in accordance with the terms "beneficial ownership" as defined in
Rule 13d-3 under the Exchange Act as in effect on the date of this Agreement,
and in addition, "beneficial ownership" shall include securities which such
Person has the right to acquire (irrespective of whether such right is
exercisable immediately or only after the passage of time, including the passage
of time in excess of sixty (60) days), or exclusive right to vote, pursuant to
any agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise. For purposes of this
Agreement, a Stockholder shall be deemed to beneficially own any Voting
Securities beneficially owned by its Affiliates or any Group of which such
Stockholder or any such Affiliate is a member.

          "Board of Directors" shall mean the Board of Directors of the Company.

          "Charter Documents" shall mean the Certificate of Incorporation and
Bylaws of the Company.

          "Commission" shall mean the Securities and Exchange Commission.

          "Effective Time" shall mean the effective time of the merger of
Paragon Acquisition Sub, Inc., a wholly owned subsidiary of the Company ("Sub"),
and Mariner Health Group, Inc. ("Mariner") pursuant to that certain Agreement
and Plan of Merger, dated as of April 13, 1998, by and among the Company, Sub
and Mariner.

                                     - 3 -
<PAGE>
 
          "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

          "Group" shall mean a "group" as such term is used in Section 13(d)(3)
of the Exchange Act as in effect on the date of this Agreement.

          "Laws" shall mean all applicable foreign, federal, state and local
laws, statutes, rules, regulations, codes and ordinances.

          "Other Stockholders" shall mean the Stockholders other than Apollo.

          "Person" shall mean any individual, Group, corporation, general or
limited partnership, limited liability company, governmental entity, joint
venture, estate, trust, association, organization or other entity of any kind or
nature.

          "Recapitalization Merger" shall mean the merger of Apollo LCA
Acquisition Corp. with and into Living Centers of America, Inc. (the predecessor
of the Company).

          "Securities Act" shall mean the Securities Act of 1933, as amended.

          "Stockholder Designee" shall mean a person designated for election to
the Board of Directors by Apollo as provided in Section 4.1.

          "Voting Securities" shall mean (x) any securities entitled, or which
may be entitled, to vote generally in the election of directors of the Company,
(y) any securities convertible or exercisable into or exchangeable for such
securities (whether or not the right to convert, exercise or exchange is subject
to the passage of time or contingencies or both), or (z) any direct or indirect
rights or options to acquire any such securities; provided that unexercised
options granted pursuant to any employment benefit or similar plan and rights
issued pursuant to any shareholder rights plan shall be deemed not to be "Voting
Securities" (or to have Voting Power).

          In addition, the following terms have the definitions specified in the
Sections noted:
 

          TERM                              SECTION
          ----                              -------
 
          Agreement                         recitals
          Allocation Percentage             6.2
          Apollo Directors                  4.1(a)
          Beneficial Ownership Threshold    4.1(a)
          Common Stock                      recitals
          Company                           recitals
          Co-Sale                           6.2
          Drag Transaction                  6.3(a)

                                     - 4 -
<PAGE>
 
          Drag Transaction Closing Date     6.2(a)
          Exempted Transfer                 6.1
          Merger Agreement                  recitals
          Nominating Committee              4.1(d)
          Notices                           6.4
          Proxy Statement                   4.2
          Purchaser                         6.3(a)
          Related Price                     6.3(a)
          Related Person                    6.3(a)
          Regulated Holder                  6.4
          Regulated Problem                 6.4
          Sale Notice                       6.3(a)
          Shares                            recitals
          Standstill Period                 5.1
          Stockholders                      recitals
          Stockholder Designee Period       4.1(a)
          Third Party Sale                  6.2
          Third Party Sale Notice           6.1
          Total Shares Outstanding          4.1(a)
          Unaffiliated Directors            4.1(b)
          Unauthorized Transfer             6.2
 

                                  ARTICLE II.

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY


     The Company hereby represents and warrants to each of the Stockholders as
follows:

     SECTION II.1    Authority for this Agreement. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company and no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by the Company and, assuming this Agreement constitutes a valid
and binding obligation of the Stockholders, constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and to general
principles of equity (whether considered in a proceeding in equity or at law).

                                     - 5 -
<PAGE>
 
     SECTION II.2  Consents and Approvals; No Violation. Except as set forth on
Schedule 2.2, neither the execution and delivery of this Agreement by the
Company nor the consummation of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provision of the respective
Restated Certificate of Incorporation or Bylaws (or other similar governing
documents) of the Company or any of its subsidiaries, (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental or regulatory authority, except where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a Material Adverse Effect or have
a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby, (iii) result in a default (or give rise to any
right of termination, cancellation or acceleration) under any of the terms,
conditions or provisions of any note, license, agreement or other instrument or
obligation to which the Company is a party or by which the Company or any of its
assets or subsidiaries may be bound, except for such defaults (or rights of
termination, cancellation or acceleration) which would not in the aggregate have
a Material Adverse Effect or have a material adverse effect on the ability of
the Company to consummate the transactions contemplated hereby, (iv) result in
the creation or imposition of any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind on any asset of the Company or any of its
subsidiaries which, in the aggregate, would have a Material Adverse Effect or
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby, or (v) violate any order, writ, injunction,
agreement, contract, decree, statute, rule or regulation applicable to the
Company, any of its subsidiaries or by which any of their respective assets are
bound, except for violations which would not in the aggregate have a Material
Adverse Effect or have a material adverse effect on the ability of the Company
to consummate the transactions contemplated by this Agreement.

     SECTION II.3    No Inconsistent Agreements. As of the Effective Date, there
is no (and from and after the Effective Date the Company will not, and will
cause its subsidiaries not to enter into any) agreement with respect to any
securities of the Company or any of its subsidiaries (and from and after the
Effective Date the Company shall not take, or permit any of its subsidiaries to
take, any action) that is inconsistent in any material respect with the rights
granted to the Stockholders in this Agreement.

     Without limiting the foregoing, except for this Agreement and the
Registration Rights Agreement, there are no other existing agreements relating
to the voting or, except as set forth on schedule 2.3, registration of any
equity securities of the Company or any of its subsidiaries,

                                     - 6 -
<PAGE>
 
                                  ARTICLE III

               REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS


     Each Stockholder severally as to itself, but not jointly or as to any other
Stockholder, represents and warrants to the Company as follows:

     SECTION III.1  Authority for this Agreement. The execution and delivery of
this Agreement by such Stockholder and the consummation by such Stockholder of
the transactions contemplated hereby have been duly and validly authorized by
all necessary action on its part. This Agreement has been duly and validly
executed and delivered by such Stockholder and, assuming this Agreement
constitutes a valid and binding obligation of the Company, constitutes a valid
and binding agreement of such Stockholder enforceable against such Stockholder
in accordance with the terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditor's rights
generally and to general principals of equity (whether considered in a
proceeding in equity or at law).

