HealthSouth reviewing surgery centers' finances

As part of its efforts to set financial records straight after a massive accounting scandal, HealthSouth has been re-examining the books of its ambulatory surgery centers.

That's raising concerns among some physician partners in those facilities who fear that past corporate mistakes could leave them owing the company big bucks.

In April, HealthSouth hired the restructuring advisory firm Loughlin Meghji Co. to take a look at how it was conducting its financial restatement process as it related to the 152 ambulatory surgery centers with physician partners from 1999 to 2005. The firm tested restatements for 40 surgery centers and issued a report in August.

The report found that the restatements resulted in positive news for some physician partners and negative news for others. According to a letter dated Aug. 21 to physician partners, the restatements showed a total decrease of $7.4 million in distributable cash and a total decrease of $120 million in net income for the facilities during that six-year period. The amounts were expected to change as HealthSouth made adjustments and negotiated finalized statements with its partners.

Robert Frischer, MD, one of about 22 owners of the North Texas Surgicenter in Wichita Falls, Texas, said he and his partners had been told that their surgery center could owe nearly $120,000.

The problem is, Dr. Frischer said, there is no way to check whether their accounting is right this time because the figures were constructed using HealthSouth numbers and based on records that might have been compiled during the era of fraud at the company. "If I truly owe them money, I wouldn't have any problem saying you overpaid me and I'm going to pay them back. But just because they say I owe them money, I don't know if it's true," he said.

Dr. Frischer, an ob-gyn, said HealthSouth had not made it clear whether it intends to try to recoup the money, but he suspects that the company will come after every dollar it says it is owed.

Mike Snow, chief operating officer and executive vice president of Birmingham, Ala.-based HealthSouth, said the reviews were part of an ongoing process and that the initial findings were only one step toward reaching agreements with physician partners about how to correct the books.

"We have said we're going to hold that amount in abeyance until a full investigation is completed," Snow said. "We're not just coming into the partnership and saying this is the number, take it or leave it."

He said that any "variances" revealed would be discussed with physician partners, and independent reviewers could be brought in to settle any disputes about the findings. Ultimately, he said some partners could end up owing money and others might end up getting paid by HealthSouth.

"How we handle this restatement process with our partners with a doctrine of fairness will re-establish our creditability with our partners," he said. The company has completely rebuilt its accounting information for several years at a corporate level. Snow said those restatements "are now being reflected at a subsidiary level."

The company was forced to re-examine its past records after it was revealed in 2003 that HealthSouth's earnings had been artificially inflated by nearly $2.7 billion over several years in a scheme to boost its stock price. More than a dozen top executives have been convicted or pleaded guilty to criminal charges relating to the scandal, though company founder Richard Scrushy was found innocent during trial.

Still, Snow said the review of the ambulatory surgery centers was more about making up for past sloppy accounting practices stemming from a poor control environment than about recovering from the fraud. Since the scandal broke, HealthSouth has revamped its internal controls to try to avoid a repeat of past mistakes.

The company, which has agreed to pay hundreds of millions of dollars to investors and the government to settle claims stemming from the fraud, announced in August that it would sell or spin off three of its major divisions -- including the surgery center division -- to concentrate solely on inpatient rehabilitation care.

Snow acknowledged that a completed review could help HealthSouth sell the division. "I would think that a buyer of this division would be interested in having this chapter of history closed," he said. "[But] this would have happened irrespective of our strategic decision."