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                                                                   EXHIBIT 10.36

                            SUBORDINATION AGREEMENT

     This SUBORDINATION AGREEMENT dated as of October 31, 1997 (this
"Agreement") by and among (i) the corporations listed on the signature pages
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hereto as "DEBTORS" (together with their respective successors and assigns,
collectively,"Debtors"); (ii) HEALTH AND RETIREMENT PROPERTIES TRUST, a real
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estate investment trust formed under the laws of the State of Maryland (together
with its successors and assigns, "HRP" or "Senior Creditor"), and (iii) the
                                  ---      ---------------  
corporations listed on the signature pages hereto as "SUBORDINATED CREDITORS"
(together with their respective successors and assigns, collectively, the
"Subordinated Creditors").
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                             W I T N E S S E T H:
                             - - - - - - - - - -  

     NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, each Subordinated Creditor and each Debtor agrees with
Senior Creditor that, until the Senior Obligations (as hereinafter defined) are
paid in full as herein provided, each such party to this Agreement will comply
with such of the following provisions as are applicable to it:

1.   Certain Definitions.
     -------------------

     1.1  Senior Obligations. The term "Senior Obligations" shall mean (a) each
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and every obligation and liability, now existing or hereafter arising, of
Debtors, or any of them, to Senior Creditor under any agreement, note, lease,
master lease, mortgage, security agreement, pledge agreement, assignment,
guaranty or other agreement or instrument now or hereafter executed by, on the
one hand, Senior Creditor, and, on the other, any Debtor, and any agreement,
note, mortgage, security agreement, pledge agreement, assignment, guaranty or
other agreement or instrument hereafter executed 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 (collectively,
the "Senior Documents"), in each case as and when the same shall become due and
     ---------------- 
payable, whether at maturity, by acceleration or otherwise, according to the
terms thereof, and the due and punctual performance and observance of all such
payments and other obligations (including, without limitation, all fees,
expenses and other amounts owing to Senior Creditor under the Senior Documents,
whether now owing or hereafter incurred, in each case regardless of the extent
to which such amounts are allowed as claims against any Debtor in any
Reorganization, as such term is defined below (including any interest thereon
accruing after the commencement of any Reorganization and any other interest
that would have accrued thereon but for the commencement of such
Reorganization)).

     1.2  Subordinated Obligations. The term "Subordinated Obligations" shall
          ------------------------            ------------------------
mean any and all obligations and liabilities, direct or contingent, now existing
or hereafter arising, of any Debtor to any Subordinated Creditor; provided that
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Subordinated Obligations shall not include obligations of any Debtor to any
Subordinated Creditor for the payment of goods and services (excluding
management services) provided to the Debtor by the Subordinated Creditor in the
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ordinary course of business and upon terms no less favorable to the Debtor than
would have been the case if such goods and services had been provided to the
Debtor by a non-affiliate.

     1.3  Other Definitions.  As used herein:
          -----------------

          (1)  the term "Default" shall mean (i) any event or condition which
                         -------
     relates to the payment of money and which constitutes or which with the
     giving of notice or the passage of time or both would constitute an Event
     of Default under, and as defined in, any Senior Document and (ii) any Event
     of Default, as defined in any Senior Document; and

          (2)  the term "Subordinated Agreements" shall mean, collectively, any
                         ----------------------- 
     agreement or instrument executed in connection with, relating to or
     evidencing any Subordinated Obligations.

     1.4  Other capitalized terms used and not defined herein shall have the
meanings assigned to them in the Master Lease Document dated as of December 28,
1990, as amended (hereinafter, as the same may be amended, modified or
supplemented from time to time, the "AMS Properties Master Lease"), among Senior
                                     ---------------------------
Creditor, as Landlord, and AMS Properties, Inc., as tenant, and the Master Lease
Document dated as of June 30, 1992, as amended (hereinafter, as the same may be
amended, modified or supplemented from time to time, the "GCIHCC Master Lease"),
                                                          -------------------  
among Senior Creditor, as Landlord, and GCI Health Care Centers, Inc., as
tenant.

2.   Subordination. The payment of any and all Subordinated Obligations shall at
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all times be junior and subordinate and subject in right of payment and exercise
of remedies to the prior payment in full of all Senior Obligations to the extent
and in the manner herein provided.

3.   Prohibited Payments; No Breach. No Debtor shall make, and no Subordinated
     ------------------------------     
Creditor shall demand, accept or receive, any direct or indirect payment (in
cash, property, by setoff or otherwise) of or on account of any Subordinated
Obligations, and no such payment shall be due, unless and until all Senior
Obligations shall have been paid in full as herein provided; provided, however,
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that so long as no Default shall have occurred and be continuing or would occur
after giving effect to such payment, any Debtor may make, and any Subordinated
Creditor may accept, a payment in respect of any Subordinated Obligation under
any Subordinated Agreement. Any Debtor's failure to pay any amount in respect of
any Subordinated Obligations under any Subordinated Agreement by reason of the
operation of this Agreement shall not constitute a breach of or default with
respect to such Subordinated Agreement on the part of such Debtor.

