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HealthSouth Stock Falls 44% On Sharp Cuts to Its Forecast

Mar 28, 2003 | Wall Street Journal

HealthSouth Corp. said that changes in Medicare reimbursements will reduce profits and that its founder, Richard Scrushy, will step aside as chief executive officer to head a planned spinoff of the company's surgery centers.

The disclosures surprised investors, who pushed down the share price of the operator of rehabilitation hospitals almost 44%. In New York Stock Exchange composite trading at 4 p.m. Tuesday, HealthSouth shares were trading at $6.71, down $5.26.

HealthSouth, based in Birmingham, Ala., said that, as a result of the changes in Medicare reimbursements for outpatient physical therapy provided at all its facilities including both hospitals and free-standing centers the company expects its earnings before interest, taxes, depreciation and amortization to fall short of previous projections by $175 million annually. Additionally, the company said it is suspending earnings guidance for this year and next because of the "uncertainties" around the impact of the change. The company had been projecting Ebidta of $1.35 billion this year.

Analysts said they were shocked, particularly since the company didn't mention the Medicare issue in either its earnings conference call earlier this month, or in its quarterly financial filing.

"The big question is why didn't they disclose this development sooner," said Kemp Dolliver, of SG Cowen Securities Inc. in Boston. HealthSouth, he added, has "lost credibility."

Mr. Scrushy, age 50, remains chairman of HealthSouth's board, and will become chairman of the new publicly traded company, to be called Surgical Care Affiliates. The company said it expects the spinoff, which will have annual revenue of $1 billion, to be completed by early next year. Larry D. Taylor, president and chief operating officer of HealthSouth's ambulatory care division, will become CEO of the new surgery-center company after the spinoff is complete.

William T. Owens, 43, a veteran HealthSouth executive who has been president and chief operating officer for the past year, was named CEO of HealthSouth. He is also a board member.

Mr. Scrushy said in an interview that he decided to step aside as CEO so he could remain involved in both companies while meeting federal regulatory requirements for a tax-free spinoff of the surgery centers.

Mr. Scrushy has been a colorful CEO at a time when investors increasingly prefer executives in less vivid tones. But one board member dismissed any suggestion that the changes resulted from board dissatisfaction with the company's chairman.

"I can tell you categorically, there was no adverse board element in this situation," said John S. Chamberlin, a board member who is a private investor based in Princeton, N.J. Mr. Scrushy remains "executive chairman," Mr. Chamberlin said, which means that he is "basically, an individual who still runs the company."

In announcing the changes, the company cited a need to free its surgery operations from "adverse" effects due to a shift in Medicare reimbursements for outpatient physical-therapy services. Under the new policy, which HealthSouth said took effect July 1, the company must bill Medicare at a lower, "group" therapy rate, rather than the higher individual rate, if two or more patients receive services at the same time, even if the patients perform different activities.

Mr. Scrushy said the company learned only on Aug. 15, at a meeting with Medicare officials, that the change would affect outpatient therapy provided not only at its free-standing centers which have a low percentage of Medicare patients but also at its in-patient hospitals, where as many as 70% of patients have Medicare coverage. Executives immediately began calculating the potential impact of the change, he said.

HealthSouth's billing practices for outpatient physical-therapy services came under scrutiny in May when the Justice Department joined a civil lawsuit against the company. The suit alleges the company defrauded Medicare by billing the agency as though licensed therapists provided care for Medicare beneficiaries, when the care was actually provided by aides or trainees.

A HealthSouth spokesman said at the time the suit was filed that the company's practices were consistent with existing Medicare regulations. HealthSouth commonly uses aides to provide "concurrent" therapy, the spokesman said, in which several patients with different ailments perform individual therapy at the same time. The spokesman said aides assist patients under supervision of a licensed therapist, who is typically within eyesight of the aides.

A spokesman for the Justice Department said the suit is pending.

Tom Scully, administrator of the Centers for Medicare and Medicaid Services, which oversees the Medicare program, said the agency issued a memo May 12 to Medicare contractors clarifying that providers couldn't bill for individual therapy if more than one patient received services at the same time. He said he was "surprised" that HealthSouth said the change was having such a big impact.

Correction & Amplification: On May 17, the Centers for Medicare and Medicaid Services issued a memo to contractors to clarify billing rules for group physical therapy. In the article above about HealthSouth Corp., a Medicare official incorrectly said the date of the memo was May 12.

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