     SECTION III.2    No Violation. Neither the execution and delivery of this
Agreement by such Stockholder nor the consummation of the transactions
contemplated hereby will conflict with or result in any breach of any provision
under such Stockholder's partnership agreement or similar governing documents of
such Stockholder.


                                  ARTICLE IV.

                        BOARD REPRESENTATION AND VOTING

     SECTION VI.1    Board Representation.

     (a) On the Effective Date the size of the Board of Directors will be fixed
at eleven members and the Company will cause the persons named on Schedule 4.1
(or subject to Section 4.1(i), such other substitute persons as may be
designated by Apollo as Stockholder Designees) to be initially elected to the
Board of Directors by virtue of the Recapitalization Merger contemplated by the
Merger Agreement. Until the earlier of (i) the date on which the Stockholders
beneficially own, collectively, less than 25% of the Shares or (ii) the date the
Standstill Period ends by virtue of Section 5.2(g) hereof (the "Stockholder
Designee Period"), the Company agrees, subject to Section 4.1(i), to support the
nomination of, and the Company's Nominating Committee shall recommend to the
Board of Directors the inclusion in the slate of nominees recommended by the
Board of Directors to stockholders for election as directors at each annual
meeting of stockholders of the Company (A) five Stockholder Designees if the
Stockholders beneficially own a number of shares of Common Stock equal to 
66 2/3% or more of the Shares, (B) four Stockholder Designees if the
Stockholders beneficially own a number of shares of Common Stock equal to 50% or
more but less than 66 2/3% of the

                                     - 7 -
<PAGE>
 
Shares, or (C) two Stockholder Designees if the Stockholders beneficially own
25% or more but less than 50% of the Shares (each a "Beneficial Ownership
Threshold"); provided, that in no event will more than four of such Stockholder
Designees be Associates of Apollo (each Stockholder Designee who is an Associate
of Apollo is hereafter referred to as an "Apollo Director"). Notwithstanding the
foregoing, if at any time after the fifth anniversary of the Effective Time, the
number of shares of Company Common Stock beneficially owned by the Stockholders
aggregate less than forty percent (40%) of the total number of shares of the
Company's Common Stock of all classes entitled to vote in the election of
directors as are then outstanding ("Total Shares Outstanding"), the maximum
number of Stockholder Designees shall be the lowest whole number which when
compared to the total number of directors of the Company (including all
vacancies) is equal to or greater than the percentage which the aggregate number
of shares of Company Common Stock beneficially owned by the Stockholders bears
to the Total Shares Outstanding.

     (b) If any vacancy on the Company's Board of Directors occurs (by virtue of
the death, retirement, disqualification, removal from office or other cause of a
Stockholder Designee), prior to a meeting of the Company's stockholders, the
Nominating Committee shall appoint, subject to Section 4.1(i), a person
designated by Apollo to fill such vacancy (except if such vacancy occurs as a
result of the reduction of the number of Stockholder Designees entitled to be
included on the Board of Directors by reason of a decrease in the Stockholders'
beneficial ownership of Common Stock pursuant to Section 4.1(a)) and each such
person shall be a Stockholder Designee for purposes of this Agreement.

     (c) In the event the size of the Company's Board of Directors is increased,
Apollo will have the right, subject to Section 4.1(i) hereof, to nominate such
additional number of persons to serve as Stockholder Designees such that the
total number of Stockholder Designees is equal to the lowest whole number which
when compared to the total number of directors (including all vacancies) of the
Company, is equal to or greater than the percentage which the aggregate number
of shares of Company Common Stock then beneficially owned by the Stockholders
bears to the Total Shares Outstanding.

     (d) On the Effective Date, the Company will cause the persons indicated on
Schedule 4.1 to be initially named to a nominating committee (the "Nominating
Committee") of the Board of Directors and at all times during the Stockholder
Designee Period, (i) the size of the Nominating Committee will be fixed at five
members, two of whom will be Stockholder Designees who are Apollo Directors and
one of whom will be the Chief Executive Officer (if he or she is a director),
and (ii) nominees for director that are not Stockholder Designees shall be
designated exclusively by vote of not less than a majority of the members of the
Nominating Committee.

     (e) Notwithstanding the foregoing, the Company shall have no obligation to
support the nomination, recommendation or election of any Stockholder Designee
pursuant to this Section 4.1 or any other obligation under this Section 4.1 if
the Stockholders are in breach of any material provision of this Agreement.

                                     - 8 -
<PAGE>
 
     (f) Other than any committee formed for the purpose of considering matters
relating to the Stockholders or as set forth above with respect to the
Nominating Committee, (i) if the Stockholders are entitled to include at least
four Stockholder Designees for election to the Board of Directors under this
Agreement, the Stockholders shall be entitled to have such number of Stockholder
Designees serve on each committee of the Board of Directors that provides the
Stockholders with representation (as a percentage) equal to no less than the
percentage which the number of shares of Common Stock beneficially owned by the
Stockholders bears to the Total Shares Outstanding, provided that under no
circumstances shall Apollo Directors serve as a majority of any committee other
than a committee formed for the purpose of considering matters relating to the
cash or other compensation of officers and employees of the Company; or (ii) if
the Stockholders are entitled to include two Stockholder Designees for election
to the Board of Directors under this agreement, the Stockholders shall be
entitled to have one Stockholder Designee serve on each committee of the Board
of Directors.

     (g) Upon any decrease in the Stockholders' beneficial ownership of Common
Stock below any Beneficial Ownership Threshold, Apollo shall use its best
efforts to cause a number of Stockholder Designees to offer to immediately
resign from the Company's Board of Directors (subject to acceptance by the Board
of Directors) such that the number of Stockholder Designees serving on the Board
of Directors immediately thereafter will be equal to the number of Stockholder
Designees which Apollo would then be entitled to designate under Section 4.1(a).
Upon termination of the Stockholder Designee Period, Apollo shall promptly offer
to cause all of the Stockholder Designees to resign from the Board of Directors
(subject to acceptance by the Board of Directors) thereof and the Company's
obligations under this Section 4.1 shall terminate.

