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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number 1-10315
HEALTHSOUTH CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-0860407
- ------------------------------------------ ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
ONE HEALTHSOUTH PARKWAY
BIRMINGHAM, ALABAMA 35243
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (205) 967-7116
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
- ------------------------------------------ ------------------------------------
COMMON STOCK, PAR VALUE NEW YORK STOCK EXCHANGE
$.01 PER SHARE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all Reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such Reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 26, 2001:
Common Stock, par value $.01 per share -- $5,221,026,283
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 26, 2001
--------------------------------- ------------------------------
COMMON STOCK, PAR VALUE
$.01 PER SHARE 389,463,041 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
HEALTHSOUTH Corporation is the nation's largest provider of outpatient
surgery, outpatient diagnostic and rehabilitative healthcare services. We
provide these services through our national network of inpatient and outpatient
healthcare facilities, including inpatient and outpatient rehabilitation
facilities, outpatient surgery centers, diagnostic centers, occupational
medicine centers, medical centers and other healthcare facilities. We believe
that we provide patients, physicians and payors with high-quality healthcare
services at significantly lower costs than traditional inpatient hospitals.
Additionally, our national network, reputation for quality and focus on
outcomes have enabled us to secure contracts with national and regional managed
care payors. At December 31, 2000, HEALTHSOUTH operated over 2,000 locations in
all 50 states, Puerto Rico, the United Kingdom, Canada and Australia.
Our healthcare services are provided through inpatient healthcare
facilities and facilities providing other clinical services (including
inpatient rehabilitation facilities and specialty medical centers, as well as
associated physician practices and other services) and outpatient healthcare
facilities (including outpatient rehabilitation centers, outpatient surgery
centers, outpatient diagnostic centers and occupational medicine centers). In
our outpatient and inpatient rehabilitation facilities, we provide
interdisciplinary programs for the rehabilitation of patients experiencing
disability due to a wide variety of physical conditions, such as stroke, head
injury, orthopaedic problems, neuromuscular disease and sports-related
injuries. Our rehabilitation services include physical therapy, sports
medicine, work hardening, neurorehabilitation, occupational therapy,
respiratory therapy, speech-language pathology and rehabilitation nursing.
Independent studies have shown that rehabilitation services like those we
provide can save money for payors and employers.
A patient referred to a HEALTHSOUTH rehabilitation facility undergoes an
initial evaluation and assessment process that results in the development of a
rehabilitation care plan designed specifically for that patient. Depending upon
the patient's disability, this evaluation process may involve the services of a
single discipline, such as physical therapy for a knee injury, or of multiple
disciplines, as in the case of a complicated stroke patient. We have developed
numerous rehabilitation programs, which include stroke, head injury, spinal
cord injury, neuromuscular and work injury, that combine certain services to
address the needs of patients with similar disabilities. In this way, all of
our patients, regardless of the severity and complexity of their disabilities,
can receive the level and intensity of services necessary to restore them to as
productive, active and independent a lifestyle as possible.
In addition to our rehabilitation facilities, we operate the largest
network of freestanding outpatient surgery centers in the United States. Our
outpatient surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures.
Outpatient surgery is widely recognized as generally less expensive than
surgery performed in a hospital, and we believe that outpatient surgery
performed at a freestanding outpatient surgery center is generally less
expensive than hospital-based outpatient surgery. Over 80% of our surgery
center facilities are located in markets served by our rehabilitation
facilities, enabling us to pursue opportunities for cross-referrals.
HEALTHSOUTH is also the largest operator of outpatient diagnostic centers
in the United States. Most of our diagnostic centers operate in markets where
we also provide rehabilitative healthcare and outpatient surgery services. We
believe that our ability to offer a comprehensive range of healthcare services
in a particular geographic market makes HEALTHSOUTH more attractive to both
patients and payors in such market. We focus on marketing our services in an
integrated system to patients and payors in such geographic markets. We are
continually evaluating potential acquisitions that complement our existing
operations, as well as divestitures of non-strategic assets and businesses.
