Document:

<PAGE>

                                                                    EXHIBIT 10.2

                                 AMENDMENT NO. 2

     AMENDMENT No.2 (this "Amendment") dated as of March 22, 2002, under the
$300,000,000 Credit Agreement dated as of April 20, 2001 (as heretofore amended,
the "Credit Agreement") among KINDRED HEALTHCARE OPERATING, INC. (formerly named
Vencor Operating, Inc.) (the "Borrower"), KINDRED HEALTHCARE, INC. (formerly
named Vencor, Inc.) ("Kindred"), the LENDERS party thereto and JPMORGAN CHASE
BANK (formerly The Chase Manhattan Bank, successor-by-merger to Morgan Guaranty
Trust Company of New York), as Administrative Agent and Collateral Agent.

                              W I T N E S S E T H:

     WHEREAS, the parties hereto desire to amend certain provisions of the
Credit Agreement and to waive certain provisions of the Intercreditor Agreement,
in each case, as provided herein;

     NOW, THEREFORE, the parties hereto agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreement has the
meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.

     Section 2. Defined Terms. The definition of "Free Cash Flow" in Section
1.01 of the Credit Agreement is amended by deleting clause (iii) thereof and
renumbering clauses (iv), (v) and (vi) thereof as clauses (iii), (iv) and (v),
respectively.

     Section 3. Acknowledgment. Each of the Lenders (i) acknowledges that the
Borrower has requested the lenders under the Exit Facility to increase the
aggregate commitments thereunder to $120,000,000, (ii) consents to such increase
in commitments, (iii) agrees that, upon such increase becoming effective, the
definition of "Exit Facility" in Section 1.01 of the Credit Agreement shall be
read to give effect to such increase in commitments and (iv) waives the
provisions of

<PAGE>

Section 5.02 of the Intercreditor Agreement to the extent that such provisions
would not permit such increase in commitments.

     Section 4. Prepayment of Loans. The language prior to clause (i) of Section
2.06(b) of the Credit Agreement is amended to read as follows:

          "If on any date (an "Equity Receipt Date") on or after the Closing
          Date Vencor receives any Net Cash Proceeds from any Equity Issuance,
          Vencor shall promptly provide notice thereof to the Administrative
          Agent, which notice shall specify the amount of the Net Cash Proceeds
          received with respect thereto, whether all or any portion of such Net
          Cash Proceeds will be transferred to the Issuer for application by the
          Issuer to prepay loans hereunder (the amount, if any, specified for
          such purpose, the "Senior Secured Prepayment Amount"), the positive
          amount, if any, equal to (x) 75% of such Net Cash Proceeds less (y)
          the Senior Secured Prepayment Amount (the "Designated Equity
          Proceeds") and the date on which such Net Cash Proceeds were received.
          If any such notice shall specify a Senior Secured Prepayment Amount,
          then within three Business Days after the date of such notice, Vencor
          shall transfer to the Issuer as an equity contribution such Senior
          Secured Prepayment Amount and, unless such prepayment is not permitted
          by the Exit Facility, the Issuer shall immediately prepay an aggregate
          principal amount of Loans equal to the amount so transferred. The
          Designated Equity Proceeds, if any, with respect to such Equity
          Issuance shall be applied as follows:"

     Section 5. Information. Section 5.01(o) of the Credit Agreement is amended
by replacing the reference to "promptly upon" with a reference to "within 15
Business Days of".

     Section 6. Guarantees by Future Restricted Subsidiaries. Section 5.08 of
the Credit Agreement is amended by replacing the reference to "five" with a
reference to "15".

     Section 7. Future Assets to Be Added to Collateral. (a) Sections 5.09(a)
and 5.09(d) of the Credit Agreement are each amended by replacing the reference
to "5" with a reference to "15".

     (b) Section 5.09(b) of the Credit Agreement is amended by replacing the
reference to "two" with a reference to "five" and replacing the reference to
"30" with a reference to "45".