     (h) The Company and each Stockholder shall use commercially reasonable
efforts to call, or cause the appropriate officers and directors of the Company
to call, a special meeting of stockholders of the Company and to vote all of the
shares of Common Stock owned or held of record by them for, or to cause to be
taken actions by written consent in lieu of any such meeting necessary to cause,
the removal (with or without cause) of any Stockholder Designee if Apollo
requests such director's removal in writing for any reason.

     Except as provided in this Section 4.1(h), each Stockholder agrees that, at
any time that it is then entitled to vote for the election or removal of
directors, it will not vote in favor of the removal of any Stockholder Designee
unless (i) such removal shall be at the request of Apollo pursuant to the
provisions of Section 4.1(h), (ii) the right of the party who nominated such
director to do so has terminated in accordance with Section 4.1(a) above, or
(iii) such removal is in accordance with the requirements of Section 4.1(i)
below.

     (i) Notwithstanding the provisions of this Section 4.1, Apollo shall not be
entitled to designate any person to the Company's Board of Directors (or any
committee thereof) in the event that (x) the Company receives a written opinion
of its outside counsel that such Stockholder Designee would not be qualified
under applicable law, rule or regulation to serve 

                                     - 9 -
<PAGE>
 
as a director of the Company or (y) if the Nominating Committee objects to such
Stockholder Designee because such Stockholder Designee has been involved in any
of the events enumerated in Item 2(d) or (e) of Schedule 13D or such person is
currently the target of an investigation by any governmental authority or agency
relating to felonious criminal activity or is subject to any order, decree, or
judgment of any court or agency prohibiting service as a director of any public
company or providing investment or financial advisory services and, in any such
event, Apollo shall withdraw the designation of such proposed Stockholder
Designee and designate a replacement therefor (which replacement Stockholder
Designee shall also be subject to the requirements of this Section). The Company
shall use its reasonable best efforts to notify Apollo of any objection to a
Stockholder Designee sufficiently in advance of the date on which proxy
materials are mailed by the Company in connection with such election of
directors to enable Apollo to propose a replacement Stockholder Designee in
accordance with the terms of this Agreement. Apollo agrees to remove any
Stockholder Designee objected to by the Nominating Committee on the grounds
specified in clause (y) above.

     (j) The Company shall not, and shall not permit any of its subsidiaries to,
without the consent of two-thirds of the entire Board of Directors of the
Company, take any action that under the Charter Documents or this Agreement
requires the approval of two-thirds of the entire Board of Directors of the
Company if any of the Stockholder Designees approving (and whose vote is
necessary to approve) such action are Persons whose removal from the Board of
Directors has been requested at or prior to the time of such action by Apollo
pursuant to Section 4.1(a), unless such action has been ratified by the
reconstituted Board of Directors following such removal and election of
successors.

     (k) Each Stockholder Designee serving on the Board of Directors shall be
entitled to all compensation and stock incentives granted to directors who are
not employees of the Company on the same terms provided to such directors.

     (l) Notwithstanding anything in this Agreement to the contrary, in
connection with a Transfer of at least 66 2/3% of the Shares to a single
transferee, whether by a single transaction or a series of transactions, Apollo
may, by written notice to the Company, and with the affirmative approval of not
less than two-thirds of the entire Board of Directors of the Company (including
a vote that complies with Section 3.09(d)(2) of the Company's By-laws) assign
all rights granted to Apollo under this Section 4.1 to such transferee (to the
exclusion of other Stockholders) and, without limiting the foregoing, such
transferee's rights to designate directors under this Section 4.1 shall not be
reduced until such transferee ceases to beneficially own at least 66 2/3%, 50% 
or 25%, as the case may be, of the number of Shares or as such number of 
directors is otherwise reduced in accordance with Section 4.1. Any approval to 
such Transfer by the requisite vote of the Company's Board of Directors shall
constitute the approval referred to in Section 203(a)(1) of the Delaware General
Corporation Law, as amended.

     SECTION IV.2    Voting. Each Stockholder agrees that during the Standstill
Period such Stockholder shall, and shall cause its Affiliates to, use
commercially reasonable efforts to 

                                     - 10 -
<PAGE>
 
be present, in person or represented by proxy, at all meetings of stockholders
of the Company so that all Voting Securities beneficially owned by such
Stockholder shall be counted for the purpose of determining the presence of a
quorum at such meetings. Each Stockholder agrees that during the Standstill
Period in connection with the election of directors of the Company, such
Stockholder shall vote or cause to be voted all Voting Securities beneficially
owned by such Stockholder to elect all individuals nominated by the Nominating
Committee, unless to do so would violate the provisions of Section 4.1.
Notwithstanding the foregoing, during the effectiveness of the Proxy and Voting
Agreement (the "Proxy Agreement"), dated the date hereof, between Apollo
Management, L.P. and the Other Stockholders, the Other Stockholders may rely (in
accordance with the terms thereof) on the proxy designated therein to take any
action required by this Section 4.2 on their behalf.


                                   ARTICLE V.

                                   STANDSTILL

     SECTION V.1    Standstill. During the period beginning on the date hereof
and ending on the earliest to occur of (A) the tenth anniversary of the
Effective Date, (B) the date on which the Stockholders own, collectively, Voting
Securities which would represent less than 10% of the voting power in the
general election of directors of the Company, on a fully diluted basis, of all
Voting Securities then outstanding or (C) a Termination Event under any
subdivision of Section 5.2 (such period, the "Standstill Period"), each
Stockholder will not, and will cause each of its Affiliates not to, directly or
indirectly:

          (i) except with the prior approval of two-thirds of the entire Board
of Directors (which approval is requested in a manner which does not require
disclosure publicly or to any third parties) acquire, offer to acquire (by
tender or exchange offer or otherwise), or agree to acquire, by purchase or
otherwise, beneficial ownership of any Voting Securities or voting rights or
direct or indirect rights or options to acquire any Voting Securities of the
Company or any of its Affiliates other than (A) the exercise of convertible
securities acquired in compliance with the terms of this Agreement, or an
acquisition as a result of a stock split, stock dividend or similar
recapitalization, (B) the acquisition of shares of Common Stock pursuant to the
Merger Agreement or the GranCare Merger Agreement, (C) acquisitions of Voting
Securities provided that the aggregate number of Voting Securities beneficially
owned by all Stockholders and their Affiliates (including the Shares) after
giving effect to such acquisitions does not exceed 49% of the Total Shares
Outstanding; (D) stock options or similar rights granted by the Company to an
Affiliate of such Stockholder as compensation for performance as a director or
officer of the Company or its subsidiaries (and any shares issuable upon
exercise thereof), (E) transfers among Stockholders or (F) any rights which are
granted to all stockholders of the Company (and any share issuable upon exercise
thereof); provided, however, that if the Stockholders or any of their Affiliates
in good faith inadvertently acquire not more than 100,000 shares of Common Stock
in violation of these provisions and within 15 days after the first date on
which the Stockholders have actual 

