HealthSouth Corporation

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HealthSouth Corporation

1 HealthSouth Parkway
Birmingham, Alabama 35243
U.S.A.
Telephone: (205) 967-7116
Fax: (205) 969-4719
Web site: http://www.HealthSouth.com

Public Company
Incorporated: 1984 as Amcare, Inc.
Employees: 51,901
Sales: $4.07 billion (1999)
Stock Exchanges: New York
Ticker Symbol: HRC
NAIC: 621493 Freestanding Ambulatory Surgical and Emergency Centers; 621111 Offices of Physicians (Except Mental Health Specialists); 62134 Offices of Physical, Occupational and Speech Therapists, and Audiologists; 621512 Diagnostic Imaging Centers; 621498 All Other Outpatient Care Centers; 621999 All Other Miscellaneous Ambulatory Health Care Services

HealthSouth Corporation is the leading provider of medical rehabilitation health care and outpatient surgery services in the United States. With more than 1,900 locations in the United States, the United Kingdom, and Australia, HealthSouth provides physical and other therapy in its rehabilitation facilities, offers imaging services through its diagnostic centers, and provides nonemergency surgical services at its outpatient surgery centers. The company also has occupational medicine clinics that deal exclusively with patients suffering from work-related health conditions. HealthSouth has contracts with managed care plans, insurance companies, and major corporations, including Wal-Mart and Goodyear. HealthSouth also has alliances with professional sports associations and schools to supply rehabilitative and sports medicine services.

A New Twist on Rehabilitation Services: 1980s

HealthSouth was the brainchild of Richard Scrushy. Scrushy grew up in Selma, Alabama, and earned a degree in respiratory therapy from the University of Alabama, Birmingham. By the age of 30 he had advanced to vice-president at Lifemark Corp., a Houston-based health care management firm. At Lifemark, Scrushy witnessed firsthand the changes sweeping the health care industry. The dominant trend was toward a reduction in reimbursement dollars available to traditional medical practitioners. Corporations and insurance companies were trying to cut health care expenditures while, at the same time, costs in the medical field were rising. “I saw the squeezing of reimbursement in the health care system and I wanted to take advantage of that change,” Scrushy said in a June 1990 article in Forbes. “My idea,” he added, “was to provide high-quality hospital-type rehabilitation services in a low-cost setting.”

Scrushy got his chance to start his rehabilitation company in 1984, when Lifemark Corp. was purchased by Los Angeles-based American Medical International. Armed with a plan, Scrushy lacked only the money to get started. His break came in a Houston restaurant, when a Citicorp venture capitalist overheard Scrushy outlining his business plan and eventually offered a $1 million grubstake, giving birth to what would become Health-South. Scrushy convinced four of his Lifemark associates to break ranks with him and move to Birmingham to build the company’s first outpatient facility. Their company was incorporated in January 1984 as Amcare Inc. before its name was changed to HealthSouth Rehabilitation Corporation in May 1985.

Scrushy got into the rehabilitation industry at a good time. During the early 1980s people began to view rehabilitation as a means of reducing medical expenses. Specifically, rehabilitation could be used to minimize unnecessary, expensive surgeries. It also helped injured workers get back to their jobs more quickly, thus eliminating expensive worker’s compensation and disability costs. As health and insurance professionals began to recognize those benefits, the use of rehabilitation services soared. Between 1982 and 1990, in fact, rehabilitation expenditures increased at an average annual rate of about 20 percent and the number of outpatient rehabilitation centers soared. That industry growth contributed to healthy gains for HealthSouth throughout the decade.

Perhaps more important than general industry expansion for HealthSouth during the 1980s was Scrushy’s and his fellow managers’ unique operating strategy. When HealthSouth got started in 1984, rehabilitation centers were stereotyped as drab, institution-like facilities with, generally, mediocre staff. Scrushy wanted to change that image. Borrowing from health clubs, he designed his rehab centers as bright, open-spaced, mirrored rooms with trained physical therapists and sporty equipment. The centers more closely resembled high-priced health clubs than traditional hospital-sty led rehab centers, and doctors became increasingly willing to send patients to a HealthSouth facility for treatment. Scrushy added a few more HealthSouth outlets and by 1985 was generating nearly $5 million in annual revenues.

HealthSouth added new rehab centers to its chain throughout the middle and late 1980s. Because of the company’s unique recipe for success, its centers became known as effective and cost-efficient, and as models for other companies in the rehab industry. Rather than focusing on a specific rehab niche, such as head or spinal injuries, HealthSouth differed from many of its competitors in that it targeted the larger market for less expensive, general outpatient rehabilitation services. HealthSouth’s facilities were built around a large gymnasium, in which some patients rode exercise bikes while listening to rock music. Old and young people worked out side by side, often with the help of a therapist, while others enjoyed physical, occupational, or speech therapy in private treatment rooms. Some of the machines even were hooked to computers that fed reports to doctors about how patients were responding to treatment.

