Now believing that one head is better, HealthSouth Corp. Chairman and Chief Executive Officer Richard Scrushy has backed out of a plan to split the nation's largest post-acute-care company into separate inpatient and outpatient companies.
The Birmingham, Ala.-based company operates more than 1,300 outpatient rehabilitation centers, 222 surgery centers, 119 diagnostic centers and 119 occupational health centers. On the inpatient side, it operates 128 rehabilitation hospitals and four acute-care hospitals.
When he announced the spinoff in June, Scrushy said it would unleash the potential of the company's outpatient business, which was outpacing the inpatient business.
Those earnings had been held back by the slower-growing hospitals and their heavy dependence on Medicare reimbursement, he said.
In fact, just last month, in the company's second-quarter earnings report, Scrushy said he continued to "make good progress toward completing (the spinoff) during the second half of 1999."
The spinoff proposal called for Scrushy to be chairman of both companies.
But since August a lot has changed, and the split has been "tabled indefinitely," the company said last week.
"There is still a large growth differential between the outpatient and the inpatient," said Jean Swenson, an analyst for Credit Suisse First Boston.
But she said developments during the past three months "took the bloom off the rose on the outpatient side, and the ugly sister (inpatient division) was made all the more attractive. (HealthSouth) decided that maybe it was better to keep the purchasing power and the negotiating power (of a single company)."
Since June, projected operating margins for the outpatient business fell to 27% from more than 30%. Clinics have not experienced expected demand, and pricing pressure and payment delays from managed-care companies continue to dog the business.
As a result, the company said cash flows for 1999 would fall to $1.2 billion. Analysts had expected that number to be closer to $1.4 billion. The analysts also said lower earnings made raising capital for the spinoff prohibitively expensive.
HealthSouth first acknowledged managed-care pricing cuts and payment delays last September.
"Most of the weakness in the earnings comes from the fact that the HMOs, if they can't get price (concessions) this year, will get utilization control," Swenson said. That would cut further into patient volume and the bottom line.
"I don't think you can expect HealthSouth to ever return to its prior levels of profitability," said Bob Hoehn, a New York-based analyst for ING Barings.
Meanwhile, the outlook for the rehabilitation hospital industry has brightened. In July, HCFA announced its decision to base the new PPS on a per-episode basis. The industry had fought a per-diem system such as the one that has generated financial difficulties for large nursing home chains.
A favorable PPS would allow HealthSouth's inpatient hospitals to profit on Medicare business.
In a related move, HealthSouth announced a $1 billion capital investment plan for the next three to five years and a corporate restructuring costing up to $300 million by year-end.
The management changes mark a shift from national managed-care contracts and allow the company to capitalize on local market penetration, analysts said.
In a written statement, Scrushy said abandoning the split was in the company's long-term interest.
"HealthSouth continues to have the best margins in healthcare services," he said.
Scrushy said that to show confidence in the company, he would take up to $25 million from his own pocketbook to buy back company stock.
HealthSouth's stock price fell 28% to $5.69 per share Friday.