Surviving And Thriving: HealthSouth’s Road To Recovery
Surviving And Thriving: HealthSouth’s Road To Recovery
It reads like a movie script.
 
A trauma victim not expected to survive—much less ever walk again—somehow defies the odds to once again become a front-runner.
 
When HealthSouth faced what might well have been a fatal blow in the 2002 fraud investigation that sent its top management to prison, the prognosis wasn’t hopeful. But like so many of the trauma patients who rebuild their lives with the help of its rehabilitation facilities, HealthSouth didn’t just wait and hope for a miracle. It did the hard work necessary to recover.
 
In the words of the Wall Street Journal, HealthSouth “survived by owning up to problems and tackling them head on.” The first step was assessing the extent of the trauma and stopping the bleeding.
 
“There was no one left on the accounting staff who really knew what was going on financially, and that was exacerbated by an antiquated and highly fragmented accounting system,” said Jay Grinney, who became CEO in early 2004. “Each area of business had multiple billing and collection systems with no accounting system to link them together. It took over one million man-hours to reconstruct and restate the financials. Instead of an overstated income of $1.3 billion between 1996 and 2002, there was an actual loss of $1.8 billion.”
 
 “When they first approached me about taking on the challenge as CEO, I turned them down, because I didn’t think it could be done. But as I looked at the company, I saw the underlying structure was sound. There were problems, but with work we could solve them and turn it around.
 
“As interim leadership, Bob May and Joel Gordon did an incredible job keeping the company viable,” Grinney said. “The role of the turnaround firm, Alvarez and Marsal, was much like that of ER physicians who do the hard work necessary to stabilize patients to get them up to the OR where problems can be corrected and the process of recovery can begin.”
 
The A&M restructuring team, particularly Bryan Marsal, Guy Samsone, and George Varughese, were noted for the creativity they used in strategic moves that helped the company survive the difficult early days.
 
Limited cash, significant debt and little access to capital made liquidity a priority. Expenses were cut and nonstrategic assets were sold to build cash. Then in a bold move, much of that hard-won cash was used to make interest payment to creditors to buy time by signaling that the underlying business was viable.
 
Restoring trust and maintaining relationships were also critical issues in reviving the company. The key in this case was close and open communication with both investigators and stakeholders. That included personal phone calls and visits with referring physicians and joint venture partners. It also meant communicating with patients and meeting with employees, addressing their concerns, and keeping them informed about how the company was doing.
 
The company soon began to show signs of improvement, but there was still pressure from some quarters to sell off assets that were essential to the company’s survival.
           
“Although we had paid interest and had only one note coming due, we had to negotiate a consent fee of $80 million to allow us time to complete an audited financial statement,” Grinney said. “We were required to submit the statement to avoid being in technical default, but first we had to get better accounting systems in place and update our technologies so we could work through the fragmented data.”
 
In a strategic move rare for companies in such a difficult position, HealthSouth was able to put itself on a more predictable footing by raising money to pay off creditors after locating a bank willing to refinance its debt at a higher interest rate.
 
“I feel the turning point came when we divested some parts of our business to reduce debt, refinanced our entire balance sheet, and we were once again listed on the New York stock exchange,” Grinney said. “In December of 2007, we made our last settlement payment, and in both 2009 and 2010, we made a profit.”
 
With a new management team and corporate culture in place, and new accounting procedures and controls, HealthSouth is looking to the future.  
 
“Over the next year or two, we’ll be focusing on strengthening our balance sheet, paying down debt, and adding new rehabilitation hospitals,” Grinney said. “In 2012 and beyond, we hope to add post acute facilities and expand in areas such as home health and long term acute care.”
 
After a remarkable recovery, the company is well on its way toward healthy, long-term growth.
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