                                        2

<PAGE>

     Section 8. Fixed Charge Coverage Ratio (EBITDAR). Section 6.01(a) of the
Credit Agreement is amended and restated in its entirety to read as follows:

          "At each Quarterly Measurement Date on or after June 30, 2001, the
          ratio of (i) Consolidated EBITDAR for the four consecutive Fiscal
          Quarters then ended to (ii) the sum of Consolidated Interest Expense
          plus Consolidated Rental Expense plus the aggregate principal amount
          of Debt of the Issuer and its Restricted Subsidiaries scheduled to be
          amortized, in each case for the same four Fiscal Quarters, will not be
          less than the ratio set forth below opposite such Quarterly
          Measurement Date (or any Quarterly Measurement Date which falls during
          the periods set forth below):

          ----------------------------------------------------
                           Period                      Ratio
          ----------------------------------------------------
          June 30, 2001 through December 31, 2001    1.01 to 1
          ----------------------------------------------------
          March 31, 2002 through December 31, 2004   1.15 to 1
          ----------------------------------------------------
          March 31, 2005 and thereafter              1.20 to 1
          ----------------------------------------------------

          ; provided that (x) at any Quarterly Measurement Date prior to the end
          of the fourth full Fiscal Quarter after the Closing Date, the
          foregoing amounts shall be calculated as of the end of the then most
          recently ended Fiscal Quarter on an Annualized Basis, (y) any amounts
          payable by the Issuer and its Restricted Subsidiaries pursuant to
          Section 6.12(a)(1)(i) and (ii) of the Plan of Reorganization in
          respect of the Government Settlement during any relevant calculation
          period shall be excluded from the calculation of the foregoing amounts
          for such period and (z) the principal amount of loans payable under
          the Exit Facility on the date of final maturity thereof shall be
          excluded from the calculation of the foregoing amounts for the period
          during which such date occurs."

     Section 9. Total Leverage Ratio. Section 6.02(a) of the Credit Agreement is
amended and restated in its entirety to read as follows:

          "On or after June 30, 2001, the ratio of (x) Consolidated Debt for
          Borrowed Money to (y) Consolidated EBITDA for the four consecutive
          Fiscal Quarters then most recently ended will not, at any date during
          any period set forth below, exceed the ratio set forth below opposite
          such period:

                                        3

<PAGE>

          ---------------------------------------------------
                           Period                     Ratio
          ---------------------------------------------------
          June 30, 2001 through December 31, 2001   3.95 to 1
          ---------------------------------------------------
          March 31, 2002 and thereafter             3.25 to 1
          ---------------------------------------------------

     ; provided that for dates prior to the end of the fourth full Fiscal
     Quarter after the Closing Date, Consolidated EBITDA shall be determined as
     of the end of the then most recently ended Fiscal Quarter on an Annualized
     Basis; provided further that any amounts payable by the Issuer and its
     Restricted Subsidiaries pursuant to Section 6.12(a)(1)(i) and (ii) of the
     Plan of Reorganization in respect of the Government Settlement during any
     relevant calculation period shall be excluded from the calculation of the
     foregoing amounts for such period."

     Section 10. Minimum Consolidated Net Worth. Section 6.03 of the Credit
Agreement is amended and restated in its entirety to read as follows:

          "At each Quarterly Measurement Date set forth below, Consolidated Net
          Worth will not be less than the amount set forth below opposite such
          Quarterly Measurement Date:

          -----------------------------------------
          Quarterly Measurement Date     Amount
          -----------------------------------------
          June 30, 2001                $378,797,000
          -----------------------------------------
          September 30, 2001           $385,470,000
          -----------------------------------------
          December 31, 2001            $399,125,000
          -----------------------------------------
          March 31, 2002               $500,000,000
          -----------------------------------------
          June 30, 2002                $510,000,000
          -----------------------------------------
          September 30, 2002           $520,200,000
          -----------------------------------------
          December 31, 2002            $530,604,000
          -----------------------------------------
          March 31, 2003               $552,040,000
          -----------------------------------------
          June 30, 2003                $563,081,000
          -----------------------------------------
          September 30, 2003           $574,343,000
          -----------------------------------------
          December 31, 2003            $585,830,000
          -----------------------------------------
          March 31, 2004               $609,497,000
          -----------------------------------------

