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HealthSouth To Cut Jobs As Probe Widens

Non-patient care sector expected to be affected

Apr 3, 2003 | The Birmingham News HealthSouth Corp.'s Birmingham employees will see job cuts soon as the company tries to avoid bankruptcy amid a widening accounting fraud investigation.

"Some assets and corporate employees that don't impact patient care will have to be reduced or eliminated," company spokesman Ernie Knewitz said Wednesday.

Knewitz would not say how many jobs will be lost at the Birmingham-based company with headquarters on U.S. 280. The company operates 1,700 hospitals and physical therapy centers.

HealthSouth has 3,500 employees in Birmingham, many of them in administrative, clerical and support jobs at headquarters. Job cuts will be concentrated in those areas that don't affect patients, Knewitz said. The company has 51,000 employees in all 50 states.

"We are continuing to ensure that patient care goes on uninterrupted," Knewitz said.

The job cuts will come as federal agencies investigate $1.4 billion in profit that former CEO Richard Scrushy and top company finance officers are accused of falsifying since 1999.

Investigators are turning their attention to a third former HealthSouth finance chief, Michael Martin. They also are looking at start-up companies that did millions in business with HealthSouth after Scrushy bought an ownership stake in them.

Martin worked in HealthSouth's finance department from 1989 until 2001 and served as chief financial officer starting in 1997. The Securities and Exchange Commission in a lawsuit last month accused HealthSouth of falsifying profit since 1999 in a scheme that goes back to 1986, when the company first sold shares to the public.

Investigators from the FBI and SEC are interested in Martin's knowledge of the alleged fraud, said officials familiar with the situation.

"It's only logical investigative technique" to include former finance officers in such a probe, said FBI spokesman Craig Dahle. He had no comment on the agency's contact with Martin.

Efforts to reach Martin at his Birmingham companies, MeadowBrook Healthcare and Cannongate Partners, were unsuccessful.

HealthSouth has said its past financial statements shouldn't be considered reliable. Two other former finance chiefs have admitted they helped inflate earnings in guilty pleas to criminal charges.

HealthSouth continued to do business with former finance chief Martin after he left the company. In 2001, Martin's MeadowBrook Healthcare bought hospitals in Louisiana, Texas, Florida and Oklahoma from his former employer, according to HealthSouth's filings with the SEC.

Martin's partner in MeadowBrook Healthcare is Eugene Smith, one of HealthSouth's founders, according to the company's incorporation papers. HealthSouth, headed by Scrushy at the time, didn't disclose how much MeadowBrook paid for the four hospitals.

Investigators are also interested in Atlanta-based, a company founded by HealthSouth executives with investment from the company and Scrushy, said officials familiar with the situation.

MedCenterDirect envisioned transforming the medical supplies business by allowing hospitals and clinics to buy items and track spending online.

HealthSouth invested in the Internet company, buying 6.4 million shares of the private company for $2.2 million, according to the hospital operator's SEC filings.

Scrushy also bought shares for himself, HealthSouth filings show.

Former HealthSouth Vice President William Hicks served on MedCenterDirect's board, and current director Charles Newhall still does, the filings say. Through 2001, HealthSouth had bought $174 million of supplies through MedCenterDirect, HealthSouth's SEC filings show.

Efforts to reach MedCenterDirect were unsuccessful.

Business goes on:

Around the country, HealthSouth clinics are largely unaffected by the headquarters accounting scandal, said Mike Doyle, HealthSouth's director of regional operations. Supplies from vendors who sell articles such as orthopedic braces, bandages and other items used to treat injuries haven't been interrupted, he said.

The number of patients visiting clinics to strengthen and stretch injured joints and limbs hasn't fallen, Doyle said.

"If you are a patient of ours in somewhere such as Wichita, Kansas, you aren't worried about what is going on in Birmingham," he said. "You have a relationship with that therapist and that clinic, who you see for an hour, two or three times a week."

The company, being run by corporate restructuring firm Alvarez & Marsal and interim CEO Robert May, sent a video message to employees to update them about the company's condition, Doyle said.

"In a situation like this, there is going to be some concern," he said. That concern hasn't prompted resignations among the company's caregivers, he said.

"There's a shortage of physical therapists in the country right now," he said. "If anyone wanted to walk, they could probably find a job tomorrow."

Investors continue to act as though the company will file for bankruptcy protection.

Shares fell Wednesday less than a cent to 11 cents; they traded at a 52-week high of $15.90 in May 2002.

The company missed $367 million in bond principal and interest payments this week. HealthSouth bonds were quoted at 45 to 50 cents on the dollar. They were between 85 and 90 cents three weeks ago. HealthSouth is negotiating with creditors to get additional loans.

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