By announcing his intention to split HealthSouth Corp. into separate inpatient and outpatient companies, Chairman and Chief Executive Officer Richard Scrushy has set the stage for what may be a buying spree of hospitals and skilled-nursing facilities.
The move would also insulate the company's fast-growing outpatient business from guilt-by-association with the Medicare-heavy rehabilitation hospitals, which are subject to a new prospective payment system starting next year.
It also marks the end of Scrushy's vision to create the country's single largest post-acute company.
"You can't hold this company back because Richard Scrushy or somebody wants to hold their empire together," Scrushy said.
But Scrushy said the spinoff will unleash growth on both sides.
"If we separate the company, we can kick up the growth rate of the inpatient and the outpatient (businesses), and end up with an extra couple of billion (dollars in) revenues over a five-year period," he said.
Last week, HealthSouth's board approved a spinoff of the Birmingham, Ala.-based company's inpatient facilities. The new company, to be called HealthSouth Hospital Corp., would include 128 rehabilitation hospitals and four acute-care hospitals.
HealthSouth would become an outpatient-only concern, retaining more than 1,200 outpatient rehabilitation centers, 222 surgery centers, 119 diagnostic centers and 119 occupational health centers.
Each company would generate about $2 billion in annual revenues.
As chairman of both companies, Scrushy expects revenues at outpatient HealthSouth to grow by about 20% each year and at inpatient HealthSouth Hospital by about 15%.
The tax-free transaction is expected to be completed by November, subject to regulatory approval and favorable tax opinions from legal counsel. The two companies hope to begin their separate lives in November.
Scrushy declined to say which company, if either, he would head; tax laws prohibit him from being CEO of both.
The two companies will have separate boards and management teams.
The spinoff "allows us to get back to what made this company successful-being smaller, more entrepreneurial," Scrushy said. "To operate them as one stymies the growth of both sides."
HealthSouth currently serves two distinct patient populations. Only about 10% of patients are seen at both its inpatient and outpatient facilities.
HealthSouth's inpatient business depends on Medicare for about 57% of its revenues, and Scrushy has deferred to investors' growing wariness of government reimbursement programs by keeping inpatient acquisitions to a minimum.
Instead, HealthSouth has grown its outpatient side, which currently derives about 12% of its business from Medicare.
Conflicts of interest between inpatient and outpatient units also kept back growth in some markets, observers said.
"The rehab hospital looks to the acute-care hospital as a referral source, whereas outpatient services see them as competitors," said A.J. Rice, an analyst for Merrill Lynch & Co.
Separately, the companies would be free to pursue relationships that HealthSouth couldn't as a single entity.
Splitting the company also would protect the outpatient business from any ill effects from Medicare's PPS for inpatient rehabilitation.
According to Jean Swenson, a Boston-based analyst for Deutsche Banc Alex. Brown, HealthSouth Hospital's probable entrance into the nursing home business could not have come at a better time.
With the worst of the adjustment to the skilled-nursing PPS ending this month, nursing homes will be ripe for the picking, she said.
On the acute-care side, HealthSouth Hospital will likely buy only those facilities that specialize in lucrative lines of business, such as orthopedics, Swenson said.