HealthSouth Rehabilitation Corporation

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HealthSouth Rehabilitation Corporation

2 Perimeter Park South
Birmingham, Alabama 35243
U.S.A.
(205) 967-7116
Fax: (205) 969-4719

Public Company
Incorporated: 1984 as Amcare, Inc.
Employees: 27,000
Sales: $1.13 billion
Stock Exchanges: New York
SICs: 8011 Offices & Clinics of Medical Doctors; 8049
Offices of Health Practitioners Not Elsewhere Classified;
8069 Specialty Hospitals, Excluding Psychiatric; 8093
Specialty Outpatient Facilities, Not Elsewhere Classified

HealthSouth Rehabilitation Corporation is the leading provider of medical rehabilitation services in the United States with approximately 40 percent of the total market. Through about 450 outpatient and 100 inpatient facilities (in late 1995), Health-South offered physical, occupational, and respiratory therapies, as well as speech language pathology, sports medicine, neurorehabilitation, and nursing care. The enterprise was expanding rapidly in the mid-1990s by acquiring other companies.

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 first-hand 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 HealthSouth. 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 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, institutional-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-styled 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 mid- 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 injures, 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 were even 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. HealthSouth 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 didn’t 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. Besides 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.

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 to $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 HealthSouth’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. Health-South 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. Importantly, 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. Also notable was the early 1995 acquisition of Surgical Health Corporation, which represented HealthSouth’s diversification into an entirely new market: outpatient surgery services. HealthSouth also bought Diagnostic Health Corporation, which offered outpatient imaging services. Going into 1996, HealthSouth, still under Scrushy’s leadership, was the U.S. leader in rehabilitation services and sports medicine and one of the top providers of outpatient surgery services.

Principal Subsidiaries

HealthSouth Medical Center, Inc.; Sports Therapy and Advanced Rehabilitation Training, Inc.; Physician Practice Management Corp.; Disability and Impairment Evaluation Centers of America, Inc.; HealthSouth Doctors’ Hospital, Inc.; Hospital Health Systems, Inc.; HRC Day Care, Inc.; Doctors’ Health Service Corp.; Doctors’ Scanning Associates, Inc.; Doctors’ Home Health, Inc.; Doctors’ Medical Equipment Corp.