                                     - 11 -
<PAGE>
 
knowledge (including by way of written notice given by the Company) that a
violation has occurred, the Stockholders or any of their Affiliates shall have
transferred any shares of Common Stock held in violation of these provisions to
unrelated third parties so that the Stockholders and their Affiliates no longer
beneficially own any such shares or have any agreement or understanding relating
to such shares, this Section 5.1 shall be deemed not to have been violated; and
provided further, that no violation of this provision shall be deemed to have
occurred by reason of the indirect acquisition of beneficial ownership of
securities resulting from (aa) investments in investment funds as to which no
Stockholder or Affiliate thereof has control or power to control with respect to
voting or investment decisions or (bb) acquisitions of securities by a limited
partner in any Stockholder or Affiliates thereof as to which limited partner no
Stockholder or its Affiliates has control or power to control;

          (ii)  except pursuant to this Agreement or the Proxy Agreement, form,
join or in any way participate in a Group with respect to any securities of the
Company or its Affiliates, other than with other Stockholders or Affiliates or
Associates of any Stockholder or Ares Leveraged Investment Fund, L.P., provided,
however, that in the case of securities other than Voting Securities,
Stockholders may participate in a Group with respect thereto with the prior
approval of two-thirds of the entire Board of Directors (which approval is
requested in a manner which does not require disclosure publicly or to any third
party);

          (iii)  grant a proxy to any Person other than (I) an Affiliate or
Associate of a Stockholder; provided that any such Person shall not, pursuant to
the grant of such proxy or otherwise, have the right or ability to vote shares
of Common Stock representing 50% or more of the Total Shares Outstanding, (II)
the proxy granted to Apollo pursuant to the Proxy Agreement or (III) proxies
designated by the Board of Directors of the Company in connection with any
contested election, or otherwise make, or in any way cause or participate in,
any "solicitation" of "proxies" to vote (as those terms are defined in
Regulation 14A under the Exchange Act) with respect to the Company or its
Affiliates, or communicate with, seek to advise, encourage or influence any
Person, in any manner, with respect to the voting of, securities of the Company
or its Affiliates, or become a "participant" in any "election contest" (as those
terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to
the Company or its Affiliates (other than (A) nonpublic communications with
other Stockholders or Affiliates or Associates of any Stockholder which would
not require public disclosure by any Person or (B) with the prior approval of a
two thirds majority of the entire Board of Directors (which approval is
requested in a manner which does not require disclosure publicly or to any third
party));

          (iv)  initiate, propose or, except with the prior approval of two-
thirds of the entire Board of Directors (which approval is requested in a manner
which does not require disclosure publicly or to any third parties) otherwise
solicit stockholders for the approval of one or more stockholder proposals with
respect to the Company or its Affiliates or induce or attempt to induce any
other Person to initiate any stockholder proposal or seek election to or seek to
place a representative on the Board of Directors of the Company (except pursuant
to Section 4.1 of this Agreement) or its Affiliates or seek the removal of any
member of the 

                                     - 12 -
<PAGE>
 
Board of Directors of the Company or its Affiliates (for this purpose, the
actions of the Stockholder Designees in communicating (without public disclosure
or disclosure to third parties) with the Board of Directors in their capacity as
directors of the Company, and non-public communication by a Stockholder with
other Stockholders or Affiliates of any Stockholder which would not require
public disclosure by any Person, shall not be deemed to be in contravention of
this paragraph (iv)); or

          (v) make any public announcement with respect to, or submit any
proposal for, any transaction involving the Company, on the one hand, and Apollo
or any Affiliates of Apollo, on the other hand, which would be deemed a
"business combination" under the provisions of Section 203(c)(3)(i)-(iv) of the
DGCL, whether or not such proposal might require public disclosure by the
Company, unless such proposal is directed and disclosed solely to the Board.

provided, that this Section 5.1 shall not restrict or inhibit the rights of a
Stockholder to exercise its voting rights as a stockholder of the Company
(subject to Section 4.2).

     SECTION V.2    Early Termination of Standstill. The obligations of the
Stockholders under Section 5.1 shall terminate at the election of the
Stockholders (representing a majority of the Shares then held by the
Stockholders) upon the occurrence of any of the following events (each a
"Termination Event"):

          (a) At least $10 million in indebtedness for monies borrowed by the
Company or its subsidiaries shall have been accelerated;

          (b) One or more judgments or decrees shall be entered against the
Company or any of its Subsidiaries involving in the aggregate a liability (not
paid or fully covered by insurance as to which the relevant insurance company
has acknowledged coverage) of $10 million or more and any such judgments or
decrees shall not have been vacated, discharged, stayed or bonded pending appeal
within 30 days from the entry thereof;

          (c) The Company or any material subsidiary shall file a petition in
bankruptcy or for reorganization or for an arrangement or any composition,
readjustment, liquidation, dissolution or similar relief pursuant to Title 11 of
the United States Code or under any similar present or future federal law or the
law of any other jurisdiction or shall be adjudicated a bankrupt or insolvent,
or consent to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator (or other similar official) of the
Company or for all or any substantial part of its property, or shall make a
general assignment for the benefit of its creditors;

          (d) A petition or answer shall be filed proposing the adjudication of
the Company or any material subsidiary as bankrupt or its reorganization or
arrangement, or any composition, readjustment, liquidation, dissolution or
similar relief with respect to it pursuant to Title 11 of the United States Code
or under any similar present or future law or the law 

                                     - 13 -
<PAGE>
 
or any other jurisdiction, and the Company shall consent to or acquiesce in the
filing thereof, or such petition or answer shall not be discharged or denied
within 60 days after the filing thereof;

          (e) The Company shall be in material breach of its obligations to the
Stockholders under their Registration Rights Agreement and such breach shall not
have been cured within 20 days after receipt by the Company from the
Stockholders of a written notice specifying such breach and requiring it to be
remedied, and the Company shall not in good faith be contesting whether such
breach has occurred;