                                        4

<PAGE>

          ------------------------------------------------
          June 30, 2004                      $621,687,000
          ------------------------------------------------
          September 30, 2004                 $634,121,000
          ------------------------------------------------
          December 31, 2004                  $646,803,000
          ------------------------------------------------
          March 31, 2005                     $659,739,000
          ------------------------------------------------
          June 30, 2005                      $672,934,000
          ------------------------------------------------
          September 30, 2005                 $683,393,000
          ------------------------------------------------
          December 31, 2005                  $700,121,000
          ------------------------------------------------
          March 31, 2006                     $714,123,000
          ------------------------------------------------
          June 30, 2006                      $728,406,000
          ------------------------------------------------
          September 30, 2006                 $742,974,000
          ------------------------------------------------
          December 31, 2006                  $757,833,000
          ------------------------------------------------
          March 31, 2007                     $772,990,000
          ------------------------------------------------
          June 30, 2007                      $788,450,000
          ------------------------------------------------
          September 30, 2007                 $804,219,000
          ------------------------------------------------
          December 31, 2007 and thereafter   $820,303,000"
          ------------------------------------------------

     Section 11. Limitation on Debt; Negative Pledge. Sections 7.01(b)(iv),
7.01(b)(v), 7.02(f) and 7.02(g) of the Credit Agreement are each amended by
replacing the reference to "$25,000,000" with a reference to "$50,000,000".

     Section 12. Restricted Payments. (a) Section 7.7(a)(v)(A) of the Credit
Agreement is amended by inserting the following proviso at the end thereof: ";
provided that solely for purposes of this clause (v)(A), the reference in
Section 7.01(a) to "3.5:1" shall be read as a reference to "4.0:1".

     (b) Section 7.07(a)(v)(B) of the Credit Agreement is amended and restated
in its entirety to read as follows:

          "the aggregate amount expended for all Restricted Payments made
          pursuant to this clause (v) (x) during the 2002 Fiscal Year, would not
          exceed 25% of the Free Cash Flow calculated for the period beginning
          on the first day of the first full Fiscal Quarter following the
          Closing Date and ending on December 31, 2001 and (y) during any Fiscal
          Year thereafter, would not exceed 20% of the Free Cash

                                        5

<PAGE>

          Flow calculated for the immediately preceding Fiscal Year (such
          calculation to be based on financial statements for such immediately
          preceding Fiscal Year that have been provided pursuant to this
          Agreement);"

     (c) Section 7.07(b) of the Credit Agreement is amended and restated in its
entirety to read as follows:

          "Vencor shall not, directly or indirectly, use more than 25% of the
          proceeds of any Restricted Payment to (i) declare or pay any dividend
          or other distribution on any Equity Interests of Vencor (except
          dividends payable solely in Equity Interests of the same class) or
          (ii) purchase, redeem, retire or otherwise acquire (any of the
          foregoing, an "acquisition") any Equity Interests of Vencor held by
          any Person; provided that (x) acquisitions of Equity Interests of
          Vencor permitted by Section 7.07(a)(ii) shall be excluded for purposes
          of determining compliance with clause (ii) and (y) payments may be
          declared and made and acquisitions may be effected pursuant to this
          clause (b) only if at the time of, and after giving effect to, such
          payment or acquisition, as applicable, no Default shall have occurred
          and be continuing."

     Section 13. Limitations on Acquisitions and Investments. Section
7.08(b)(ii) of the Credit Agreement is amended by (i) deleting the reference to
"(such Debt, "Investment Related Debt")", (ii) replacing the reference to
"$30,000,000" with a reference to "$130,000,000" and (iii) deleting the proviso
thereto.

     Section 14. Representations Correct; No Default. Kindred and the Borrower
each represents and warrants that (i) the representations and warranties
contained in the Financing Documents are true as though made on and as of the
date hereof and will be true on and as of the Amendment Effective Date (as
defined below) as though made on and as of such date and (ii) no Default has
occurred and is continuing on the date hereof and no Default will occur or be
continuing on the Amendment Effective Date.

     Section 15. Counterparts; Effectiveness. (a) This Amendment may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.

     (b) This Amendment shall become effective as of the date hereof on the date
(the "Amendment Effective Date") when the Administrative Agent shall have
received (i) duly executed counterparts hereof signed by Kindred, the

                                        6

<PAGE>

Borrower and the Required Lenders (or, in the case of any Lender as to which an
executed counterpart shall not have been received, the Administrative Agent
shall have received telegraphic, telex or other written confirmation from such
party of execution of a counterpart hereof by such Lender) and (ii) confirmation
that the Borrower has paid all statements of Davis Polk & Wardwell, special
counsel for the Administrative Agent, that have been rendered to the Borrower at
least two Business Days prior to the Amendment Effective Date in respect of this
Amendment or other Credit Agreement matters.

