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What happened

After Kindred Healthcare (NYSE:KND)issued third-quarter results that included a lower forecast, shares of the company tumbled 29.7% today.

So what

The third quarter marked the first full quarter that reimbursement for Kindred Health's long-term acute care (LTAC) business has transitioned entirely to a new payment criteria. Despite preparation, the company's sales suffered. The company's results were also held back by rising costs in its skilled-nursing business, prompting management to announce a plan to exit that business.

LTAC revenue fell 0.7% year over year, to $575.3 million, and rehab revenue declined 2%, to $361.5 million. The home health/hospice/community-care segment revenue improved 5.5% year over year, to $638.5 million. Overall, consolidated revenue was $1.8 billion, up 1.6% from last year.

The LTAC transition and the skilled-nursing business headwinds forced management to ratchet down its guidance for the full year. Management now expects annual revenue of approximately $7.2 billion, down from a forecast of between $7.2 billion to $7.3 billion, and core diluted earnings per share of $0.70 to $0.80, down from $0.80 to $1.00 previously.

According to CEO Benjamin Breier:

Our change in expectations is primarily impacted by significant headwinds facing the skilled nursing facility business and labor cost challenges impacting both the company and the healthcare industry in general. Our exposure to the challenges facing the nursing center industry is expected to amount to between $40 million to $50 million of EBITDAR compared to our operating plan for the year upon which our guidance was based. Our decision to reduce guidance for the balance of 2016, exit the skilled nursing facility business and substantially reduce our overhead is directly related to these challenges.

Now what

After Breier walks away from the skilled-nursing business, the home-health business will generate about half of the company's earnings before interest and income taxes, or EBIT. Its home health/hospice/community-care and long-term acute-care businesses will each generate roughly one-quarter of EBIT.

Management's attempt to get lean is a positive for investors, but Kindred Health will still rely heavily on government reimbursement -- and that means there's still uncertainty. Therefore, while demand for Kindred Health's services should increase because of aging baby boomers, and the company's 5.8% dividend yield is intriguing, most investors are likely best off hunting for other investment ideas.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this.

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