4.   No Transfer. Each Subordinated Creditor agrees that it will not assign,
     -----------
transfer or otherwise dispose of any of the Subordinated Obligations except to a
person who agrees in advance, in a writing delivered to Senior Creditor, to
become a party to this Agreement, and subject in any case to the prior written
consent of Senior Creditor.

5.   Insolvency, etc.
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     5.1  In the event of (i) any insolvency or bankruptcy proceeding, or any
receivership, liquidation, reorganization or other similar proceeding in
connection therewith, relative to any Debtor or its property, or (ii) any
proceedings for voluntary liquidation, dissolution or other winding-up of any
Debtor and whether or not involving insolvency or bankruptcy, or (iii) any
assignment or receivership for the benefit of creditors, or (iv) any
distribution, division, marshaling or application of any of the properties or
assets (including, without limitation,  properties or assets securing the
Subordinated Obligations) of any Debtor or the proceeds thereof, to creditors,
voluntary or involuntary, and whether or not involving legal proceedings (a
"Reorganization"), then and in any such event all Senior Obligations shall first
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be indefeasibly paid in full as herein provided before any payment or
distribution of any character, whether in cash, securities or other property,
shall be made in respect of the Subordinated Obligations, and in furtherance
thereof,

          (1)  any payment or distribution of any character, whether in cash,
               securities or other property, which would otherwise (but for the
               terms hereof) be payable or deliverable by Debtors in respect of
               the Subordinated Obligations (including any payment or
               distribution in respect of the Subordinated Obligations by reason
               of any other indebtedness of Debtors being subordinated to the
               Subordinated Obligations or by reason of any properties or assets
               of Debtors securing the Subordinated Obligations), shall be paid
               or delivered directly to Senior Creditor, until all Senior
               Obligations shall have been paid in full as herein provided;

          (2)  each Subordinated Creditor irrevocably authorizes and empowers
               (without imposing any obligation on) Senior Creditor and Senior
               Creditor's representatives to demand, sue for, collect and
               receive such payments and distributions in respect of the such
               Subordinated Obligations and to receipt therefor, and to file and
               prove all claims therefor and take all such other action
               (including the right to vote the Subordinated Obligations) in the
               name of Subordinated Creditor or otherwise, as Senior Creditor or
               Senior Creditor's representatives may determine to be necessary
               or appropriate; and

          (3)  each Subordinated Creditor irrevocably authorizes, empowers and
               directs all receivers, trustees, liquidators, conservators and
               others having authority in the premises to effect all such
               payments and deliveries and agrees to execute and deliver to
               Senior Creditor and Senior Creditor's representatives all such
               further instruments confirming the above authorization, and all
               such powers of attorney, proofs of claim, as signments of claim
               and other instruments, and shall take all such other action as
               may be requested by Senior Creditor or Senior Creditor's
               representatives, in order to enable Senior Creditor to enforce
               all claims upon or in respect of the Subordinated Obligations.
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     5.2  Unless and until all Senior Obligations shall have been indefeasibly
paid in full as herein provided, no Subordinated Creditor will commence any
proceeding against any Debtor, or join with any creditor in any such proceeding,
under any bankruptcy, reorganization, readjustment of debt, arrangement of debt,
receivership, liquidation or insolvency law or statute of the federal or any
state government, unless the holders of the Senior Obligations shall also join
in bringing such proceeding.

6.   Payments and Distributions Received.  If any payment or distribution of any
     -----------------------------------     
character (whether in cash, securities or other property) or any security shall
be received by any Subordinated Creditor in contravention of any of the terms
hereof and before all Senior Obligations shall have been indefeasibly paid in
full as herein provided, such payment or distribution or security shall be held
in trust for the benefit of, and shall be paid over or delivered and transferred
to, Senior Creditor (or Senior Creditor's representatives) for application to
the payment of all Senior Obligations remaining unpaid, to the extent necessary
to pay all such Senior Obligations in full as herein provided.  In the event of
the failure of any Subordinated Creditor to endorse or assign any such payment,
distribution or security on demand, Senior Creditor and Senior Creditor's
representatives shall be irrevocably authorized to endorse or assign the same.

7.   Rights of Subrogation, etc. No Subordinated Creditor shall exercise any
     --------------------------
right of subrogation which it may have with respect to the Senior Obligations
until the Senior Obligations shall have been indefeasibly paid in full following
the termination of the Senior Documents.