     (c) No later than the first Business Day after the Fee Determination Date
(as defined below), the Borrower shall pay the Administrative Agent, in
immediately available funds for the account of each Lender that has evidenced
its agreement hereto as provided in clause (b) by 5:00 P.M. (New York City time)
on the later of (i) April 5, 2002 and (ii) the date the Administrative Agent
issues a notice to the Lenders saying this Amendment has become effective (such
later date, the "Fee Determination Date"), an amendment fee in an amount equal
to 0.15% of the aggregate outstanding principal amount of such Lender's Loans
(as outstanding on the opening of business on the date of this Amendment).

     (d) Except as expressly set forth herein, the waivers and amendments
contained herein shall not constitute a waiver or amendment of any term or
condition of the Credit Agreement or any other Financing Document, and all such
terms and conditions shall remain in full force and effect and are hereby
ratified and confirmed in all respects.

     Section 16. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

                                        7

<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.

                                        KINDRED HEALTHCARE OPERATING, INC.

                                        By /s/ RICHARD A. LECHLEITER
                                           -------------------------------------
                                          Name: RICHARD A. LECHLEITER
                                          Title: SENIOR VICE PRESIDENT, CHIEF
                                                 FINANCIAL OFFICER AND TREASURER

                                        KINDRED HEALTHCARE, INC.

                                        By /s/ RICHARD A. LECHLEITER
                                           -------------------------------------
                                          Name: RICHARD A. LECHLEITER
                                          Title: SENIOR VICE PRESIDENT, CHIEF
                                                 FINANCIAL OFFICER AND TREASURER

                                       8

<PAGE>

                                        CREDIT LYONNAIS NEW YORK
                                        BRANCH

                                        By: /s/ CHARLES HEIDRIECH
                                            --------------------------------
                                        Name: CHARLES HEIDRIECH
                                        Title: SENIOR VICE PRESIDENT

<PAGE>

                                        BANKERS TRUST COMPANY

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        VAN KAMPEN
                                        PRIME RATE INCOME TRUST

                                        By: Van Kampen Investment Advisory Corp.

                                        By: /s/ BRAD LANGS
                                            ------------------------------------
                                        Name: BRAD LANGS
                                        Title: VICE PRESIDENT

<PAGE>

                                        BEAR STEARNS & CO., INC.

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                                      GOLDMAN SACHS CREDIT
                                                      PARTNERS, L.P.

                                                      By: /s/ TRACY McCAFFREY
                                                         -----------------------
                                                      Name: TRACY McCAFFREY
                                                      Title: AUTHORIZED SIGNATOR

<PAGE>

                                        JPMORGAN CHASE BANK, as
                                        Administrative Agent and as Lender

                                        By: /s/ ROBERT BOTTAMEDI
                                            ------------------------------------
                                        Name: ROBERT BOTTAMEDI
                                        Title: VICE PRESIDENT

<PAGE>

                                        VAN KAMPEN
                                        SENIOR INCOME TRUST
                                        By: Van Kampen Investment Advisory Corp.

                                        By: /s/ BRAD LANGS
                                            ------------------------------------
                                        Name: BRAD LANGS
                                        Title: VICE PRESIDENT

<PAGE>

                                        VAN KAMPEN
                                        SENIOR FLOATING RATE FUND
                                        By: Van Kampen Investment Advisory Corp.

                                        By: /s/ BRAD LANGS
                                            ------------------------------------
                                        Name: BRAD LANGS
                                        Title: VICE PRESIDENT

<PAGE>

                                        PENSLER CAPITAL CORPORATION

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        GOLDENTREE HIGH YIELD
                                        MASTER FUND, LTD

                                        By: /s/ FRED HADDAD
                                            ------------------------------------
                                        Name: Fred Haddad
                                        Title:

<PAGE>

                                                    CONTINENTAL CASUALTY COMPANY

                                                    By: /s/ MARILOU R. McGIRR
                                                        ------------------------
                                                    Name: MARILOU R. McGIRR
                                                    Title: VICE PRESIDENT

<PAGE>

                                        PRESIDENT & FELLOWS HARVARD
                                        COLLEGE

                                        By:  REGIMENT CAPITAL MANAGEMENT, LLC
                                             AS ITS INVESTMENT ADVISOR

                                        BY:  REGIMENT CAPITAL ADVISORS, LLC
                                             ITS MANAGER AND PURSUANT TO
                                             DELEGATED AUTHORITY

                                        BY: /s/ TIMOTHY PETERSON
                                           ----------------------
                                        Name:  TIMOTHY PETERSON
                                        Title: PRESIDENT

<PAGE>

                                        REGIMENT CAPITAL, LTD.

