Encompass Health

HealthSouth Corporation, based in Birmingham, is one of the US's largest healthcare services provider. Best known for its rehabilitation services, HealthSouth has more than 1,000 facilities in US and Puerto Rico. It has both inpatient and outpatient rehabilitation facilities and outpatient surgery centers, including more than 330 hospitals. At the company's height, it recorded nearly $4.4 billion in revenue, dominated the rehabilitation services market and employed more than 50,000 people at 2,000 facilities in every state of the U.S. along with its facilities in the United Kingdom, Canada, Austrialia, Puerto Rico and Saudi Arabia.

In 2003 HealthSouth was involved in a corporate accounting scandal in which its CEO Richard Scrushy was accused of directing company employees to falsely report grossly exaggerated company earnings in order to meet stockholder expectations.

By the mid to late 2006 HealthSouth completed its recovery and relisted its stock on the New York Stock Exchange under the symbol HLS. The company operates four divisions: inpatient rehabilitaion, outpatient rehabilitation, surgery centers, and diagnostics.

Company Beginnings

HealthSouth was incorporated in Delaware on February 22, 1984 as Amcare Inc. by its founder Richard Scrushy. The company opened its first facility in Little Rock, Arkansas and one in Birmingham later that year. In 1985 the company changed its name to HealthSouth Rehabilitation Corporation. In 1986 the company went public with its initial public offering on the NASDAQ exchange under the ticker symbol HSRC. In September of 1988 the company moved to the New York Stock Exchange and became listed under the symbol HRC. By 1990 the company had expanded to 50 facilities across the U.S. HealthSouth finished out 1992 with $400 million in annual revenue. In 1993 the company made its first large acquisition when it bought 28 hospitals and 45 outpatient rehabilitation facilities from National Medical Enterprise for around $300 million in cash. In 1994 HealthSouth announced it would buy fellow Birmingham based ReLife for $180 million in stock.

Growth and Scandal

Throughout the mid '90s, HealthSouth expanded rapidly through mergers and aquistions. In 1995 the company changed its name to HealthSouth Corporation. On August 31, 1995 HealthSouth CEO Richard Scrushy announced that HealthSouth was going to build a new headquarters on U.S. Highway 280 in Birmingham. The new corporate campus was to be built on 74 acres of land that the company had bought from Southern Company earlier that year. The corporate campus plans included a five story headquarters building with a connecting conference center and parking deck.

In January of 1995 the company entered the surgery center business with its $155 million acquisition of Surgical Health Corporation. One month later the company acquired Novacare's entire rehabilitational hospital business for $215 million in cash. In 1996 the company expanded into diagnostics with its purchase of Health Images Inc. HealthSouth made its largest acquisition yet when it purchased Horizon/CMS for $1.8 billion. After the acquisition, HealthSouth sold the assets it did not need to Integrated Health for $1.15 billion in cash. Also in February of 1997 the company moved into a new corporate headquarters, which included a company store and museum. HealthSouth continued its acquisition spree through 1999.

In 2001 the company announced it would, along with Oracle Corporation, build the world's first all digital hospital on its corporate campus. The 13-story structure was meant as a replacement for the aging Healthsouth Medical Center on Birmingham's Southside. Construction of the new facility proceeded up until the company's fraudulent accounting practices were exposed.

The first of HealthSouth's accounting problems surfaced in late 2002 after Richard Scrushy sold $75 million in stock several days before the company posted a large loss. The U.S. Securities and Exchange Commission (SEC) announced it was investigating Scrushy on whether or not the sale amounted to insider trading. HealthSouth hired an outside law firm to review Scrushy's stock sale, with the firm concluding that the sale and profit loss were not related, although this did not remove the company off the SEC's radar. On the evening of March 18, 2003 FBI agents executed search warrants at the company's headquarters after the company's CFO William Owens agreed to wear a wire, with which he was able to record Scrushy talking about the fraud.

Accounting Scandal

On March 20, 2003, HealthSouth and its founder and CEO Richard Scrushy were accused by the SEC of an accounting scandal where the company's earnings were falsely inflated by $1.4 billion. In 1996, Scrushy allegedly instructed the company's senior officers and accountants to falsify company earnings reports in order to meet investor expectations and control the price of the company's stock. In certain fiscal years, the company's income was overstated by as much as 4700 percent. The $1.4 billion represents more than 10 percent of the company's total assets.

