HealthSouth Earns Fall on Medicare Change

By William Borden, Washington Post

  November 5, 2002

NEW YORK (Reuters) - HealthSouth Corp. , which is under investigation by the Securities and Exchange Commission, said on Tuesday its net income fell 32 percent, hit by Medicare changes for reimbursement for group physical therapy.

Net income at the provider of physical therapy, outpatient surgery and diagnostic imaging centers, dropped to $53.6 million, or 13 cents per share, from $79.1 million, or 20 cents per share in last year's third quarter.

Frank Morgan, analyst at Jefferies & Co., "I would say that the results in the quarter were not that big of a surprise, given the operational challenges they are facing in retooling outpatient rehab."

The Birmingham, Alabama, company warned in August that changes in Medicare reimbursement for physical therapy would hurt earnings before interest, taxes, depreciation and amortization by $175 million annually.

Also the company faces investigations into possible insider trading, and is facing challenges to the company's corporate governance policies.

The SEC is investigating the timing of the announcement and stock sales by HealthSouth Chairman Richard Scrushy. The company's outside counsel said it found no evidence of insider trading by Scrushy, who exercised options for 5.3 million shares in May and returned 2.5 million shares to the company in July to repay a loan.

Excluding a one-time gain from the early repayment of debt, earnings were $38.3 million, or 10 cents per share at HealthSouth.

On that basis, 13 analysts who follow HealthSouth expected the company to earn between 13 cents and 23 cents per share with a mean estimate of 21 cents, according to research firm Thomson First Call.

Revenue rose 2 percent to $1.09 billion from $1.08 billion a year ago.

Medicare's change in group therapy billing and closing or consolidating facilities in some markets to improve efficiency, led to a 17 percent drop in outpatient rehabilitation business revenue, the company said.

"The demands on management resources in the quarter, combined with confusion among our therapists on scheduling and staffing requirements under the new Medicare policy, negatively affected our ability to restore lost (patient) volumes during the quarter," President and Chief Executive William Owens said in a statement.

HealthSouth's inpatient rehabilitation revenue increased 12 percent in the third quarter from a year ago.

Over the past three months, HealthSouth said it added two new independent members to its board of directors, and formed a special corporate governance committee to review its governance policies and recommend changes.

The company has become the target of criticism for its governance policy, with some investors suggesting that its board is not independent.

Scrushy, who founded the company in 1984, said he might be willing to change some board members, some of whom have been with the company prior to 1985.

Since Aug. 26, the day before HealthSouth warned of the Medicare change, the company's stock fell 59.23 percent. HealthSouth shares closed at $4.88, but the stock traded as low as $2.80 shortly after the company disclosed the SEC investigation on Sept 19.

"It's clear the company has distractions on multiple fronts," Morgan said.

"All these external issues between investigations and the SEC will have to run their natural course and the timing of that is difficult to say. The further they get into that process of getting it resolved the better," said Morgan, who has a "hold" on the stock and a $9 sum-of-the-parts valuation.