Rehabilitation giant HealthSouth Corp. dropped three bombshells today, and investors reacted by hacking its stock price nearly in half.
HealthSouth said a new interpretation of Medicare reimbursement policy for outpatient therapy services will cost it $175 million in operating earnings on an annual basis. Since the interpretation, part of a Centers for Medicare and Medicaid Services directive, became effective July 1, it should lower 2002 operating earnings -- or earnings before interest, taxes, depreciation and amortization -- by half that amount, or $87.5 million, Merrill Lynch & Co. said in a research report today. HealthSouth's 2002 operating income would then be about $1.3 billion.
The company also announced today that it would spin off its outpatient surgery division into a separate, publicly traded company to be named Surgical Care Affiliates with an estimated $1 billion in annual revenue. The company would be the nation's largest chain of surgery centers operating a total of 209 in 37 states, HealthSouth said.
The move is designed to shield the surgery division, which analysts consider the most lucrative part of HealthSouth, from the reimbursement change, the company said. Pending Securities and Exchange Commission approval and legal opinions that the split can be done tax-free to shareholders, HealthSouth expects to complete the spinoff by the end of March 2003, although officials hope it can be accomplished by year's end.
Other divestitures also could be in the making. In an SEC filing, HealthSouth said it has hired UBS Warburg "to assist us in evaluating potential divestitures and other strategies."
Meanwhile, HealthSouth is embarking on a major overhaul of its management structure, even before the spinoff's completion. For the first time since Richard Scrushy founded HealthSouth in 1984, Scrushy has relinquished day-to-day control of the company. Scrushy retained the title of chairman but handed over the reins as chief executive officer to William Owens, who was president and chief operating officer. Scrushy also will be chairman of Surgical Care Affiliates. Its CEO will be Larry Taylor, president and COO of the company's outpatient surgery division.
In light of HealthSouth's announcements, credit-rating agencies Standard & Poor's and Moody's said they are reviewing whether they should downgrade their ratings on HealthSouth's debt, which they estimated at between $3.3 billion and $3.5 billion.
While HealthSouth was revoking the earnings guidance that it had issued in December and had confirmed as recently as July 11, another therapy provider, Select Medical Corp., Mechanicsburg, Pa., confirmed its earnings estimates and said in a statement that it had already made adjustments in its operations to account for the directive.
According to HealthSouth, the CMS directive to Medicare Part B carriers changes the way Medicare considers reimbursement when a single physical therapist provides services to more than one patient at a time. Under HealthSouth's previous interpretation, a therapist could bill for two or more patients at the "individual therapy" rate if the patients were engaged in separate therapy activities. The company's therapists would bill at the "group therapy" rate when the patients were engaged in a group therapy activity.
The CMS, according to HealthSouth, is now directing providers to bill at the concurrent rate any time two or more patients are receiving therapy at the same time from the same physical therapist, regardless of whether the patients are working on the same activity.
The directive came as an addition to the Medicare carriers manual issued by CMS on May 17. The three sentences added to the manual are based on an underlying regulation that dates back to 1995.
The outpatient therapy services HealthSouth provides in its inpatient facilities -- four acute-care hospitals and 118 rehabilitation hospitals -- will be hit particularly hard, because the facilities have a higher percentage of Medicare patients than the company's 1,427 outpatient rehabilitation centers, Owens said during a conference call with analysts. HealthSouth executives did not take questions from the analysts, citing the need to secure regulatory approvals for the proposed spinoff of the surgery center division.
After closing yesterday at $11.97, HealthSouth shares were priced at around $6.60 in midafternoon trading.