                                        By: REGIMENT CAPITAL MANAGEMENT, LLC AS
                                            ITS INVESTMENT ADVISOR

                                        By: REGIMENT CAPITAL ADVISORS, LLC ITS
                                            MANAGER AND PURSUANT TO DELEGATED
                                            AUTHORITY

                                             /s/ Timothy Peterson
                                        By: ____________________________________
                                        Name: Timothy Peterson
                                        Title: President

<PAGE>

                                        SUNAMERICA LIFE INSURANCE COMPANY

                                             /s/ John G. Lapham, III
                                        By: ____________________________________
                                        Name: John G. Lapham, III
                                        Title: Authorized Agent

<PAGE>

                                        WELLS FARGO BANK

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        CERBERUS PARTNERS, L.P.

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        AG CAPITAL FUNDING PARTNERS,
                                        L.P.

                                        By: ANGELO, GORDON & CO., L.P. AS
                                            INVESTMENT ADVISOR

                                             /s/ John W. Fraser
                                        By: ____________________________________
                                        Name: John W. Fraser
                                        Title: Managing Director

<PAGE>

                                        LCM I LIMITED PARTNERSHIP

                                        By: LYON CAPITAL MANAGEMENT LLC, AS
                                            ATTORNEY-IN-FACT

                                             /s/ Farboud Tavangar
                                        By: ____________________________________
                                        Name: Farboud Tavangar
                                        Title: Senior Portfolio Manager

<PAGE>

                                        NORTHWOODS CAPITAL III, LIMITED

                                        By: ANGELO, GORDON & CO., L.P. AS
                                            COLLATERAL MANAGER

                                        By:    /s/ John W. Fraser
                                              --------------------------
                                        Name: John W. Fraser
                                        Title: Managing Director

<PAGE>

                                        NORTHWOODS CAPITAL II, LIMITED

                                        By: ANGELO, GORDON & CO., L.P. AS
                                            COLLATERAL MANAGER

                                        By:    /s/ John W. Fraser
                                              --------------------------
                                        Name: John W. Fraser
                                        Title: Managing Director

<PAGE>

                                        NORTHWOODS CAPITAL, LIMITED

                                        By: ANGELO, GORDON & CO., L.P. AS
                                            COLLATERAL MANAGER

                                        By:    /s/ John W. Fraser
                                              --------------------------
                                        Name: John W. Fraser
                                        Title: Managing Director

<PAGE>

                                        SPS HIGH YIELD LOAN TRADING

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        CREDIT SUISSE FIRST BOSTON
                                        INTERNATIONAL

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        DEUTSCHE BANK SHARPS PIXLEY
                                        INC.

                                        By:    /s/ Fred Haddad
                                              --------------------------
                                        Name: Fred Haddad
                                        Title:

<PAGE>

                                        HIGHLAND LEGACY LIMITED

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        REDWOOD MASTER FUND, LTD

                                        By:    /s/ Jonathan Kolatch
                                              --------------------------
                                        Name: Jonathan Kolatch
                                        Title: Director

<PAGE>

                                        PACIFIC SELECT FUND HIGH YIELD
                                        BOND PORTFOLIO

                                        By: ____________________________________
                                        Name:
                                        Title:

<PAGE>

                                        GOLDENTREE HIGH YIELD
                                        OPPORTUNITIES II, L.P.

                                        By:    /s/ Fred Haddad
                                              --------------------------
                                        Name: Fred Haddad
                                        Title:<PAGE>

                                                                    EXHIBIT 10.3

               KINDRED HEALTHCARE, INC. SHORT-TERM INCENTIVE PLAN

1.   Purpose of the Plan.
     -------------------

          This Kindred Healthcare, Inc. Short-Term Incentive Plan is intended to
promote the interests of the Company and its shareholders by providing key
employees of the Company and its Affiliates, who are largely responsible for the
management, growth and/or success of the Company and its Affiliates, with
incentives and rewards based on defined company operating and individual
management goals.

2.   Definitions.
     -----------

          As used in the Plan, the following definitions apply to the terms
indicated below:

     (a) "Affiliates" shall mean with respect to any person, any other person
that, directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with the first person.

