HealthSouth pares down to inpatient rehabilitation care

The embattled company aims to divest three of its four divisions, including those that are owned in joint ventures with physicians.

By Katherine Vogt — Posted Sept. 4, 2006

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Doctors who co-own surgery centers with HealthSouth soon might find themselves with a new partner.

HealthSouth Corp. has announced plans to sell or spin off three of its four major divisions so it can focus solely on inpatient rehabilitation care in a move that may mark the last major adjustment of a company that has been working to recover from the massive accounting scandal that nearly destroyed it.

The company said Aug. 14 that it would seek to sell, spin off or otherwise divest its surgery center and outpatient rehabilitation divisions in addition to its previously announced plans to shed its diagnostic division. The bulk of the proceeds would be used to help pay down the company's large debt.

Though HealthSouth said it probably would take a year to complete the divestitures, analysts said the surgery center division is likely to get snapped up quickly, perhaps by private equity investors -- the same class of investor that took HCA private. The division accounted for 24.5% of HealthSouth's consolidated operating revenue and 18.1% of the operating earnings in the second quarter.

The surgery division is comprised of ambulatory surgery centers, many of which are joint ventures with physicians.

Analysts said the physicians who do business with HealthSouth at those facilities shouldn't expect significant changes resulting from the divestiture, and the division might maintain some of its current leadership even under new owners.

John Henley, MD, an otolaryngologist in Fayetteville, N.C., who is medical director of a surgery center that is a joint venture between physicians, a health system and HealthSouth, is looking forward to the change.

"Frankly, I think operating the surgery division as a [separate] entity will perhaps allow the division to be more flexible, grow more easily and be more user friendly," he said. "So I'm optimistic that this is a good move."

Still, physicians who have partnered with HealthSouth in recent years know that upheaval at the company can translate into uncertainty at the surgery center level. Three years ago, when the accounting scandal surfaced, Boca Raton Outpatient Surgery and Laser Center in Boca Raton, Fla., was wary enough of potential problems with its partner that it created segregated bank accounts to protect itself in case the situation deteriorated.

Fortunately, major problems never materialized, and since then the surgery center has run smoothly, said Steven Rosenfeld, MD, an ophthalmologist who is a limited partner in the facility.

"What's going to happen now is anyone's guess. It really depends on who we get sold to," Dr. Rosenfeld said. "[But] we weathered the first storm with the corporate malfeasance at HealthSouth, and I think we will weather this."

Analysts interpreted HealthSouth's announcement as a measured strategic move rather than the sign of a foundering company desperate to save itself after three years of leadership overhaul, massive legal and regulatory settlements, and operational changes brought on by the $2.7 billion accounting scandal, which nearly sent the company into bankruptcy.

"This is a clear strategic move on behalf of the company to basically provide themselves the flexibility to focus on a single strategy going forward," said Andreas Dirnagl, an analyst with JP Morgan in New York. "If you're going to do a move like this, now is probably the best time to do it from the perspective that we have a good private equity market."

Derrick Dagnan, a research analyst with Avondale Partners in Nashville, Tenn., said the company had taken several steps in the last few years signifying that it is successfully recovering from the scandal, including the massive legal settlements it reached and the refinancing of its debt.

"This step is more forward-looking and offensive in nature," he said.

That HealthSouth would become bullish about its inpatient business while distancing itself from its other divisions was not a surprise to those who have monitored the company's recent performance. For the quarter ending June 30, HealthSouth's inpatient division accounted for 57.9% of the company's consolidated net operating revenue and 86% of its operating earnings from its four divisions.

HealthSouth President and CEO Jay Grinney said in prepared remarks that proceeds from the divestitures would help deleverage the company so it can concentrate on opportunities in the post-acute care sector.

The Birmingham, Ala.-based company did not say how much it expects to reap from shedding the divisions. Dagnan said HealthSouth had previously set a goal of paying down $1 billion of debt over five years, and that the proposed sales would help it reach that goal or more "in a much quicker fashion."

Physicians who work at HealthSouth's inpatient rehabilitation facilities are likely to benefit from more capital investment in those facilities as the company concentrates on that division, Dirnagl said.

He said the next significant move for HealthSouth could be additional acquisitions in its inpatient post-acute care business. But overall, he said, the divestitures would likely mark "the last piece of the puzzle" in the company's recovery from the accounting fiasco.

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