Home Health Business Quarterly: Companies in the News: HealthSouth sued over alleged disclosure

Shareholders of HealthSouth Corp. of Birmingham, AL, have filed a lawsuit alleging that the company failed to disclose that the Centers for Medicare & Medicaid Services (CMS) had reclassified some categories of Medicare reimbursements, which will hurt company profits.

The suit deals yet another legal blow to the company, which has experienced its share of litigation. In May, the company was sued for allegedly submitting false reimbursement claims to Medicare. (See Home Health Business Quarterly, July 2002, "Justice Department joins suit against HealthSouth," p. 1.)

The complaint, filed by the law firm of Milberg, Weiss, Bershad, Hynes & Lerach, claims that Richard Scrushy, company chairman and CEO; Weston Smith, CFO and executive vice president; William Owens, chief operating officer; and George Strong, director, sold millions of shares at artificially inflated prices.

The plaintiff class comprises people who bought HealthSouth shares between Jan. 14 and Aug. 26, 2002.

HealthSouth shares fell 44% the day the suit was filed — an estimated $2 billion loss in market value. The complaint charges that the defendants violated Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 by issuing false and misleading statements to the market during the time frame above.

During that time, the suit alleges, HealthSouth announced favorable revenue and earnings growth in press releases and SEC reports, and it assured the market it would meet financial targets for 2002.

However, these statements did not disclose a CMS mandate to bill certain patient care at lower group rates rather than individual rates, which would impact the business negatively.

The complaint alleges that the defendants knew about this for many months, but did not disclose the information in order to sell company shares at a higher value.

The company also began a $998 million note exchange/offer on more favorable terms than disclosing the reimbursement changes would have allowed, according to the complaint. The exchange/offer began Aug. 27 — the day before HealthSouth disclosed in a press release that the CMS directive of July 1 could result in a $175 million shortfall in EBITDA (earnings before interest, taxes, depreciation, and amortization) from previous predictions for 2002, and that, as a result, the company would not issue further predictions for 2002 and 2003.

The company also announced it would restructure to deal with these developments by spinning off its surgery center division by early 2003 and replacing Scrushy as CEO with Owens. Scrushy will become chairman of the surgery center division. Splitting off the surgery centers, the company said, would allow that business to grow without being affected by government reimbursements for rehabilitation care.

HealthSouth operates 1,427 outpatient and 118 inpatient rehabilitation facilities. The independent surgery center company will have annual revenue of about $1 billion from 209 facilities, the company said.