HealthSouth appealed to the medical community by offering a number of rehabilitation programs tailored for different ailments. At the urging of Dr. Scott Burke, a Denver spinal rehabilitations specialist, HealthSouth designed a program to treat back problems. Becoming widely used, the whole package—incorporating stretching, aerobic conditioning, anatomy education, and work simulation exercises—took about four weeks and cost a total of only $3,700, which was much less than the patient might otherwise spend on unnecessary surgeries and hospital costs. Health-South also began offering special services for the lucrative sports rehabilitation market. To that end, HealthSouth eventually launched an entire sports division with separate facilities and prominent doctors. Dr. Jim Andrews, one of HealthSouth’s most renowned surgeons, treated such celebrities as Bo Jackson, Jane Fonda, and Charles Barkley, among others.

While HealthSouth kept the doctors and patients happy with state-of-the-art facilities, it stayed on the good side of the insurance companies by minimizing overhead and treatment costs. It saved money on construction, for example, by using the same basic floor plan and architecture for all of its outpatient centers, including the same carpeting, wallpaper, and furniture. Because the centers processed so many patients—about 15 to 20 per hour, or roughly 200 a day at many HealthSouth facilities—the average cost of a visit was kept at a low $50 to $90. Insurers did not blink at the cost, because it was much less expensive than traditional treatment. A study conducted by Northwestern National Life Insurance Co. estimated that every $1 spent on rehabilitation saved about $30 on disability benefits.

By 1988 HealthSouth was operating a network of 21 outpatient facilities, 11 inpatient facilities, and seven rehabilitation equipment centers in 15 states, making it a leader in the U.S. rehabilitation industry. Sales had spiraled upward at an average of more than 100 percent annually since 1984, peaking at $75 million in 1988. Revenues shot up to $114 million in 1989 and then to $181 million in 1990, about $13 million of which was netted as income. In fact, HealthSouth managed to post successive profits every year after 1985. Aside from increasing its customer base at existing centers, the company grew by purchasing other rehab and health care companies and restructuring them to fit into the HealthSouth organization. It was in December 1989, for example, that Scrushy jumped into the sports rehab business when he paid $21 million for a 219-bed general hospital in Birmingham that specialized in orthopedic surgery and sports medicine.

Company Perspectives:

The fundamental human relationships involved in the delivery of quality healthcare services are the foundation of our way of doing business. Therefore, we place primary value upon our patients, their families and our employees. We are dedicated to providing superior care to those individuals whose lives are entrusted to us. Our primary focus is to respond to their needs. Our dealings with them will be professional, courteous, helpful and cooperative. Our employees are critical to our success as a corporation. We will respect their individuality, recognize and reward their good performance, provide opportunities for their growth and development and encourage their participation in the decision-making process. We consider respect, trust and integrity to be essential in all our dealings. We expect honest, ethical behavior from ourselves, and we encourage it in others. Our employees live and work in the larger context of society. Therefore, we value and encourage responsible individual and corporate citizenship. We recognize our obligation to be a positive influence in the communities in which we maintain a corporate presence. We are progressive in our response to the changing needs of our business and prudent in the management of our resources. We value superior, high-quality work at the individual, unit and corporate levels. Without apology, we are profit-oriented, for only profitable companies can adapt and survive to meet their long term commitments to patients, employees and stockholders.

Rapid Growth Through Acquisitions in the Early 1990s

By the mid-1990s, HealthSouth was operating 14 inpatient and 31 freestanding outpatient rehabilitation centers in 21 states. The company continued to add new general rehabilitation centers to its chain in 1991 and 1992. Meanwhile, its specialized sports business flourished and it enjoyed success with its new orthopedic hospitals that featured leading surgeons. By 1992 HealthSouth had established itself as one of two leaders in the U.S. rehabilitation industry. Its chief nemesis was Continental Medical Systems Inc., of Pennsylvania. Continental, with $20 million in net earnings in 1991 compared with $22 million for HealthSouth, generated most of its profit from rehabilitation service contracts with hospitals, schools, and nursing homes. Like HealthSouth, it operated inpatient and outpatient rehab centers across the country.