     (b) "Award Period" shall mean each consecutive calendar-year period
commencing on January 1, 2002 and each January 1 thereafter while this Plan is
in effect.

     (c) "Award Range" shall mean the range of awards that may be awarded to
Participants based on their positions or employment levels within the Company or
its Affiliates, expressed as percentages of such Participants' Base Salary,
pursuant to Section 4(a)(i) hereof.

     (d) "Base Salary" shall mean, with respect to each Participant, such
Participant's annual base compensation, exclusive of any bonuses (whether under
this Plan or otherwise), stock option benefits, or other compensatory or fringe
benefits. If the Participant's annual base compensation shall fluctuate during
an Award Period as a result of a promotion, the Base Salary shall be the
weighted average of the annual base compensation for such period. If the
Participant's annual base compensation shall fluctuate during an Award Period
for any other reason, the Base Salary shall be the annual base compensation on
February 1 of the relevant Award Period.

     (e) "Board" shall mean the Board of Directors of the Company.

     (f) "Change in Control" shall mean any one of the following events:

          (i) any Person (as this term is used in Sections 3(a)(9) and 13(d)(3)
     of the Securities Exchange Act of 1934, as amended, but excluding any
     person described in and satisfying the conditions of Rule 13d-1(b)(1)(i)
     thereunder) (an "Acquiring Person") becomes the "beneficial owner" (as such
     term is defined in Rule 13d-3 promulgated under the Exchange Act (a
     "Beneficial Owner"), directly or indirectly, of securities of the Company
     representing 50% or more of the combined voting power of the Company's then
     outstanding securities, other than beneficial ownership by a Participant,
     the

<PAGE>

     Company, any employee benefit plan of the Company or any Person organized,
     appointed or established pursuant to the terms of any such benefit plan;

          (ii) the Company's stockholders approve an agreement to merge or
     consolidate the Company with another corporation, or an agreement providing
     for the sale of substantially all of the assets of the Company to one or
     more Persons, in any case other than with or to an entity 50% or more of
     which is controlled by, or is under common control with, the Company;

          (iii) during any two-year period, individuals who at the date on which
     the period commences constitute a majority of the Board of Directors (the
     "Incumbent Directors") cease to constitute a majority thereof for any
     reason; provided, however, that a director who was not an Incumbent
             --------  -------
     Director shall be deemed to be an Incumbent Director if such director was
     elected by, or on the recommendation of, at least two-thirds of the
     Incumbent Directors (either actually or by prior operation of this
     provision), other than any director who is so approved in connection with
     any actual or threatened contest for election to positions on the Board of
     Directors; or

          (iv) the Company is merged, combined, consolidated, recapitalized or
     otherwise organized with one or more other entities that are not affiliates
     of the Company, as a result of which less than 50% of the outstanding
     voting securities of the surviving or resulting entity immediately after
     the reorganization are, or will be, owned, directly or indirectly, by
     shareholders of the Company, determined on the basis of record ownership as
     of the date of determination of holders entitled to vote on the transaction
     (or in the absence of a vote, the day immediately prior to the event).

     (g) "Code" shall mean the Internal Revenue Code of 1986, as amended.

     (h) "Committee" shall mean the committee designated by the Board to
administer the Plan pursuant to Section 3, which shall be comprised solely of
two or more "outside" directors within the meaning of Treasury Regulation
section 1.162-27(e)(3) promulgated under Section 162(m) of the Code.

     (i) "Company" shall mean Kindred Healthcare, Inc.

     (j) "Covered Participant" shall mean, with respect to an Award Period, a
Participant who the Committee determines is or may be a "covered employee"
within the meaning of Treasury Regulation Section 1.162-27(c)(2) promulgated
under Section 162(m) of the Code.

     (k) "Participant" shall mean an employee of the Company whose position is
approved by the Committee to participate in this Plan for an Award Period, and
upon his death, his successors, heirs, executors and administrators, as the case
may be.

     (l) "Performance Award" shall mean an opportunity to receive a cash bonus
awarded pursuant to the Plan, based on the achievement of Performance Goals,
calculated pursuant to Section 4(b) hereof.

                                       2

<PAGE>

     (m) "Performance Goals" shall mean the Performance Goals established in
writing by the Committee pursuant to Section 4(a)(ii) hereof.

