As Richard M. Scrushy, chairman and chief executive officer of HealthSouth Corp., wryly notes, "Unless you're at the North Pole, then you're south of something."
That may be justification enough for the 45-year-old Alabamian to hang HealthSouth signs over the doors of more than 1,100 rehabilitation hospitals and outpatient centers in towns as unsouthern as Anchorage, Alaska; Grand Forks, N.D.; and Ann Arbor, Mich.
HealthSouth signs hang in every state and may soon show up in the United Kingdom, where the Birmingham, Ala.-based company recently acquired six diagnostic imaging centers.
For better or worse, rehabilitation in America now bears HealthSouth's pervasive for-profit stamp. Since its founding in 1984, HealthSouth has come to dominate the rehabilitation industry to an extent arguably greater than any other provider in any other healthcare sector. The company has been busy buying up pieces of a fragmented, $16 billion industry, expected to grow 10% annually.
With its pending $1.6 billion acquisition of Albuquerque-based Horizon/CMS Healthcare Corp., HealthSouth has secured its place at the top, leaving little chance anyone south or north of the Mason-Dixon line can topple it.
"HealthSouth is so far out in front and has such a substantial head start; I don't see another company or startup catching them," says Robert Hoehn, an analyst with Salomon Brothers in New York.
But the industry's dynamics raise questions about how HealthSouth can sustain its rapid growth and just who else out there is trying to grab a piece of rehab pie.
"HealthSouth probably will continue to grow but will likely have many challenges," predicts Karen Breckenridge, president of Breckenridge & Associates, a rehab consulting firm in St. Helena, Calif. "You can't just get bigger and bigger and be responsive to consumers in every market. It starts to show."
Focused operations. At least for the moment, it's difficult, if not impossible, to point to another rehabilitation company approaching the field from the same focused core of operations as HealthSouth.
The company has stuck rigidly to building a referral system that links inpatient rehabilitation hospitals with outpatient diagnostic, surgery, rehabilitation and occupational-health centers. It now treats patients in any rehab setting at any intensity level.
HealthSouth currently controls about 40% of the nation's rehabilitation providers (See chart below). The acquisition of Horizon/CMS will add another 33 inpatient rehabilitation hospitals, 58 specialty hospitals and subacute units, 282 outpatient rehabilitation centers and 267 long-term-care facilities.
Scrushy says he likely will keep only the Horizon/CMS nursing homes that complement HealthSouth's existing services. He also says he doesn't plan to add to HealthSouth's four acute-care hospitals, grow its home-care business or expand into contract therapy.
He says he is interested, however, in pursuing sports medicine opportunities in the United Kingdom and inpatient rehab in Australia. He also has his sights set on South America and the Pacific Rim.
During 1996, HealthSouth's net income grew 139% to $220.8 million on revenues of $2.4 billion. After completing the Horizon/CMS acquisition, HealthSouth expects combined pro forma revenues of more than $4 billion for 1996 and nearly $5 billion for fiscal 1997. The company ended 1996 with total assets of $3.4 billion, total debt of $1.5 billion and a market capitalization of more than $7 billion. The company's share price has climbed from less than $10 in mid-1995 to about $27 last week.
In just the second quarter ended June 30, HealthSouth added 68 locations and secured more than 500 managed-care and employer contracts, bringing its total regional and national pacts to more than 3,000.
Hoehn expects HealthSouth's earnings to grow 20% annually until 1999 and then to slow to the high teens.
Creating a giant. Wall Street analysts like HealthSouth's track record of smoothly integrating its acquisitions.
Last year, the company secured its presence in diagnostic imaging with its acquisition of Atlanta-based Health Images for $270 million. It entered occupational health with its $70 million purchase of Sunnyvale, Calif.-based ReadiCare. It pushed its outpatient rehabilitation network into the Northeast with its acquisitions of Woburn, Mass.-based Advantage Health Corp. and Harrison, N.Y.-based Professional Sports Care Management for a total of $392 million. And it became a leader in outpatient surgery with a $1.2 billion deal to acquire Nashville-based Surgical Care Affiliates.
All those acquisitions were financed using HealthSouth stock, as have 80% to 90% of all the company's deals.
"Scrushy is very adept at integrating acquisitions because he has such a focused game plan," says John Runningen, a healthcare principal with Cordova Capital in Atlanta.