          (f) If the Company shall, in breach of its obligations under this
Agreement, fail to nominate for election to the Board of Directions any
Stockholder Designee who satisfies the requirements for designation to the Board
of Directors set forth in Section 4.1 (i) or if the stockholders of the Company
shall fail to elect to the Board of Directors all Stockholder Designees
nominated in accordance with Section 4.1;

          (g) At any time after the expiration of six (6) years from the
Effective Date; or

          (h) Without the prior approval of the Board of Directors, any Person
or Group (other than any Stockholder or its Affiliates or any Group including
any Stockholder or its Affiliates, or any person acting in concert with any of
the foregoing) acquires (by tender or exchange offer or otherwise), offers to
acquire (other than pursuant to a proposal which is not publicly disclosed or
required to be publicly disclosed) or publicly announces the intention to
acquire (other than an offer or announcement of the intention to acquire from
any Stockholder the Voting Securities beneficially owned by such Stockholder)
directly or indirectly, Voting Securities or voting rights or direct or indirect
rights or options to acquire any Voting Securities of the Company representing
30% or more of the Voting Securities of the Company then outstanding.

     SECTION V.3    Notice of Proposed Acquisitions.  In order to enable the
Stockholders to comply with the provisions of Section 5.1, prior to the end of
the Standstill Period, without the prior written consent of Apollo (other than
as contemplated by Sections 5.1(i)(A), (B), (D), (E) or (F) hereof) none of the
Other Stockholders or their Affiliates shall acquire, offer to acquire (by
tender or exchange offer or otherwise), or agree to acquire, by purchase or
otherwise, (a) Voting Securities or voting rights or direct or indirect rights
or options to acquire any Voting Securities of the Company or any of its
Affiliates that together with all other such securities so acquired by any
Stockholder and its Affiliates since last obtaining consent pursuant to this
Section 5.3 represent an additional 1% of the Total Shares Outstanding on the
date of such purchase, offer or acquisition, or (b) if the Stockholders
collectively own or have the right to acquire 40% or more of the Total Shares
Outstanding and Apollo shall have provided written notice to the Other
Stockholders thereof, any Voting Securities or voting rights or direct or
indirect rights or options to acquire any Voting Securities of the Company or
any of its Affiliates.

                                     - 14 -
<PAGE>
 
                                  ARTICLE VI.

                                    TRANSFER

     SECTION VI.1    Transfer. Subject to the provisions of the Proxy Agreement,
the Other Stockholders may sell, transfer, assign or otherwise dispose of any of
the Shares; provided, however, that no Other Stockholder shall sell, transfer,
assign or otherwise dispose of any of the Shares unless (i) such Other
Stockholder delivers written notice to Apollo of its intent to transfer Shares
not less than five (5) business days prior to such transfer, and (ii) if such
transfer occurs other than pursuant to an Exempted Transfer (as defined below),
such transferee becomes a party to this Agreement (whereupon such transferee
shall become an "Other Stockholder" hereunder). Any purported transfer in
violation of the provisions of this Agreement (an "Unauthorized Transfer") shall
be null and void. The Company will not register, recognize or give effect to an
Unauthorized Transfer and the purported transferee of any Shares pursuant to an
Unauthorized Transfer will not thereby acquire any rights in such Shares. The
Company will, immediately upon becoming aware of an actual or attempted
Unauthorized Transfer, instruct the transfer agent for the Shares to issue an
appropriate stop transfer order with regard to such transaction or attempted
transaction.

     An "Exempted Transfer" hereunder (which shall not be subject to the
transfer conditions set forth in clause (ii) of the first sentence of the
preceding paragraph) shall mean: (a) any transfer by any Other Stockholder to
its respective equity owners, whether by way of a distribution, return of
capital, dividend or otherwise, or (b) any sale of Shares by any Other
Stockholder either (1) pursuant to a registered public offering under the
Securities Act, (2) pursuant to Rule 144 or Rule 145 promulgated under the
Securities Act or (3) pursuant to a broker to broker sale executed on any
national securities exchange or traded on the National Market System of NASDAQ.

     SECTION VI.2    Tag-Along Rights. If Apollo or any of their respective
Affiliates proposes to enter into an agreement with respect to or otherwise
enter into a bona fide sale transaction (a "Third-Party Sale") of Shares to a
third party other than an Affiliate of Apollo, Apollo shall first provide the
Company and each Other Stockholder a written notice (the "Third Party Sale
Notice") specifying (i) the nature and amount of consideration to be paid to the
Stockholders upon consummation of the Third Party Sale, (ii) the identity of the
third party purchaser, and (iii) all other material terms of such proposed Third
Party Sale, including the proposed closing date. If an Other Stockholder
delivers a written notice (a "Co-Sale Notice") to Apollo on or prior to the
fifth business day after the giving of the Third Party Sale Notice, such Other
Stockholder shall be permitted to sell, on the same terms as Apollo, a portion
of the total number of Shares sold in such Third Party Sale equal to the lesser
of (i) the amount specified by such Other Stockholder in its Co-Sale Notice and
(ii) the product of (A) such Other Stockholder's Allocation Percentage and (B)
the total number of Shares to be sold in such Third Party Sale. The "Allocation
Percentage" of each Other Stockholder at any time will be a fraction, the
numerator of which is the number of Shares owned by such Other Stockholder and
the denominator of which is the number of Shares owned by all Stockholders

                                     - 15 -
<PAGE>
 
desiring to include Shares in such Third Party Sale. The provisions of this
Section 6.2 shall not apply to any transfer to an Affiliate of Apollo or
pursuant to a public offering.