8.   Security.  So long as any of the Senior Obligations shall not have been
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indefeasibly paid in full following the termination of the Senior Documents, the
Debtors shall not give and the holders of the Subordinated Obligations shall not
demand, accept or receive, any security, direct or indirect, for any
Subordinated Obligations.

9.   Subordination Not Affected, etc. The terms hereof, the subordination
     -------------------------------     
effected hereby, and the rights of Senior Creditor shall not be affected by (a)
any amendment of or addition or supplement to any Senior Obligations, or any
Senior Document, or any other instrument or agreement relating thereto; (b) any
exercise or nonexercise of any right, power or remedy under or in respect of any
Senior Obligations or any Senior Document, or any other instrument or agreement
relating thereto; (c) any sale, exchange, release or other transaction affecting
all or any part of any property at any time pledged or mortgaged to secure, or
however securing, any Senior Obligations; or (d) any waiver, consent, release,
indulgence, extension, renewal, modification, delay or other action, inaction or
omission, in respect of any Senior Obligations, or any other Senior Document, or
any instrument or agreement relating thereto; whether or not Subordinated
Creditor shall have had notice or knowledge of any of the foregoing.

1.   Payment in Full. For all purposes hereof, the Senior Obligations shall not
     ---------------
be deemed to have been paid in full unless Senior Creditor (or its duly
authorized representative) shall have received cash equal to the amount of
Senior Obligations at the time outstanding.
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10.  Limit on Right of Action.  Each Subordinated Creditor, for itself and its
     ------------------------
successors and assigns, agrees for the benefit of Senior Creditor, that until
all Senior Obligations shall have been paid in full after the termination of the
Senior Documents, each Subordinated Creditor agrees it will not accelerate the
maturity date of the Subordinated Obligations or commence any action, suit or
other legal or equitable proceeding or otherwise seek to enforce its rights,
powers or remedies as such holder with respect to the payment of any
Subordinated Obligations, the performance of any obligations with respect
thereto or the collection thereof, whether under any Subordinated Agreement,
under applicable law or against any collateral.

11.  Further Assurances. Each Debtor and each Subordinated Creditor, for itself
     ------------------
and its successors and assigns as holders of the Subordinated Obligations,
covenants to execute and deliver to Senior Creditor such further instruments and
documents and take such further actions as Senior Creditor may from time to time
request for the purpose of carrying out the provisions and intent of this
Agreement.

12.  Requirement of Notice.  Each Subordinated Creditor agrees to notify Senior
     ---------------------     
Creditor immediately upon the occurrence of any default or event of default in
respect of the Subordinated Obligations or under any Subordinated Agreement or
any event which, upon notice or lapse of time or both, would constitute such a
default.

13.  Notices. Any notice, request, demand, statement or consent ("Notice")
     -------                                                      ------
desired or required to be given hereunder shall be in writing and shall be
delivered by hand, sent by certified mail, return receipt requested, or sent by
a nationally recognized commercial overnight delivery service with provisions
for a receipt, postage or delivery charges prepaid, and shall be deemed given
when actually delivered, if delivered by hand, (b) upon receipt, if sent by
certified mail, or (c) the next Business Day after being placed in the
possession of an overnight delivery service, if sent by an overnight delivery
service, and shall be addressed as follows:

     if to any Debtor:

          c/o Paragon Health Network, Inc.
          One Ravinia Drive
          Atlanta, GA
          Attention: General Counsel

     if to Senior Creditor:

          Health and Retirement Properties Trust
          400 Centre Street
          Newton, MA  02158
          Attn:  President
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                                      -6-

     if to any Subordinated Creditor:

          c/o Paragon Health Network, Inc.
          One Ravinia Drive
          Atlanta, GA
          Attention: General Counsel

or to such other address as any party hereto may from time to time hereafter
designate to the others in writing.

14.  Successors; Continuing Effect, etc. This Agreement is being entered into
     ----------------------------------     
for the benefit of Senior Creditor and its respective successors and assigns.
This Agreement shall be a continuing agreement and shall be irrevocable and
shall remain in full force and effect so long as there are both Senior
Obligations and Subordinated Obligations outstanding. The liability of each
Subordinated Creditor hereunder shall be reinstated and revived, and the rights
of Senior Creditor shall continue, with respect to any amount at any time paid
on account of the Senior Obligations which shall thereafter be required to be
restored or returned by Senior Creditor in any Reorganization, all as though
such amount had not been paid. Senior Creditor will have relied and will
continue to rely upon the subordination provided for herein, and each
Subordinated Creditor and, by its acceptance hereof, each Debtor hereby waives
notice and proof of such reliance.