HealthSouth's latest deal with Horizon/CMS links the nation's two largest operators of inpatient rehabilitation hospitals. The merger has been delayed by an extended antitrust review by the Federal Trade Commission. HealthSouth expects to receive clearance and complete the merger later this month.
To address antitrust concerns, Horizon/CMS sold its partnership interests in Baptist Rehabilitation Hospital outside Memphis-where HealthSouth has a strong presence-and its Northeast Tennessee Rehabilitation Hospital in Johnson City, where the two companies own the only two rehab hospitals.
While its shopping spree continues to draw attention, "HealthSouth isn't just a roll-up acquisition story," says Andrew May, an analyst with J.C. Bradford & Co. in Nashville. "The company also drives internal growth with consumer outreach and by cultivating payer and physician relationships."
HealthSouth also has avoided the allegations of misconduct that have plagued other for-profit healthcare giants, most recently Nashville-based Columbia/HCA Healthcare Corp.
As a recent report from Alex. Brown & Sons points out, upcoding Medicare cost reports has not been an issue for HealthSouth because rehabilitation hospitals operate under a cost-reimbursement system, not the diagnosis-related-group system of acute-care hospitals.
HealthSouth hasn't been bothered by investigations into physician referrals, either. According to the report, the only physician ownership at HealthSouth is in the outpatient surgery division. Under current law, the report explains, doctors may refer patients to their own surgery centers, which are considered an extension of their practices.
Pursuing other opportunities. As chances for larger acquisitions start to dry up, HealthSouth is expected to continue growing through cross-selling opportunities.
Under its integrated service model, Scrushy explains, the company aims to provide a patient's diagnostic services and then perform any related services, such as orthopedic surgery and follow-up rehab. This referral ability helped it boost case-volume gains at SCA's former outpatient surgery centers to 8% in this year's second quarter from 4% before the acquisition, Salomon Brothers said.
Also, Scrushy says there are at least 70 markets in which he would like HealthSouth to build new inpatient facilities. He says the company plans to build two to three a year.
"There is pressure from payers and employers to make sure we provide service in all the major markets," Scrushy says. "And they're looking at our ability to provide a seamless system of care."
No match. In the world of rehabilitation providers no company comes close to the market share of HealthSouth on the inpatient side.
When its acquisition of Horizon/CMS is completed, HealthSouth will control about 130 of the 204 inpatient rehabilitation hospitals in the U.S. One of the next-closest chain operators is Santa Barbara, Calif.-based Tenet Healthcare Corp., a for-profit with only 12 inpatient rehabilitation hospitals in four states. Most of the remaining rehab hospitals are stand-alone and staunchly not-for-profit.
As a result, few potential rival providers aspire to be as fully integrated as HealthSouth on a national scale. They have chosen instead to diversify and pursue certain segments of the rehab business, such as outpatient rehabilitation, where HealthSouth is more vulnerable.
Outside the control of HealthSouth or other chains are 3,200 private physical therapy practices, 1,122 outpatient rehab centers, 1,498 diagnostic imaging centers, 1,651 outpatient surgery centers and 135 occupational health clinics, according to SMG Marketing Group, Chicago.
Although local and regional providers cut in on HealthSouth's business, Columbia is viewed as one of the few companies that ever could overtake HealthSouth nationally. For example, Columbia is the largest operator of outpatient surgery centers, with 167, according to SMG.
But, as a Columbia spokesman acknowledges, the company doesn't have a focused rehabilitation strategy and is unlikely to pursue rehab independently of its core acute-care hospital business.
Like Columbia, King of Prussia, Pa.-based NovaCare and Fort Smith, Ark.-based Beverly Enterprises have been cited as potential competitors to HealthSouth but have different core businesses.
In 1995 NovaCare sold its inpatient rehabilitation hospital division to HealthSouth for $215 million.
"If you're going to play in a market segment, then you should play to be No. 1," says John H. Foster, NovaCare's founder and CEO. "We didn't intend to be No. 1 in the acute inpatient rehab business."
Today 55% of NovaCare's business is providing contract therapy services to patients in 1,900 nursing homes; 36% is providing orthotics, prosthetics and outpatient rehabilitation services; and 9% is administering human resources functions for small and medium-sized businesses. In 1996 NovaCare reported net income of $15.3 million on revenues of $793 million.
NovaCare remains an active purchaser of outpatient rehab centers. In April it announced the acquisitions of 24 outpatient and occupational health businesses with combined revenues of $47 million.
