Groups protect themselves from HealthSouth woes

Affiliates of the troubled rehab giant are hiring attorneys, reviewing contracts and considering dropping the name because of alleged accounting misdeeds.

By Katherine Vogt, amednews staff. May 12, 2003.

If HealthSouth sinks into bankruptcy, physicians who do business with the outpatient services giant don't want to be cast overboard without a lifeboat.

Concerned that a massive accounting scandal is threatening HealthSouth's financial solvency, some physician partners are taking steps to distance themselves from the company and protect their practices. They have talked to attorneys, reviewed partnership documents and even considered removing the HealthSouth name from their facilities.

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While they remain confident in the care patients receive at HealthSouth facilities, several physicians say it makes good business sense to prepare for the worst.

"If the company goes bankrupt tomorrow, we've got to be ready to take action right away," said Dennis G. Pappas Jr., MD, a neurotologist and board member of the HealthSouth Outpatient Care Center in HealthSouth's hometown of Birmingham, Ala. He is part of a physician group that owns 49% of the center and has hired an attorney to review its contract with HealthSouth.

Federal investigators have accused HealthSouth and its former chair and chief executive, Richard M. Scrushy, of overstating earnings by $2.5 billion since 1994. At least 11 executives have agreed to plead guilty to criminal charges since allegations of fraud were first announced in March. Scrushy was fired, and the Securities and Exchange Commission is investigating him for alleged insider trading and other civil charges related to what it called a $1.4 billion inflation of earnings since 1999. No criminal charges have been filed.

The House Energy and Commerce Committee sent letters April 22 to HealthSouth and its auditor, Ernst & Young, demanding records related to alleged financial irregularities at the company. The committee, which has jurisdiction over consumer protection, accounting standards and health care matters, wants to see e-mails and letters as well as other documents that passed between HealthSouth and its auditor.

There are no reports that HealthSouth's corporate troubles have had a widespread effect on the company's 203 outpatient surgery centers. But physicians are following developments closely.

Dr. Pappas said his partners had voted to remove the HealthSouth name from their center when they first heard about the scandal.

"We thought bankruptcy was imminent. But once we saw that the company was going to fulfill its obligations of the bills, we've seen no reason to take the sign down," he said. "We've seen no drop-off in the amount of surgeries being performed or the amount of physicians using the center."

Arnold Weil, MD, a nonsurgical orthopedic specialist who performs some outpatient procedures at HealthSouth's ambulatory surgery center in Atlanta, said none of his patients had expressed concern about HealthSouth, though some have called to make sure the center is still open.

"I haven't experienced any problems at the surgical centers. My concerns would be whether they can continue to get the supplies I use to do my procedures, which I haven't had any problems with,'' Dr. Weil said.

Company stands firm

HealthSouth says it is committed to keeping the surgical centers open and financially healthy.

"HealthSouth considers the surgery centers the crown jewels of our system, and we intend to do everything we can to ensure those physician partners have the resources to continue this mutually beneficial relationship," said spokesman Andy Brimmer.

He said the company had sent letters to its physician partners to address concerns.

Brimmer also stressed that no decision had been made about a bankruptcy filing and, in the meantime, operations are unaffected.

"The patient census numbers remain constant, and in some markets they've actually increased. The referral rates remain steady; supplier relationships remain strong. We have adequate cash on hand to meet vendor commitments and employee commitments. That's a long way to say our core operations are sound and showing encouraging resilience," Brimmer said.

Even though bills are getting paid now, some physicians are worried that a sudden change of events could put a stopper in the flow of business operations.

To protect themselves, physicians at the Boca Raton Outpatient Surgery and Laser Center in Florida set up a separate bank account and demanded that HealthSouth allow the center to pay its bills locally -- disconnected from HealthSouth's corporate coffers.

"This way we have total control over paying our vendors. So even if there are terrible financial problems in the corporate headquarters, we can still pay our vendors and meet our obligations locally," said Steven Rosenfeld, MD, an ophthalmologist at the multispecialty center.

Dr. Rosenfeld said his group was considering trying to break away from HealthSouth and possibly buying the company's 60% stake in the center. The group has hired an attorney.

Partners at the Fayetteville Ambulatory Surgery Center in North Carolina are also consulting with an attorney about their contract with HealthSouth, said medical director John Henley, MD.

"Right now we are still an affiliate of HealthSouth and we continue to operate without any difficulties," said Dr. Henley, an otolaryngologist.

Dr. Henley is hoping for the best. "I sure own more shares of [HealthSouth] stock than I'd like to right now," he said. HealthSouth stock has dropped off of the New York Stock Exchange onto the "pink sheets," or over-the-counter market, and as of April 28 it traded for 14.5 cents per share. "I hope they rise like a phoenix from the ashes," Dr. Henley said.