     SECTION VI.3    Drag-Along Rights. (a) Each Stockholder shall transfer all,
but not less than all Shares then owned by such Stockholder, in connection and
together with the sale of all, but not less than all of the Shares then owned by
Apollo and its Affiliates and the Other Stockholders in a bona fide transaction
(a "Drag Transaction") to any person who is not an Affiliate of Apollo (a
"Purchaser"). Prior to consummating any Drag Transaction, Apollo will deliver to
each Other Stockholder a written notice (a "Sale Notice") specifying (i) the
nature and aggregate amount of consideration (the "Sale Price") to be paid to
the Stockholders upon the consummation of the Drag Transaction, (ii) the
identity of the Purchaser, and (iii) all other material terms of such proposed
Drag Transaction, including the proposed date of the closing of the Drag
Transaction (the "Drag Transaction Closing Date"). On the Drag Transaction
Closing Date, each Stockholder shall sell to the Purchaser 100% of the Shares
then held by such Stockholder on the terms and subject to the conditions set
forth in the Sale Notice. If any Stockholder fails to deliver certificates
representing its Shares as required by this Section 6.3, such Stockholder (i)
shall not be entitled to the consideration it is to receive in the Drag
Transaction until it cures such failure (provided, that after curing such
failure it shall be so entitled to such consideration without interest), (ii)
shall for all purposes be deemed no longer to be a stockholder of the Company
and have no voting rights, (iii) shall not be entitled to any dividends or other
distributions declared after the Drag Transaction Closing Date with respect to
the Shares held by it, (iv) shall have no other rights or privileges granted to
Stockholders under this or any future agreement and (v) in the event of
liquidation of the Company, its rights with respect to any consideration it
would have received if it had complied with this Section 6.3, if any, shall be
subordinate to the rights of any equity holder. This Section 6.3 shall inure to
the benefit of, and be enforceable by, Apollo and its Related Persons. "Related
Person" means, with respect to any person, (i) any Affiliate of such person,
(ii) any investment manager, investment advisor or general partner of such
person, and (iii) any investment fund, investment account or investment entity
whose investment manager, investment advisor or general partner is such person
or a Related Person of such person.

          (b) The obligations of the Other Stockholders pursuant to this Section
6.3 are subject to the satisfaction of the following conditions:

          (i) if any Stockholder is given an option as to the form and amount of
 consideration to be received, all Stockholders will be given the same option
 (except that no Stockholder shall be required in any circumstance to accept
 consideration for its Shares in a form other than cash, cash equivalents or
 securities listed for trading on any national securities exchange or traded on
 the National Market System of NASDAQ);

          (ii  no Other Stockholder shall be obligated to make any out-of-pocket
 expenditure prior to the consummation of the Drag Transaction (excluding modest
 expenditures for its own postage, copies, etc., and the fees and expenses of
 its own counsel retained by it), and no Other Stockholder shall be obligated to
 pay more 

                                     - 16 -
<PAGE>
 
 than its or his pro rata share (based upon the amount of consideration received
 for or with respect to its or his Shares) of reasonable expenses incurred in
 connection with such Drag Transaction to the extent such costs are incurred for
 the benefit of all Stockholders and are not otherwise paid by the Company or
 the acquiring party (including the costs of one counsel chosen by Apollo on
 behalf of the Stockholders and one counsel chosen by the holders of a majority
 of the Shares held by the Other Stockholders) (costs incurred by or on behalf
 of an Other Stockholder for its or his sole benefit will not be considered
 costs of the transaction hereunder); provided, however, that any Other
 Stockholder's liability for its or his pro rata share of such allocated
 expenses shall be capped at the total purchase price received by such Other
 Stockholder for its or his Shares; and

         (ii) (A) in the event that the Stockholders are required to provide any
 representations or warranties in connection with the Drag Transaction, each
 Other Stockholder shall only be required to represent and warrant as to its or
 his title to its or his Shares, and such Other Stockholder's authority, power,
 and right to enter into and consummate such other purchase agreement without
 violating any other agreement or legal requirement, and (B) in the event that
 the Other Stockholders are required to provide any indemnities in connection
 with the Drag Transaction, then each Other Stockholder shall not be liable for
 more than his pro rata share (based upon the amount of consideration received
 for or with respect to its or his Shares) of any liability for indemnity and
 such liability shall not exceed the total purchase price received by such Other
 Stockholder for its or his Shares.

     SECTION VI.4    Regulatory Compliance Cooperation.

     (a) If a Regulated Holder (as defined below) determines that it has a
Regulatory Problem, the Company and the other Stockholders will (i) take all
such actions to avoid or cure such Regulatory Problem as are reasonably
requested by such Regulated Holder in order (A) to effectuate and facilitate a
Transfer by such Regulated Holder of any securities of the Company then held by
such Regulated Holder to any Person designated by such Regulated Holder, (B) to
permit such Regulated Holder (or any Affiliate of such Regulated Holder) to
exchange all or any portion of the Voting Securities of the Company then held by
such Person on a share-for-share basis for shares of a class of nonvoting
Securities of the Company, which nonvoting Securities shall be identical in all
respects to such Voting Securities, except that such nonvoting Securities shall
be nonvoting and shall be convertible into Voting Securities of the Company on
such terms as are requested by such Regulated Holder in light of regulatory
considerations then prevailing, and (C) to preserve and continue the respective
allocation of the voting interests and powers with respect to the Company
arising out of such Regulated Holder's ownership of Voting Securities of the
Company and as provided in this Agreement before the transfers and amendments
referred to above (including entering into such additional agreements as are
reasonably requested by such Regulated Holder to permit a Person designated by
such Regulated Holder to exercise voting power relinquished by such Regulated
Holder upon any exchange of Voting Securities of the Company for nonvoting
securities of the Company), and 

                                     - 17 -
<PAGE>
 
(ii) enter into such additional agreements, adopt such amendments to this
Agreement, the Charter Documents of the Company and other relevant agreements
and take such additional actions, in each case as are reasonably requested by
such Regulated Holder, in order to effectuate the purpose and intent of the
foregoing.

     (b) If a Regulated Holder elects to transfer securities of the Company to
another Regulated Holder in order to avoid or cure a Regulatory Problem, the
Company and the other Stockholders shall enter into such agreements with such
other Regulated Holder and its Affiliates as it may reasonably request in order
to assist such other Regulated Holder and its Affiliates in complying with all
Applicable Laws. Such agreements may include restrictions on the conversion,
redemption, repurchase or retirement of securities of the Company that would
result or be reasonably expected to result in such Regulated Holder or its
Affiliates holding more Voting Securities or total equity interests in the
Company than it is permitted to hold under such Applicable Laws.

     (c) If a Regulated Holder has the right or opportunity to acquire any of
the Company's or its Subsidiaries' securities (as the result of a preemptive
offer, pro-rata offer or otherwise), at such Regulated Holder's request the
Company will offer to sell (or if the Company is not the seller, to cooperate
with the seller and such Regulated Holder to permit such seller to sell) such
non-voting Securities on the same terms as would have existed had such Regulated
Holder acquired the securities so offered and immediately requested their
exchange for non-voting securities pursuant to Section 6.4(a).