     (n) "Plan" shall mean this Kindred Healthcare, Inc. Short-Term Incentive
Plan.

3.   Administration of the Plan.
     --------------------------

          The Plan shall be administered by the Committee. The Committee shall
have full authority to administer the Plan, including authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary and to determine the Performance
Award with respect to each Participant for an Award Period. Decisions of the
Committee shall be final and binding on all parties. Neither the Committee nor
any member of the Committee shall be liable to any Participant for any action,
omission, or determination relating to the Plan. Whether an authorized leave of
absence, or absence in military or government service, shall constitute
termination of employment shall be determined by the Committee in its absolute
discretion.

          Notwithstanding the foregoing, and without otherwise limiting the
discretion of the Committee, the Committee shall not have the authority to
increase any Performance Award payable to a Covered Participant beyond the
Performance Award calculated pursuant to Section 4(b) hereof.

          Performance Awards to Covered Participants are subject to shareholder
approval of the Plan.

4.   Determination and Payment of Award Amounts.
     ------------------------------------------

     (a) No later than 90 days after the start of each Award Period, the
Committee shall (i) designate Participants for such Award Period; (ii) determine
the Award Ranges applicable to Participants in the Plan according to their
position or employment level; and (iii) establish, in writing, Performance Goals
for such Award Period.

          (i) Award Ranges for each position or level within the Company shall
     be expressed as a minimum level, a target level, and a maximum level, which
     levels shall correspond with minimum, target and maximum levels of
     achievement of Performance Goals respectively.

          (ii) Performance Goals may be expressed in terms of (i) earnings per
     share of the Company's common stock, (ii) share price of the Company's
     common stock, (iii) pre-tax profit, (iv) net earnings, (v) return on equity
     or assets, (vi) revenues, (vii) account receivable collection days, (viii)
     earnings, before interest, tax, depreciation, amortization and rent, (ix)
     individual management or performance objectives, (x) quality objectives,
     (xi) any combination of the foregoing, or (xii) such other goals as the
     Committee may determine, and any components of Performance Goals may be
     based, in whole or in part, on the performance of an Affiliate of the
     Company. Performance Goals shall be expressed in ranges, with minimum,
     target and maximum levels of achievement for such goals.

                                       3

<PAGE>

          (iii) With respect to both Award Ranges and Performance Goals, the
     minimum, target and maximum levels represent points in a range of awards
     and goals, not absolute amounts, such that, e.g., if Performance Goals are
     achieved to a level that falls between the "target" and "maximum" levels,
     the corresponding award level will also fall between the "target" and
     "maximum" levels in the Award Range.

     (b) With respect to each Award Period, not later than ninety (90) days
after the end of such Award Period or five days after receipt by the Company of
audited financial statements for the Company or any applicable Affiliate for
such Award Period, whichever is later, the Committee shall determine whether,
and to what extent, the Performance Goals were achieved during such Award
Period, basing such decision on all relevant criteria, including the Company's
final audited financial statements as of the end of the Award Period. Based on
such determination, the Committee shall determine the dollar amount of each
Participant's Performance Award, if any, by (i) determining the percentage of
base salary to be applied to each Participant within the percentages determined
in the Award Range and (ii) multiplying such percentage with such Participant's
Base Salary. If the minimum levels of the Performance Goals are not achieved by
any Participant or group of Participants in an Award Period, such Participant(s)
shall not receive a cash payment under the Plan for such Award Period. No
Performance Award payable to a Participant may exceed $1,000,000.

     (c) Subject to Section 6 hereof, not later than thirty (30) days following
determination of the Performance Awards as provided in Section 4(b) hereof, the
Company shall pay to each Participant his respective Performance Award for such
period in a lump sum in cash.

     (d) Notwithstanding anything in this Section 4 to the contrary, payment of
a Participant's Performance Award is contingent on such Participant's compliance
with the Company's policies and with satisfactory delivery of quality services
throughout the period. Departures from such compliance or delivery of services
that the Committee determines in its sole discretion to be material to the
Company may result in loss of eligibility or forfeiture of the Performance
Award.