But Foster views NovaCare as more than a healthcare provider. In the May Chief Executive magazine, he writes: "Fundamentally, I don't view NovaCare as a healthcare company but as a set of portable core competencies that we transfer from business to business to create shareholder value."
Beverly is the nation's largest operator of skilled-nursing facilities, reporting net income of $50.3 million on revenues of $3.3 billion in 1996. Two years ago, the company formed a new division called Spectra Rehab Alliance that provides outpatient rehabilitation, home care, hospice, respiratory therapy and rehabilitation consulting services.
Mark Wortley, an executive vice president for Beverly and president of Spectra, says the division has budgeted for 15 acquisitions of outpatient therapy clinics per quarter and plans to operate more than 300 by the turn of the century.
Currently Spectra operates 50 clinics in the Carolinas, Georgia, Ohio and Texas; has secured 117 managed-care contracts; and is expected to bring in $38 million in rehabilitation therapy revenues by year-end. In addition, Beverly's skilled-nursing division generates some $650 million annually in rehabilitation therapy revenues.
"We decided to diversify our presence in the relatively high-margin rehab field," Wortley says. "HealthSouth has acquired many of the large practices already, but consolidation is not complete."
Hungry startups, like Mechanicsburg, Pa.-based Select Medical Corp., also have targeted rehab. Formed in March with $56 million in seed money, Select already has acquired more than 10 outpatient clinics in Florida and Pennsylvania. Select also is pursuing other post-acute services.
"There's limited opportunity in rehabilitation," says investor James Hoover, general partner at New York's Welsh, Carson, Anderson & Stowe. "You're dealing with a subset of the post-acute market, and it's smaller in terms of money. Some segments, like inpatient rehabilitation, are more consolidated than they were 10 years ago."
Maintaining position. Meanwhile, traditional rehabilitation providers are repositioning themselves.
In Chicago, Schwab Rehabilitation Hospital and Care Network has affiliated with local hospital systems to provide rehabilitation services and has opened two primary-care clinics.
President and CEO Kathleen C. Yosko says most other stand-alone, not-for-profit facilities are similarly linking with larger systems and diversifying in an effort to be included in managed-care contracts and tap into new sources of revenues. Yosko also heads the Washington-based American Rehabilitation Association.
With 55% of Schwab's reimbursement coming from Medicaid, Yosko contends, "you won't see anyone coming into my neighborhood trying to pick up my market share."
Therapists in private practice also have found a way to compete with HealthSouth and remain independent.
Woodland Hills, Calif.-based PTPN represents a network of nearly 1,100 independent practices of physical therapists, speech-language pathologists and occupational therapists in negotiations with managed-care organizations. The network spans 22 states and has secured more than 300 contracts, including six national ones, that cover 33 million enrollees.
"These providers want an alternative to joining a larger corporation. They went into private practice so that they could maintain their autonomy in clinical and staffing decisions," says President and CEO Michael Weinper, who founded the private, for-profit company in 1984.
Not bashful. For its part, HealthSouth is optimistic about its opportunities for continued growth, judging by its tag line: "The Healthcare Company of the 21st Century." And Scrushy makes no apologies for its reputation as an aggressive competitor.
"With 1,500 projects slated for 1997, our pipeline is bigger than ever," he says. "There is no one company that parallels HealthSouth, and there is no other company operating a large network of rehabilitation hospitals. That was something we wanted to do."
Scrushy clearly takes personal pride in HealthSouth. Last year, the company erected the Richard M. Scrushy/HealthSouth Sports Medicine and Sport Science Center in Colorado Springs, Colo., to house the U.S. Olympic Committee's sports medicine and sport science technology divisions. It also has opened its own corporate museum and most recently moved into its new $38 million national headquarters, which includes the Richard M. Scrushy Conference Center.
Scrushy's personal stake is further evidenced by his control of the company's corporate environment and culture. He reportedly worked directly with the architects of the new headquarters, drawing its first sketch and selecting such details as brushed-chrome elevator doors.
The risk that HealthSouth will become a cautionary tale, analysts say, depends on its ability to keep its edge, stay focused, not grow too bureaucratic and play within the lines.
"I call it the edifice complex," says Hoehn of Salomon Brothers. "Any time we see someone build something with respect to an office complex, we worry about the mental position of the management and that they're starting to feel fat and happy."
But, like other analysts, Hoehn is reluctant to criticize until a shoe actually drops. "With HealthSouth, you've got one of the most driven management teams in the healthcare industry, and they seem to be aware of the pitfalls," he says.