Despite HealthSouth Corp.'s 41% drop in profits during this year's first quarter, management is telling investors that the company has left the worst behind. And analysts have picked up the tune.
"The company is signaling fairly aggressively that they feel very confident that they're not going to see a repeat of the last two years," said Debra Lawson, who analyzes the company's performance for Salomon Smith Barney.
"Things have stabilized," said Chairman and Chief Executive Officer Richard Scrushy. "The numbers are strong, and I think the company is on the road to moving on up to recovery."
The nation's largest post-acute-care company, HealthSouth operates 230 surgery centers, 1,400 outpatient rehabilitation clinics and 118 inpatient rehabilitation hospitals in all 50 states.
The financial performance of the Birmingham, Ala.-based company has been rocky since mid-1998, when it disclosed sharply lower earnings after it was unable to sidestep demands for lower pricing from managed-care companies.
Those demands coincided with a concerted effort by hospital companies, led by Columbia/HCA Healthcare Corp., to head off mounting managed-care pricing pressure on inpatient services.
Unable to gain further concessions from acute-care hospitals, managed-care companies may have shifted their focus to surgery centers and other outpatient clinics, Lawson speculated.
HealthSouth first reported negative pricing trends in its managed-care contracting in September 1998.
In September 1999, the company scrapped an initiative to split itself into separate outpatient and inpatient companies. HealthSouth hit an earnings nadir in the last quarter of 1999, when it lost $143.1 million, or 37 cents per share.
HealthSouth posted net income of $65.3 million, or 17 cents per share, in the first quarter ended March 31, which is down from $109.9 million, or 26 cents per share, in the same quarter a year ago. Revenue was flat at $1 billion.
The earnings beat Wall Street analyst projections by a penny.
"(Meeting expectations) is usually the first step in recovery, showing that you've got some predictability," Lawson said. "I think they've hit the stability phase. Now the question is, can we expect it to grow from here."
Jean Swenson, a Boston-based analyst for Credit Suisse First Boston, was more bullish. "Their volumes are good, the pricing is stable. It appears that they have turned the corner," she said.
The regulatory environment has also turned favorable.
HealthSouth expects profitability at its inpatient rehabilitation hospitals to rise slightly once Medicare's inpatient prospective payment system is implemented in April 2001, Swenson said.
HealthSouth plans further investment in its e-commerce business lines, including a procurement agreement with MedCenterDirect.com.