     (d) Each Stockholder agrees to cooperate with the Company in complying with
this Section 6.4, including voting to approve amending the Charter Documents or
this Agreement in a manner reasonably requested by the Regulated Holder
requesting such amendment.

     (e) The Company and each Stockholder agree not to amend or waive the voting
or other provisions of the Company's certificate or articles of incorporation or
by-laws, or other constitutive and governing instruments and documents, or this
Agreement if in any such case such amendment or waiver would cause any Regulated
Holder to have a Regulatory Problem and such Regulated Holder has so notified
the Company that it would have a Regulatory Problem promptly after it has notice
of such proposed amendment or wavier.

     (f) In this Agreement, the following capitalized terms have the meanings
given to them below:

     "Regulated Holder" means any holder of the Company's securities that is (or
that is a subsidiary of a bank holding company that is) subject to the various
provisions of Regulation Y of the Board of Governors of the Federal Reserve
Systems. 12 C.F.R., Part 225 (or any successor to Regulation Y).

     "Regulatory Problem" means (i) any set of facts or circumstances wherein it
has been asserted by any governmental regulatory agency (or a Regulated Holder
believes that there is a 

                                     - 18 -
<PAGE>
 
significant risk of such assertion) that such Person (or any bank holding
company that controls such Person) is not entitled to hold, or exercise any
material right with respect to, all or any portion of the securities of the
Company which such Person holds or (ii) when such Person and its Affiliates
would own, control or have power (including voting rights) over a greater
quantity of securities of the Company than is permitted under any law or
regulation or any requirement of any governmental authority applicable to such
Person or to which such Person is subject.

     SECTION VI.5    Legend.  Each certificate issued to represent any Shares
shall bear the following (or a substantially equivalent) legend.

     The transfer of these securities is subject to restrictions set forth in a
 Stockholders Agreement, dated as of November 4, 1997, a copy of which is
 available for inspection at the office of the Corporation.

     Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon the
completion of a public distribution of securities of the Company represented
thereby) shall also bear such legend, unless the restrictions contained in this
Agreement are no longer in effect


                                  ARTICLE VII

                                 MISCELLANEOUS

     SECTION VII.1   Amendment and Modification. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
the party against whom the enforcement of such waiver is sought. This Agreement
may not be amended, modified or supplemented other than by a written instrument
signed by (a) the Company (in accordance with the approval of two-thirds of the
entire Board of Directors, including a majority of the directors who are not an
Affiliate or an Associate of any Stockholder), and (b) the holders of a majority
of the Shares held by the Stockholders; provided, however, that so long as
Apollo beneficially owns at least 25% of the Shares held by Apollo on the
Effective Date, without the consent of Apollo, no amendment or modification
which adversely affects the rights or duties of Apollo hereunder may be
effected, and provided, further, that no amendment or modification that would
have a material adverse effect on the rights or obligations of any Other
Stockholder without similarly and proportionately (based on the respective
number of Shares then owned by the Other Stockholders hereunder) affecting the
rights and obligations of all Other Stockholders hereunder, or that would
otherwise unfairly discriminate against any Other Stockholder shall be effective
as to such Other Stockholder unless such Other Stockholder shall have consented
in writing thereto. No course of dealing between or among any Persons having any
interest in this Agreement will be deemed effective to modify, amend or
discharge any part of this Agreement or any rights or obligations of any Person
under or by reason of this Agreement.

                                     - 19 -
<PAGE>
 
     SECTION VII.2    Successors and Assigns: Entire Agreement.

     (a) This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns and executors, administrators and heirs; provided, that except as
otherwise specifically permitted pursuant to this Agreement, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by the Company without the prior written consent of each of the
Stockholders.

     (b) This Agreement sets forth the entire agreement and understanding
between the parties as to the subject matter hereof and merges and supersedes
all prior discussions, agreements and understandings of any and every nature
among them.

     SECTION VII.3    Separability. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.

     SECTION VII.4    Notices. All notices, demands, requests, consents or
approvals (collectively, "Notices") required or permitted to be given hereunder
or which are given with respect to this Agreement shall be in writing and shall
be personally delivered or delivered by a reputable overnight courier service
with charges prepaid, or transmitted by hand delivery, telegram, telex or
facsimile, addressed as set forth below, or such other address as such party
shall have specified most recently by written notice. Notice shall be deemed
given or delivered on the date of service or transmission if personally served
or transmitted by telegram, telex or facsimile. Notice otherwise sent as
provided herein shall be deemed given or delivered on the next business day
following delivery of such notice to a reputable overnight courier service.

     To the Company:
 
          Mariner Post-Acute Network, Inc.
          One Ravinia Drive, Suite 1500
          Atlanta, Georgia 30346
          Attention:  Chief Executive Officer
          Fax: (770) 698-8199

                                     - 20 -
<PAGE>
 
     with a copy (which shall not constitute notice) to:

     To Apollo:
 
          c/o Apollo Advisors II, L.P.
          2 Manhattanville Road
          Purchase, New York 10577
          Attention:  Tony Tortorelli
          Fax:  (914) 694-8032

                                     - 21 -
<PAGE>
 
     with a copy (which shall not constitute notice) to:

          Sidley & Austin
          555 West Fifth Street
          Suite 4000
          Los Angeles, California 90013
          Attention: Robert W. Kadlec, Esq.
          Fax: (213) 896-6600

     To the Other Stockholders:

          To the address specified on the signature page executed by such Other
Stockholder.

     SECTION VII.5    Governing Law. This Agreement shall be governed by and
construed in accordance with the internal law of the State of Delaware without
giving effect to principles of conflicts of law.

     SECTION VII.6    Headings. The headings in this Agreement are for 
convenience of reference only and shall not constitute a part of this Agreement,
nor shall they affect their meaning, construction or effect.

     SECTION VII.7    Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original instrument and
all of which together shall constitute one and the same instrument

     SECTION VII.8    Further Assurances. Each party shall cooperate and take 
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.

     SECTION VII.9   Termination. Unless sooner terminated in accordance with 
its terms or as otherwise herein provided, this Agreement shall terminate upon
the earlier to occur of (i) the mutual agreement by the parties hereto, (ii)
with respect to any Stockholder, such Stockholder ceasing to own any Shares or
(iii) the tenth anniversary of the Effective Date.

     SECTION VII.10   Remedies. In the event of a breach or a threatened 
breach by any party to this Agreement of its obligations under this Agreement,
any party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall be
specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.