15.  Entire Agreement, Amendment. This Agreement constitutes the entire
     ---------------------------
agreement of the parties and no modification or waiver of any provision of this
Agreement shall in any event be effective unless the same shall be in writing
signed by Senior Creditor and the Subordinated Creditor affected thereby.

16.  Severability.  Any provision of this Agreement 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 in that jurisdiction or affecting the validity or
enforceability of such provision in any other jurisdiction.

17.  Miscellaneous. The headings in this Agreement are for convenience of
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reference only and shall not alter or otherwise affect the meaning hereof. In
the event of any conflict between the provisions of this Agreement and the
provisions of any of the Senior Documents, or any of the Subordinated
Agreements, the provisions of this Agreement shall control. Each Debtor and each
Subordinated Creditor, jointly and severally, shall reimburse Senior Creditor
upon demand for all reasonable costs and expenses (including reasonable
attorney's fees and disbursements) paid or incurred by Senior Creditor in
connection with any enforcement of this Agreement in favor of Senior Creditor.

18.  Counterparts. This Agreement may be executed in any number of counterparts,
     ------------
all of which taken together shall constitute one and the same instrument and any
parties hereto may execute this Agreement by signing any such counterpart.
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19.  GOVERNING LAW.
     -------------

     EXCEPT AS TO MATTERS REGARDING THE INTERNAL AFFAIRS OF SENIOR CREDITOR AND
ISSUES OF OR LIMITATIONS ON ANY PERSONAL LIABILITY OF THE SHAREHOLDERS AND
TRUSTEES OF SENIOR CREDITOR FOR OBLIGATIONS OF SENIOR CREDITOR, AS TO WHICH THE
LAWS OF THE STATE OF MARYLAND SHALL GOVERN, THIS AGREEMENT AND ANY OTHER
INSTRUMENTS EXECUTED AND DELIVERED TO EVIDENCE, COMPLETE, OR PERFECT THE
TRANSACTIONS CONTEMPLATED HEREBY WILL BE INTERPRETED, CONSTRUED, APPLIED AND
ENFORCED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE LAWS GOVERNING CONFLICTS OF
LAWS) OF THE COMMONWEALTH OF MASSACHUSETTS.

20.  NON-LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST ESTABLISHING SENIOR
     -------------------------
CREDITOR, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS
THERETO (THE "DECLARATION"), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND
RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION
COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR CREDITOR SHALL BE
HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR
CLAIM AGAINST, SENIOR CREDITOR. ALL PERSONS DEALING WITH SENIOR CREDITOR, IN ANY
WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR CREDITOR FOR THE PAYMENT OF ANY SUM
OR THE PERFORMANCE OF ANY OBLIGATION.


                          [Intentionally left blank.]
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                                      -8-

     IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be
executed under seal by its duly authorized representative as of the day and year
first above written.

                         SENIOR CREDITOR:

                         HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real
                         estate investment trust


                         By: /s/ David J. Hegarty
                            --------------------------    
                           Name:  David J. Hegarty
                           Title: President

                         SUBORDINATED CREDITORS:

                         PARAGON HEALTH NETWORK, INC., a Delaware corporation


                         By:____________________________
                           Name:
                           Title:

                         GRANCARE, INC., a Delaware corporation AMERICAN
                         PHARMACEUTICAL SERVICES, INC., a Delaware corporation
                         AMERICAN REHABILITY MANAGEMENT, INC., a Tennessee
                         corporation
                         AMERICAN REHABILITY SERVICES, INC., a Utah corporation
                         AMERICAN SENIOR HEALTH SERVICES, INC., a Delaware
                         corporation
                         APS HOLDING COMPANY, INC., a Nevada corporation
                         APS PHARMACY MANAGEMENT, INC., a Delaware  corporation
                         HOSPICE ASSOCIATES OF AMERICA, INC., a Delaware
                         corporation
                         HOSPICE MANAGEMENT PARTNERS, INC., a Delaware
                         corporation
                         THERAPY MANAGEMENT INNOVATIONS, INC., a Nevada
                         corporation


                         By:  /s/ Boyd P. Gentry
                            ----------------------------    
                           Name:  Boyd P. Gentry
                           Title: Vice President
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                                      -9-

                         DEBTORS:

                         AMS PROPERTIES, INC., a Delaware corporation
                         GCI HEALTH CARE CENTERS, INC., a Delaware corporation


                         By:  /s/ M. Henry Day, Jr.
                            -----------------------------    
                           Name:  M. Henry Day, Jr.
                           Title: Assistant Secretary






                   Signature page to Subordination Agreement
                         dated as of October 31, 1997.