Continental and HealthSouth nearly merged in 1992. The resulting company would have been a $2 billion concern had the deal not fallen through. Instead, HealthSouth remained independent and went on to become the largest provider of rehabilitative services in the nation. It attained that status through an aggressive merger and acquisition agenda advanced during the early and mid-1990s. Chief among its acquisitions was the purchase of National Medical Enterprises Inc. in December 1993. That pivotal buyout added 31 inpatient rehabilitation facilities and 12 outpatient rehabilitation centers to Health-South’ s portfolio, boosting the total number of outpatient centers in its chain from 126 at the end of 1992 to 171 going into 1994. Evidencing the effectiveness of HealthSouth’s strategy was a substantial improvement in the performance of National Medical’s facilities in the two years following the acquisition.

HealthSouth’s revenues for 1993 surged impressively to $575 million and the company assumed the industry lead. HealthSouth achieved its dazzling gains during the early 1990s, in part, by focusing on rehabilitating people who were injured rather than chronically ill. That was the primary growth market, because employers and insurance companies were eager to get those people out of the health care system. HealthSouth’s Workstart program was a good example of its core service. The Workstart plan was designed to get most workers back on the job after surgery or an injury within 30 days at an average cost of just $2,700. The program was ideal for employers because HealthSouth, using advanced testing and statistical analysis, was able to determine the extent of the patients’ pain and injury. Among other benefits, that kind of analysis discouraged faking or exaggerating the extent of injuries to take advantage of disability payment programs.

HealthSouth stepped up its acquisition program in 1994 and 1995 by absorbing a number of new companies. Two major purchases included the September 1994 acquisition of ReLife Inc. and the February 1995 buyout of NovaCare, Inc.’s inpatient rehabilitation hospital division. ReLife brought 31 inpatient rehabilitation facilities and 12 outpatient centers that added roughly $119 million in annual revenues to HealthSouth’s income statement. That and other acquisitions helped to push HealthSouth’s sales past the $1 billion mark to $1.13 billion in 1994. Furthermore, net income vaulted to $53.23 million and the company’s stock price raced to a record level. Following the NovaCare acquisition, the company’s total network rose to more than 425 facilities located in 33 states.

HealthSouth sustained its aggressive growth drive throughout 1995, snapping up several smaller competitors. Significantly, in October 1995 HealthSouth announced that it had agreed to purchase the rehabilitation services operations of Caremark International for $127 million in cash. The Caremark operations consisted of 123 outpatient rehabilitation facilities that were generating about $80 million in annual revenues. That gave the company a total of about 440 outpatient facilities and about 40 percent of the total rehabilitation market. HealthSouth also bought Diagnostic Health Corporation, which offered outpatient imaging services. Perhaps most notable was the early 1995 acquisition of Surgical Health Corporation, which represented HealthSouth’s diversification into an entirely new market: outpatient surgery services. The $1.1 billion acquisition, the company’s largest to date, immediately catapulted Health-South into the lead as the top operator of outpatient surgery centers in the nation.

Continued Diversification and New Challenges in the Late 1990s

HealthSouth’s steady string of acquisitions did not end as the company headed into the second half of the decade. Purchases in 1996 included Surgical Care Affiliates, Inc., which included 67 outpatient surgery centers in 24 states, for an estimated $1.4 billion; Advantage Health Corporation, which owned about 136 inpatient and outpatient rehabilitation centers in 11 states, for about $315 million; Professional Sports Care Management, Inc., which included 36 outpatient rehabilitation centers in New York, New Jersey, and Connecticut, for about $59 million; and ReadiCare, Inc., which operated 37 occupational health centers in Washington and California, for about $76 million.

The following year HealthSouth acquired Health Images, Inc., which owned 55 diagnostic imaging centers in the United Kingdom and 13 states in the United States; ASC Network Corporation, which operated 29 surgery centers in eight states; and National Imaging Affiliates, Inc., which ran eight diagnostic imaging centers in six states. The most significant acquisition, however, was the purchase of Horizon/CMS Healthcare, the largest provider of specialty health care services in the United States. The transaction included 30 inpatient rehabilitation centers and about 275 outpatient rehabilitation centers, in addition to other businesses. After completing the deal, HealthSouth sold Horizon’s 139 long term care facilities, 12 specialty hospitals, 35 institutional pharmacies, and more than 1,000 rehabilitation therapy contracts to Integrated Health Services, Inc.

Key Dates:

1984:: Richard Scrushy and four partners form Amcare Inc.
1985:: Company changes name to HealthSouth Rehabilitation Corporation.
1986:: Company goes public.
1994:: HealthSouth surpasses the $1 billion mark in revenues.
1995:: HealthSouth expands into outpatient surgery services with the acquisition of Surgical Health Corporation.