                                     - 22 -
<PAGE>
 
     SECTION VII.11   Pronouns. Whenever the context may require, any pronouns
used herein shall be deemed also to include the corresponding neuter, masculine
or feminine forms.

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

                                    MARINER POST-ACUTE NETWORK, INC.



                                    By:     /s/ Keith B. Pitts
                                       ----------------------------------
                                         Name:  Keith B. Pitts
                                         Title: President and Chief
                                                Executive Officer

                                     - 23 -
<PAGE>
 
                                    APOLLO

                         APOLLO INVESTMENT FUND III, L.P.

                         By:        Apollo Advisors II, L.P.
                                         Its General Partner

                         By:        Apollo Capital Management II, Inc.
                                         Its General Partner


                         By:        /s/ Peter P. Copses
                              ---------------------------------------
                                    Name:   Peter P. Copses
                                    Title:  Vice President

                         13,100,370 Shares of Common Stock


                         APOLLO UK PARTNERS III, L.P.

                         By:  Apollo Advisors II, L.P.
                              Its General Partner

                         By:  Apollo Capital Management II, Inc.
                              Its General Partner


                         By:        /s/ Peter P. Copses
                              ----------------------------------------
                                    Name:   Peter P. Copses
                                    Title:  Vice President

                         484,188 Shares of Common Stock

                                     - 24 -
<PAGE>
 
                         APOLLO OVERSEAS PARTNERS III, L.P.

                         By:        Apollo Advisors II, L.P.
                                    Its General Partner

                         By:        Apollo Capital Management II, Inc.
                                    Its General Partner



                         By:      /s/ Peter P. Copses
                                ------------------------------------------
                                    Name:   Peter P. Copses
                                    Title:  Vice President

                         783,033 Shares of Common Stock

                                     - 25 -
<PAGE>
 
                               OTHER STOCKHOLDERS


                         CHASE EQUITY ASSOCIATES, L.P.

                         By:        Chase Capital Partners
                                         Its General Partner



                         By:    /s/ Brian J. Richmand
                              -------------------------------------
                                    Name:   Brian J. Richmand
                                    Title:  General Partner

                         2,000,001 Shares of Common Stock

                         Address for Notice:
                         380 Madison Avenue
                         12th Floor
                         New York, New York 10017
                         Attention: Christopher C. Behrens
                         Telecopy No.: (212) 622-3101

                         with a copy to:

                         O'Sullivan Graev & Karabell, LLP
                         30 Rockefeller Plaza
                         New York, New York 10112
                         Attention:  Michael F. Killea, Esq.
                         Telecopy No.: (212) 408-2420

                                     - 26 -
<PAGE>
 
                         HEALTHCARE EQUITY PARTNERS, L.P.

                         By:        Beecken, Petty & Company, L.L.C. Its 
                                    General Partner



                         By:      /s/ Gregory A. Moerschel
                                ---------------------------------------
                                      Name:   Gregory A. Moerschel
                                      Title:  Managing Director

                         182,592 Shares of Common Stock


                         Address for Notice:
                         c/o Beecken, Petty & Company, L.L.C.
                         901 Warrenville Road, Suite 205
                         Lisle, Illinois 60532
                         Attention:  David K. Beecken
                         Telecopy No.: (630) 435-0370


                         HEALTHCARE EQUITY QP PARTNERS, L.P.

                         By:        Beecken, Petty & Company, L.L.C. Its 
                                    General Partner


                         By:    /s/ Gregory S. Moerschel
                               ----------------------------------------------
                                    Name:   Gregory S. Moerschel
                                    Title:  Managing Director

                         558,150 Shares of Common Stock

                         Address for Notice:

                         c/o Beecken, Petty & Company, L.L.C.
                         901 Warrenville Road, Suite 205
                         Lisle, Illinois 60532
                         Attention:  David K. Beecken
                         Telecopy No.: (630) 435-0370

                                     - 27 -
<PAGE>
 
                         KEY CAPITAL CORPORATION



                         By:      /s/ Stephen R. Haynes
                                -----------------------------------
                                      Stephen R. Haynes
                                      Vice President

                         277,779 Shares of Common Stock

                         Address for Notice:
                         127 Public Square, 6th Floor
                         Cleveland, OH 44114
                         Attention: Stephen R. Haynes
                         Telecopy No.: (216) 689-3204

                         KEY EQUITY PARTNERS 97



                         By:    /s/ Stephen R. Haynes
                            ----------------------------------
                                    Stephen R. Haynes
                                    Its:  General Partner

                         92,592  Shares of Common Stock

                         Address for Notice:
                         127 Public Square, 6th Floor
                         Cleveland, OH 44114
                         Attention: Stephen R. Haynes
                         Telecopy No.: (216) 689-3204

                                     - 28 -
<PAGE>
 
                         DRAX HOLDINGS L.P.

                         By:        Inman Corporation
                                    Its General Partner



                         By:    /s/ Linda Hamilton
                               ----------------------------------------
                                    Name:   Linda Ann Hamilton
                                    Title:

                         75,000 Shares of Common Stock

                         Address for Notice:
                         c/o The Drax Group
                         8889 Pelican Bay Blvd., Suite 403
                         Naples, FL 34108
                         Attention:  Linda Hamilton
                         Telecopy No.: (941) 262-0467



                         WALNUT GROWTH PARTNERS LIMITED PARTNERSHIP

                         By:        Walnut GP, L.L.C
                                    Its General Partner

                         By:        Walnut Funds, Inc.
                                    A Member

                         By:    /s/ Joel Kanter
                              ------------------------------------------
                                    Name:   Joel Kanter
                                    Title:

                         74,073 Shares of Common Stock


                         Address for Notice:
                         Suite 700
                         1227 25th Street, N.W.
                         Washington, D.C. 20037
                         Attention: Michael Faber
                         Telecopy No.: (202) 296-2882

                                     - 29 -
<PAGE>
 
                                  SCHEDULE 4.1


Stockholder Designees
---------------------

Laurence M. Berg*+
Peter P. Copses*+
John H. Kissick*
Robert L. Rosen


GranCare Nominees
-----------------

Gene E. Burleson
Joel S. Kanter
William G. Petty, Jr.


LCA Nominees
------------

Donald C. Beaver

Chief Executive Officer
-----------------------

Keith B. Pitts+

____________________________
*  Apollo Director
+  Nominating Committee

                                     - 30 -