5.   Partial Year Employment
     -----------------------

     (a) The chief executive officer of the Company from time to time (the
"CEO") may, in his sole discretion, designate an individual who commences
employment with the Company more than ninety (90) days following the beginning
of an Award Period as a Participant for such Award Period, in which case the CEO
shall simultaneously determine the Award Range applicable to such Participant
based on his position with the Company and, to the extent that Performance Goals
for such Award Period incorporate individual management or performance
objectives, establish such Participant's individual Performance Goals. The CEO
may further specify that the Performance Award that may become payable to such
Participant for such Performance Period shall be prorated to reflect the
Participant's performance of services for less than the entire Performance
Period.

     (b) Notwithstanding the foregoing, in the event such new Participant is a
Covered Participant, all such decisions by the CEO must be ratified in writing
by the Committee before 25% of the remaining Award Period has elapsed.

                                       4

<PAGE>

6.   Effect of Termination of Employment or Change in Control.
     --------------------------------------------------------

     (a) In the event of the termination of the employment of a Participant for
any reason prior to the date of payment, the Participant shall not be entitled
to any Performance Award with respect to such Award Period unless such provision
contradicts with other agreements entered into by the Company or state law.

     (b) In the event of a Change in Control, each Participant who is employed
with the Company on the date of such Change in Control or whose employment is
terminated in contemplation of a Change in Control (as determined by the
Committee in effect immediately prior to such Change in Control, in its sole
discretion) shall be entitled to receive a Performance Award with respect to the
Award Period in which such Change in Control occurs, which shall be calculated
as if the Award Period were fully completed and as if Performance Goals were
achieved at the target level, without any proration, and which shall be paid
within fifteen (15) days after such Change in Control. Notwithstanding Section
6(a) hereof, continued employment on the date of payment of a Performance Award
following the Change in Control shall not be required.

7.   Miscellaneous.
     -------------

     (a) Certain Adjustments. In the event of a merger, consolidation or other
corporate event involving the Company, or the acquisition or disposition by any
entity forming part of the Company, or the occurrence of any other transaction
or event which could reasonably be expected to have a substantial impact on the
achievement of Performance Goals, the Committee will review the effect of such
occurrence on the operation of the Plan and may adjust such Performance Goals
with respect to each Award Period as the Committee, in its absolute discretion,
determines to be appropriate in light of the circumstances.

     (b) Non-Assignability. The right of a Participant or of any other person to
any payment under the Plan shall not be assigned, transferred, pledged or
encumbered, and any purported assignment, transfer, pledge or encumbrance shall
be null and void.

     (c) Applicable Law. The Plan and all rights under the Plan shall be
governed by, and shall be interpreted in accordance with, the laws of the State
of New York without reference to its principles of conflicts of law.

     (d) Applicable Withholdings. All payments required to be paid under the
Plan shall be subject to any required Federal, state, local and other applicable
withholdings or deductions as determined by the Company.

     (e) No Contract of Employment. Nothing contained in the Plan shall confer
upon any Participant any right with respect to the continuation of such
Participant's employment by the Company or interfere in any way with the right
of the Company at any time to terminate such employment or to increase or
decrease the base salary or other compensation of the Participant.

     (f) No Right to Participate. No person shall have any claim or right to
participate in the Plan. The selection of an employee to participate in the Plan
with respect to any Award

                                       5

<PAGE>

Period shall not give such employee any right to participate in the Plan in any
subsequent Award Period.

     (g) Right to Amend; Suspend or Terminate. The Committee may amend or
suspend the Plan at any time in its absolute discretion. The Committee may
terminate the Plan at any time, in whole or in part, with respect to some or all
Participants or with respect to the Company or some or all of its Affiliates, in
its absolute discretion. Upon termination or partial termination of the Plan,
each Participant affected thereby (as determined by the Committee), unless
otherwise determined by the Committee, shall be entitled to receive a
Performance Award prorated based on the number of full months elapsed between
the commencement of such Award Period and the date of such termination. Such
prorated Performance Award shall be calculated as if the "target" level in the
Award Range were achieved and shall be paid no later than ninety (90) days
following such termination.

     (h) Plan Unfunded. The Plan shall be unfunded. Payments under the Plan
shall be made from the general assets of the Company and to the extent any
Participants have any right to payments hereunder, such Participants shall be
general unsecured creditors of the Company. No Participant shall have any right,
title, claim or interest in or with respect to any specific assets of the
Company or any of its subsidiaries or affiliates in connection with the
Participant's participation in the Plan.

     (i) Gender and Number. All references herein to the masculine gender shall
include the feminine; and all references to the plural shall include the
singular and vice versa.

                                       6

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