Dennis Pappas Jr., M.D., a partner in an ambulatory surgery center with HealthSouth Corp., says he feels better now about his relationship with the beleaguered company than he did when news first hit on March 29 that HealthSouth was tumbling into an accounting scandal.
Initially, Pappas considered taking down the HealthSouth sign standing in front of his five-operating-room ASC, HealthSouth Outpatient Care Center, in the corporation's hometown of Birmingham, Ala.
Pappas, a board member of the facility, representing 52 physician-investors, says he was concerned that patients would question the quality of care.
But as revelations about the HealthSouth affair continue to trickle out, Pappas says only two patients have even asked about it, and the board stopped plans to take down the sign.
Also, even as the financial position of the nation's largest provider of outpatient surgery and rehabilitation services becomes dire, Pappas says financial results for his ASC last quarter were among the best it has had in five years. In mid-April, he says, HealthSouth distributed quarterly profits to its physician partners 12 days before the usual date.
"They're paying their bills, they're even making their distributions," Pappas says.
But plenty of other HealthSouth physician partners in the 203 HealthSouth ASCs are worried about the future of the company and how it could affect them, according to lawyers and consultants in the ASC field.
They report that dozens of these physicians have been calling, asking how they can protect themselves from a potential bankruptcy or a fraud investigation and how they can break ties with HealthSouth.
Breaking up is hard to do
"There are a lot of physicians who would love to get out of their relationship with HealthSouth," says Carsten Beith, an ASC expert in Chicago with Cain Brothers, a healthcare investment banking firm. But Beith says the terms of HealthSouth's contracts with physicians don't make it easy for them to buy the company out.
Company officials say HealthSouth might agree to release partnering physicians from contractual terms and let them buy out single centers, but they note that the ASCs are the most lucrative part of the corporation at a time when HealthSouth needs a stable income.
Even if the corporation went bankrupt, which they insist won't happen, HealthSouth officials say contracts with physicians would still hold.
Beith and other experts say the company appears to be correct on this. Still, HealthSouth has been bought out before by partnering physicians, such as Steven Immerman, M.D., CEO of the physicians' organization that partnered with Health-South on Oak Leaf Surgery Center in Eau Claire, Wis.
Oak Leaf bought out HealthSouth 16 months ago and has converted itself into a surgery hospital, Immerman says. He says the physicians ended relations with HealthSouth because it was too bureaucratic. They had built the ASC to get away from hospital policies that slowed down operations, he says, but discovered HealthSouth had its own red tape.
"We would want to do something that was different from the entire organization, like pay staff more than the HealthSouth corporate rate, and they weren't really able to deal with it," Immerman says. When the OR manager quit in frustration, the physicians decided to buy out HealthSouth, he says.
HealthSouth's control over its ASCs is reportedly a common complaint among physician partners, but Pappas, for one, says it should be expected.
"What group of doctors would necessarily want to have a corporate partner?" he says. "Doctors sell to a corporate entity like HealthSouth because it's a good return on the original investment."
Immerman also reports that HealthSouth slowed down payments to vendors at the time of each quarterly earnings report. But neither he nor Pappas say they have ever seen the type of fraudulent conduct in bookkeeping at their ASCs that has been alleged at the main office, such as overstating earnings by nearly $2.5 billion since 1997.
Immerman says the buyout went fairly smoothly because the physicians already owned majority interest in the ASC, an unusual arrangement for HealthSouth, which usually is the controlling partner, according to the company. A buyout may not be as easy for physician partners with minority interest, he adds.
Pappas says doctors at his Birmingham ASC aren't contemplating a similar takeover now, but since they hold a minority interest, he says it would be hard to buy out HealthSouth.
Scott Becker, an attorney at Ross & Hardies in Chicago who has been getting frantic calls from physicians partnering with HealthSouth, says the ASCs' role as the company's golden goose puts them in a precarious position. In addition to its ASCs, HealthSouth operates nearly 1,500 facilities, including inpatient and outpatient rehabilitation services, outpatient diagnostic services and two acute care hospitals.
Each evening, Becker says, every HealthSouth ASC sends its earnings for the day to a corporate account in Birmingham, and all ASC payments, including staff salaries, are paid by headquarters.
The daily cash "sweep," as it is called, "is a huge problem for the local centers," Becker says. "If HealthSouth gets into a bankruptcy, the local center may not ever see that money again."