In June of 2005, Scrushy was acquitted on all 36 of the accounting fraud counts against him, most notably one count in violation of the Sarbanes-Oxley Act, which casts doubt on the enforceability of the law. But in June 2006, he was convicted on bribery charges, having stood accused of arranging $500,000 in campaign donations in exchange for a seat on a state hospital regulatory board.

Recovery And The New HealthSouth

Following the raid at the company's corporate headquarters, the board of directors held an emergency meeting to discuss what actions needed to be taken. On of the first was the termination of Richard Scrushy as Chairman and CEO, and Bill Owens as CFO. Robert P. May was elected as interim CEO and Joel C. Gordon as Chairman. Another issue that was immediately addressed by the board was how it was going to come up with the cash for interest payments of senior bonds and principal payments due on a $344 million convertible bond. The board agreed that the company's cash flow problems were too great to tackle on its own. At the advice of its lender JPMorgan Chase, the company hired restructuring firm Alvarez & Marsal to bring it finances in order and immediately appointed Bryan Marsal Chief Restructuring Officer. By the end of 2003, the company had most of its finance back in order and was able to avoid bankruptcy.

Efforts were made at the corporate headquarters to remove the memory of Scrushy. The board removed Scrushy's name from the conference center, closed the company store and museum and opened the fifth floor executive offices to all employees, which under Scrushy, were kept away. The board also sold all but a few of the company's 11 corporate jets which included a Gulfstream V and Sikorsky S-76 C+ helicopter. On May 10, 2004 Jay Grinney was chosen by the board as the company's permanent CEO. In an effort to save money, the company halted construction of its Digital Hospital, for which building costs had doubled to $400 million. Soon after Grinney's appointment, the company moved forward with its goal of again becoming a current filer with the SEC. By doing so the company restated earnings from 2000 to 2003. The company also sold or closed many underperforming facilities including its medical center division in its effort to return to profitabiity.

On May 15, 2006 the company completed its goal of once again becoming a current filer with the SEC when it filed its first quarter 2006 financial result. It was the first time the company had filed a 10-Q since its accounting scandal began. On August 14, 2006 the company unveiled its restructuring plan which included the sale, spin-off or other disposition of its surgery, outpatient, and diagnostic divisions along with a 1-for-5 reverse stock split to coincide with its relisting on the New York Stock Exchange under the symbol HLS. The revese stock split was approved by stock holders at a special meeting at the company's corporate headquarters on October 18, 2006. The last step in HealthSouth's recovery from its accounting scandal occurred on October 26, 2006 when it was again relisted on the New York Stock Exchange. On January 29, 2007 the company announced it will sell its more than 600 outpatient centers to Select Medical Corporation for $245 million in cash.

Affiliated Companies

Offspring companies:

• MedPartners Inc. — a physician practice management company founded by Scrushy, today the company is known as Caremark Rx
• Capstone Capital Corp. — a real estate investment trust founded by Scrushy
• Source Medical Solutions — healthcare technology systems

Other Affiliated Companies:

• GG Enterprises (Hoover) — founded by Scrushy's mother and brother
• 21st Century Health Ventures (Birmingham) — founded by Scrushy and former HealthSouth CEO Michael Martin
• MedCenterDirect.com (Atlanta) — HealthSouth bought 6.4 million shares of this hospital supplies company
• Integrated Health Services Inc. (Sparks, Maryland) — a nursing homes and rehabilitation center company that Scrushy was a director of in the 1990s
• HealthTronics Surgical Services Inc. (Marietta, Georgia) — Michael Martin was director while CFO at HealthSouth

External links

• HealthSouth corporate website
• SEC litigation release - SEC Charges HealthSouth Corp., CEO Richard Scrushy With $1.4 Billion Accounting Fraud
• Birmingham News Special Report on the HealthSouth Scandal

References

• HealthSouth. (March 13, 2007). Wikipedia, The Free Encyclopedia. Accessed March 19, 2007.