HealthSouth founder and Chairman Richard Scrushy contends the rehabilitation giant will emerge unscathed from its series of troublesome business dealings in recent months, but whether his reassurance will quell investors' and the industry's fears about management credibility issues at the company and its future remains to be seen.
In the wake of recently disclosed Medicare billing problems, reduced operating earnings projections and dozens of shareholder lawsuits alleging investors were defrauded by executives who made misleading statements, Birmingham, Ala.-based HealthSouth last week dropped another bombshell: The Securities and Exchange Commission is investigating the company.
Scrushy said HealthSouth voluntarily contacted the SEC and offered to provide the commission with "any information" that might aid the SEC in evaluating recent events.
"We did this on our own in advance of any contact from the SEC," Scrushy said in a conference call last week with investors and analysts. "We have since received a notice from the SEC and are cooperating." He later added, "The company is in solid financial health and we continue to lead the industry."
SEC officials would not comment on the investigation.
HealthSouth stunned the investor community Aug. 27 when it announced it would take a $175 million hit on operating earnings in 2003 because of a change in Medicare reimbursement policy for outpatient therapy services. In addition, the company announced it would spin off its surgery-center division as part of a massive restructuring and that HealthSouth President and Chief Operating Officer William Owens would replace Scrushy as chief executive officer.
In an interview with Modern Healthcare two weeks ago (Sept. 16, p. 8), Scrushy said he still could not calculate the long-term financial effect of the new billing regulations clarified by the Centers for Medicare and Medicaid Services on May 17. He said he also did not learn of the billing changes' impact until months after the clarification appeared online. "It's going to take us time to re-engineer," Scrushy told investors on the call. He said the company intends to "minimize the impact of this rule change and work with the system that's been handed to us now to continue to do a very fine job taking care of our patients."
While HealthSouth has had difficulty applying the new billing regulations, other outpatient therapy providers said they already had adjusted their operations to adhere to the new CMS interpretation. To further clarify any remaining confusion regarding coding for group therapy services, the CMS held a conference call earlier this month.
"We're not announcing any policy changes," CMS Administrator Thomas Scully said. "We're here to reiterate what our policy has been. We believe our policy has been clear all along."
Other industry groups have a different story.
Federation of American Hospitals President Chip Kahn in a Sept. 19 letter to Scully said, "It is our view that there has been confusion in the field caused by CMS announcements and actions since 1999."
Kahn said "the fairest and most reasonable course of action to respond to all of the concerns of the provider community is the one (the) CMS followed for skilled-nursing facilities-a public notice and comment process."
HealthSouth shareholders blame the company for more than just poor billing practices. Dozens of new shareholder lawsuits filed since Aug. 28 accuse Scrushy of insider trading; he sold 2.5 million shares of HealthSouth stock at $10.06 each on July 31, netting about $25 million.
Suits filed in the U.S. District Court in Birmingham over the past two weeks allege HealthSouth executives provided misleading information and SEC filings that defrauded investors from Jan. 14-when the company confirmed its earnings estimates for 2002-to Aug. 27, when Scrushy announced the $175 million earnings hit.
"These suits are without merit," Scrushy told investors on the call last week.
In light of the pending shareholder lawsuits, Scrushy said HealthSouth has appointed an independent member to its board of directors and appointed a special litigation committee to review shareholders' claims. In addition, the company has hired the law firm Fulbright & Jaworski as special counsel to conduct "a review of issues related to the litigation and other matters." Findings will be presented to the board and shared with regulatory authorities, company officials said.
Healthcare analysts said the announcement of the SEC's involvement didn't come as much of a surprise.
"Even though we believe there's value in HealthSouth's franchise, we think the SEC investigation and its headline risk will be overwhelming in the coming months," David Shove, an analyst with Prudential Securities, New York, said in a research note.