Industry high-flier HealthSouth Corp. dropped to a lower altitude last week when its stock price fell about 33% after analysts predicted revenue losses related to its managed-care contracts.
HealthSouth Chairman and Chief Executive Officer Richard Scrushy acknowledged that revenues from its managed-care contracts would probably drop by about 10% next year. But he said the 1,900-facility outpatient surgery and rehabilitation chain is still "one of the most profitable healthcare companies in the business."
The Birmingham, Ala.-based company's shares closed at just under $10 on Oct. 2, down nearly $5 from the close Sept. 29. Its shares were trading at near $30 late this summer.
"It has been apparent that there has been some pricing slippage (in managed-care contracts) over the past year," said Frank Brown, an analyst at investment banking firm Sterne, Agee & Leach. "HealthSouth is the only one left that hasn't experienced problems."
Scrushy called the stock-price drop an overreaction. "We have an incredible track record," he said. "We have room for pricing pressure."
He also emphasized that the company will not close facilities or lay off employees to trim operating costs.
HealthSouth managed-care contracts account for about 60% of its business, Scrushy said.
Still, the company isn't taking things lightly. HealthSouth's board of directors has approved a 1.6 million-share stock buyback but did not specify a dollar amount. In addition, it said senior management planned to repurchase shares worth $1 million. Scrushy said he believed "a good part" of the buyback was complete.
On Friday, Standard & Poor's cut HealthSouth's outlook to "negative" from "stable," citing the possibility of a large-scale repurchase program, but it affirmed its outstanding investment-grade ratings for the company.
HealthSouth has expanded rapidly in recent years. Earlier this year it acquired 73 outpatient surgery centers from Columbia/HCA Healthcare Corp. and Chicago-based National Surgery Centers for a combined $1 billion. Analysts estimate HealthSouth will have net income of $500 million this year on revenues of about $4 billion.
The company will release an analysis of its managed-care contracts about the time it announces its third-quarter earnings, which should be "in three weeks or sooner," Scrushy said.