Becker says the chances that HealthSouth will end up in Chapter 11 reorganization are "better than 50-50."
Meanwhile, HealthSouth officials say they will decide by the end of June whether the company must go into bankruptcy.
HealthSouth is already $1.25 billion in default to its bank lenders. But in April, lenders averted bankruptcy by signing a forbearance agreement to not call in HealthSouth's debts until May, with the possibility of extending the agreement at that time.
HealthSouth officials say they are hopeful that the lenders will do so because the company is making money and paying its bills and staff salaries.
Saying previous financial statements "can no longer be relied upon," HealthSouth has indefinitely postponed its financial reports for 2002 and for the first quarter. But company spokesperson Andy Brimmer says steady patient volume at its ASCs since the scandal broke show that it is weathering the storm.
Brimmer adds that some vendors for HealthSouth ASCs have demanded cash up-front, but the corporation won't allow this.
"We are cutting checks every day for vendors," he says.
Suits pile up
Still, high payouts from lawsuits against the company could tip HealthSouth into bankruptcy. The Securities and Exchange Commission is seeking up to $743 million in penalties, forfeiture of illegal profits and triple damages. It accuses the company and former CEO Richard Scrushy of insider trading and fraud.
Also, the Justice Department reports that several whistleblower lawsuits pending against the company allege fraud in Medicare payments. Those suits, consolidated in federal court in San Antonio, are limited to HealthSouth's rehabilitative business and not its ASCs.
Brimmer insists that the HealthSouth scandal won't bring down its ASCs because each center keeps its own books and does its own billing. HealthSouth, however, hires each center's administrator and staff, who do the billing, while the corporate offices oversee accounts receivables and pay vendors, he says.
If HealthSouth should enter bankruptcy and have to sell off its ASC operations, they are more likely to be sold in groups, rather than as individual centers to their physician co-owners, says Tom Yearden, CEO of Aspen Healthcare, a Boulder, Colo.-based manager of ASCs in 26 states.
Unlike some other experts, Yeardon says the scandal would not substantially dampen ASC prices, which have shot up from 3.5 times earnings several years ago to 7.5 times earnings this year. With ASCs now selling for $5 million to $10 million each, he says a big package of ASCs thrown on the market might depress prices somewhat, but a bigger concern is finding the expertise to manage them.
Yeardon and other consultants say they worry that the HealthSouth scandal could tarnish ASCs at a time when the industry needs to burnish its image to ward off federal attempts to reduce ASC fees.
"This is a blot for the whole industry, not just HealthSouth," Yeardon says. "Now healthcare has its Enron."
Should I stay or should I go?Gerald Niederman, a health law attorney at Faegre & Benson in Denver, offers some tips for physicians who hold ASC partnerships with HealthSouth:
- Get professional help. Hire an attorney, consultant and/or accountant to examine your HealthSouth contract, other documents and the finances and operations of the ASC.
- Do you want to stay with HealthSouth? Your other options are to drop out, thus avoiding future liabilities, or buy out the company, if your contract allows that and it's in your interest.
- Would a buyout be a good thing? Would the arrangement pass legal muster? Would you have "successor liability" for its current obligations?
- Who owns what? You also need to determine the ownership and transferability of medical equipment, building, IT system, managed care contracts, etc.
- What price will you offer? Take into account debt, personal guarantees, accounts payable and receivable, who has possession of the cash and who owes what to whom.
- Do you want a new partner? You could pair with another ASC company or a hospital. If you want to be completely doctor-owned, think about how many doctors you should enlist.
How HealthSouth headed southSummer 2002: HealthSouth warns that changes in Medicare regulations are causing a severe profit shortfall, causing stocks to dive. Plans to spin off its ASC unit are announced but later rescinded.
March 19: The Securities and Exchange Commission files a civil lawsuit charging that HealthSouth overstated profits by $1.4 billion since 1999. That figure is later revised upward to nearly $2.5 billion. HealthSouth is delisted; stocks plummet immediately.
March 27: The company says it is in default on $1.25 billion in loans, opening up the possibility of bankruptcy.
March 31: HealthSouth board fires founder, chairman and CEO Richard Scrushy and appoints two board members to replace him: Joel Gordon as acting chairman and Robert May as acting CEO.
April 10: Major lenders agree to refrain from pressing HealthSouth for payment until May 1, thus delaying bankruptcy.
Source: News reports and HealthSouth releases