Interim management at HealthSouth Corp. said last week that although fraud at the company is now believed to have exceeded $4 billion, the rehabilitation provider is expected to recover fully from the scandal and remain financially viable.
Officials with Alvarez & Marsal, the turnaround firm managing HealthSouth, told company stakeholders at a business meeting in New York that fraud at the Birmingham, Ala., provider totaled between $3.8 billion and $4.6 billion, far higher than the $2.7 billion estimate alleged by federal prosecutors last year. An ongoing audit uncovered $2.5 billion in fraudulent accounting entries from 1996 to 2002, $500 million in incorrect accounting for goodwill and other items involved in acquisitions from 1994 to 1999, and between $800 million and $1.6 billion in "aggressive accounting" from 1992 to March 2003.
The meeting with company stakeholders was HealthSouth's first since July 7, 2003, when company officials said HealthSouth would likely avoid bankruptcy. Chief restructuring officer Bryan Marsal said at last week's business update that the company expects to produce a cleaned-up balance sheet and install a new chief executive officer and permanent management team by the end of June. HealthSouth is projecting 2004 revenue of nearly $4 billion.
"By the end of the second quarter, this company should be doing business as usual," said Guy Sansone, HealthSouth's acting chief financial officer and a partner at Alvarez & Marsal.
Declaring HealthSouth's crisis period and scrubbing of its financials largely over, restructuring officials said the company is performing better than anticipated in several service lines, although its outpatient surgery business is facing reimbursement and competitive pressures. HealthSouth spokesman Andy Brimmer called the company's inpatient and diagnostic imaging divisions "rock solid." Brimmer said major construction also continues on HealthSouth's digital hospital in its corporate hometown. The full-service acute-care facility is expected to open in early 2005.
"We have stable and improving operations that are focused on our core business, which is patient care," said interim Chairman Joel Gordon.
Legal fees and other professional fees for restructuring experts and forensic accounting work will cost HealthSouth $91 million, company officials said.
Analysts and others in the industry were surprised but encouraged by HealthSouth's stated progress, although they said several obstacles remain in the road to recovery. Among them are ongoing talks with the CMS to reach a settlement of previous Medicare overpayments related to the company's alleged fraud. But HealthSouth officials said any overpayments were not significant. HealthSouth is also discussing with the CMS the implications of the accounting fraud on future Medicare reimbursements, as well as separate whistleblower litigation against the company. Company officials would not comment on the status of the negotiations but said they hope to reach a settlement by midsummer.
Also unresolved are the U.S. Justice Department's criminal investigation, several class-action lawsuits and the company's investigation by the Securities and Exchange Commission. While analysts said the financial risk is difficult to quantify, it's something that should not be forgotten until a settlement with the government is reached.
"It appears (in the business update) that they played down the investigation risk that is still out there," said Premila Peters, an analyst who covers high-yield bonds for KDP Investment Advisors, which represents HealthSouth bondholders. "Other than that, as far as operations, based on annualized numbers so far and the company's continued confidence in their plan, it seems, although it's hard to believe, that they are viable."
When the accounting fraud was disclosed on March 19, 2003, HealthSouth feared bankruptcy and liquidation in the absence of financial facts about the company's position. Banks froze HealthSouth's credit and the board acted swiftly to remove company founder Richard Scrushy as CEO.
Scrushy has denied any knowledge of the fraud, blaming the company's gross financial misconduct on his underlings. Fifteen former HealthSouth employees, including all five former chief financial officers, have pleaded guilty in the scandal. Scrushy's jury trial is slated to begin in August.
"I give credit to the board-I'm astounded at the job they did," Peters said. "Leadership was the most important thing they needed to keep the company together."
Gordon, who became a director in 1996 with HealthSouth's acquisition of his surgery center company, said earlier this month that the company reached a "milestone" in restructuring efforts when it refinanced debt due in April that had put it in default and raised fears of bankruptcy. The company said it is current on all of its payments under its borrowing agreements that cover more than $3 billion of debt.