HealthSouth Corp., the Goliath of rehabilitation and ambulatory surgery center chains, stumbled on Wall Street last week. And the Davids were watching.
"Some of my clients who can't compete with HealthSouth tell me they don't understand how HealthSouth can keep their costs that low," said Phyllis Costanza, a senior manager at Fairfax, Va.-based Lewin Group, which does consulting for post-acute-care firms. "And the answer we see now is, they can't."
HealthSouth Chairman and Chief Executive Officer Richard Scrushy would dispute that claim, despite his acknowledgment that revenues from managed-care contracts might fall by 10% next year. HealthSouth's stock dropped by a third late last month. The drop followed analysts' warnings that the company might have lower than expected earnings (Oct. 5, p. 4). HealthSouth's 3,800 managed-care contracts account for 60% of its $4 billion annual revenues.
The company plans to do business as usual, Scrushy said, continuing to open facilities at the rate of about one a day.
"We will continue to grow the company; we will continue to expand," he said.
"(Managed-care companies) know HealthSouth is a company to do business with. They don't intend to stop doing business with us."
As little as a month ago analysts were saying that HealthSouth was insulated from the Medicare reimbursement change to a prospective payment system for rehabilitation services. They said it was doing an excellent job integrating its new acquisitions, including its $1 billion purchase earlier this year of 73 outpatient surgery centers from Nashville-based Columbia/HCA Healthcare Corp. and Chicago-based National Surgery Centers. But those analysts are no longer so sure.
"HealthSouth has been the cheapest game in town," said Jean Swenson, Boston-based analyst for BT Alex. Brown. "But the profit profile for HMOs overall seems more dismal than in the past," and HealthSouth may be forced to accept lower-paying contracts, she said.
Nancy Adams-Henroid, a Chicago-based manager in Arthur Andersen's healthcare consulting practice, said that if diversification was a HealthSouth strategy, it wasn't paying off. "With PPS, they are going to be impacted in the ambulatory surgery arena as well as the long-term-care arena."
Last week HealthSouth stock continued its slide, closing at about $8.50 a share on Oct. 9.
Although the company has not pointed the finger at Medicare payment policies for affecting its earnings, other rehabilitation providers have pointed fingers. King of Prussia, Pa.-based Novacare, the country's biggest provider of rehab services, points to HCFA's delay in providing new prospective payment rates for nursing homes.
Because of uncertainty about how much they will be paid as PPS is phased in, nursing homes seem to be cutting back on Medicare-related services, including rehab, said David Fridling, Novacare's vice president of corporate public relations. "I don't mean to say we aren't doing well," he said, "just that we are not doing as well as we were."