In 1998 HealthSouth made two major acquisitions. The firm purchased National Surgery Centers, Inc., which operated 40 surgical facilities in 14 states, and also acquired 34 surgery centers from Columbia/HCA Healthcare Corporation. To focus on its core operations, HealthSouth decided in 1998 to sell its nonstrategic businesses, including its home health operations. HealthSouth’s numerous acquisitions had significantly strengthened and expanded its dominance and presence in rehabilitative and outpatient surgery services, and by the end of the year HealthSouth had nearly 1,900 centers in 50 states, the United Kingdom, and Australia.

Despite HealthSouth’s leadership position and long history of steady earnings growth, the company faced new challenges in the late 1990s that cut into its profits. The federal government’s Balanced Budget Act of 1997 placed new restrictions on Medicare, which resulted in lower reimbursements for some medical services. A significant portion of HealthSouth’s revenues came from Medicare, and the new legislation led to decreasing reimbursements for HealthSouth. In addition, managed care companies and health maintenance organizations (HMOs) were growing in number and power, and their attempts to lower reimbursement costs to health care providers posed a serious threat to HealthSouth, which received about 60 percent of its total revenue from managed care. In October 1998 Health-South announced that earnings growth was slowing to about 15 to 20 percent from about 30 percent a year. As a result, the company’s stock tumbled from a high of about $30 per share during the summer to less than $8. HealthSouth’s founder and CEO was undaunted, however—Scrushy noted that growth of between 15 and 20 percent a year was quite acceptable and commented on the share price erosion in the Wall Street Journal. “It’s all paper,” Scrushy stated, adding “I’m very calm.”

HealthSouth continued to face difficulties in 1999. In June the company announced plans to divide its inpatient and outpatient operations by spinning off the inpatient services into a new company, to be called HealthSouth Hospital Corporation. The strategy would have allowed HealthSouth to concentrate on its more profitable outpatient operations, but in September, the corporation decided to postpone its plans. HealthSouth also stated that it expected operating profit margins to fall lower than forecast during the third and fourth quarters of 1999. The company said it would take charges of between $250 and $300 million. As a result, share prices dropped to a low of $4.56 per share. For the third quarter of 1999 HealthSouth reported revenues of $993.3 million, down from $1.05 billion during the comparable period of 1998. The overall picture was not necessarily bleak, however, and for the nine months ended September 30, 1999, HealthSouth’s revenues were $3.07 billion, up from $2.97 billion in the same period of 1998.

Hoping to rise above its recent problems, HealthSouth endeavored to strengthen and continue building its empire. The company acquired American Rehability Services, which operated outpatient rehabilitation centers in 18 states, from Mariner Post-Acute Network, Inc., in July 1999. HealthSouth also formed a partnership with WebMD, Inc., a provider of health care information on the Internet, and Healtheon Corporation, a provider of electronic commerce services related to the health care industry, to develop and operate a channel dedicated to sports medicine issues on the WebMD Web site. The channel, which was launched in early 2000, offered sports medicine information, links to HealthSouth centers, online chat events with physicians and celebrity athletes, and online communities. The venture extended HealthSouth’s presence on the rapidly growing Internet medium and significantly raised its brand recognition.

HealthSouth had nearly 2,000 locations in 50 states, Puerto Rico, the United Kingdom, and Australia by the end of the decade. The company had enjoyed phenomenal growth since its inception in 1984 and believed it was poised to overcome the obstacles of the late 1990s as it prepared to greet a new century. With leadership positions in the rehabilitative health care, outpatient surgery, and diagnostic imaging markets, HealthSouth hoped to realize and maintain its standing as “the healthcare company of the 21st century.”

Principal Subsidiaries

HealthSouth Medical Center, Inc.; HealthSouth Aviation, Inc.; HealthSouth Community Re-Entry Center of Dallas, Inc.; HealthSouth Doctors’ Hospital, Inc.; HealthSouth IMC, Inc.; HealthSouth International, Inc.; HealthSouth Medical Clinic, Inc.; HealthSouth Network Services, Inc.; HealthSouth Orthopedic Services, Inc.; HealthSouth Specialty Hospital, Inc.; Advantage Health Corporation; ASC Network Corporation; CMS Capital Ventures, Inc. (15%); Diagnostic Health Corporation; Disability and Impairment Evaluation Centers of America, Inc.; Horizon/CMS Healthcare Corporation; National Imaging Affiliates, Inc.; National Surgery Centers, Inc.; Physical Therapeutix, Inc.; Physician Practice Management Corporation; Professional Sports Care Management, Inc.; ReadiCare, Inc.; Rehabilitation Hospital Corporation of America, Inc.; Surgery Center Holding Corporation; Surgical Care Affiliates, Inc.; Surgical Health Corporation; The Company Doctor.