HEALTHSOUTH was organized as a Delaware corporation in February 1984. Our
principal executive offices are located at One HealthSouth Parkway, Birmingham,
Alabama 35243, and our telephone number is (205) 967-7116.
1
COMPANY STRATEGY
Our objective is to continue to grow profitably and enhance our position
as the preferred provider in our lines of business and geographic markets. In
the 1994-1998 period, we pursued a strategy of rapid growth through
acquisitions. During this period, we consummated a series of major acquisitions
that strengthened our position in our primary lines of business. Today, we
believe that we have a strong franchise in our core product lines that
encompasses a geographic scope that is unlikely to be duplicated by competitors
in the foreseeable future. Going forward, our business strategy will be focused
on enhancing profit margins through operating efficiencies and organic growth,
as well as selective acquisition and development activity. The following are
key elements of our strategy:
o Leverage Our Existing National Network. As one of the largest
providers of healthcare services in the United States, and as the
largest provider in our primary lines of business, we believe we are
well-positioned to leverage our existing network of facilities in
order to realize economies of scale and compete successfully for
national and regional contracts while retaining the flexibility to
respond to particular needs of local markets. Our national network
offers large national and regional employers and payors the
convenience of dealing with a single provider, a well as offering us
the ability to utilize greater buying power through centralized
purchasing, to achieve more efficient costs of capital and labor and
to more effectively recruit and retain clinicians. We believe that our
operations management structure allows us to realize these benefits
without sacrificing local market responsiveness. Our objective is to
provide those outpatient and rehabilitative healthcare services needed
within each local market by tailoring our services and facilities to
that market's needs, thus bringing the benefits of nationally
recognized expertise and quality into the local setting.
o Deliver Cost-Effective Services. We strive to provide high-quality
healthcare services in cost-effective settings. To that end, we use
standardized clinical protocols based on "best practices" techniques
for the treatment of our patients. We use these standardized clinical
protocols at all of our facilities, promoting the delivery of
high-quality care in a highly efficient, consistent and cost-effective
manner. We believe that our facilities are among the most
cost-effective in the industry, making us an attractive healthcare
provider for payors and self-insured employers. In addition, we
believe that our low-cost profile favorably positions us to respond to
reimbursement pricing pressure.
o Market to Managed Care Organizations and Other Payors. Since the late
1980s, we have focused on the development of contractual relationships
with managed care organizations, major insurance companies, large
regional and national employer groups and provider alliances and
networks. Our documented clinical outcomes and our daily experience
with thousands of patients in delivering quality healthcare services
at reasonable prices has enhanced our attractiveness to such entities
and has given us a competitive advantage over smaller and regional
competitors. These relationships have increased patient volume in our
facilities and contributed to our same-store growth. These
relationships also enable us to work with major payors to ensure
competitive pricing and provide for more efficient billing, claims
processing and payment procedures.
o Expand Our Integrated Service Model. Our Integrated Service Model
("ISM") strategy coordinates the delivery of our outpatient services
in a given market through the integrated management and marketing of
our outpatient operations. We plan to expand our ISM into the 300
largest markets in the United States. We believe our ISM strategy
capitalizes on the complementary nature of our primary services.
Almost all rehabilitation and surgery patients have diagnostic
procedures, and many inpatient rehabilitation patients require some
form of outpatient rehabilitation. Furthermore, a significant number
of both inpatient and outpatient rehabilitation patients require
surgery. Through the ISM, our healthcare services are delivered in a
coordinated manner intended to enhance referrals across our business
lines. The ISM also allows us to offer patients and payors attractive
pricing on bundled services in a given market, as well as the
convenience of dealing with a single source for patient care needs.
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o Manage for Cash Flow. We have implemented disciplined financial
policies that have resulted in strong cash flows as compared to other
publicly traded healthcare companies. We intend to continue focusing
on managing our business for cash flow and improving financial
performance. We will also seek to leverage new technologies into
tangible operating efficiencies, improved accounts receivable
collection and cost-effective operations. In particular, we are
aggressively working to reduce our accounts receivable days and
enhance our operating margins by utilizing new electronic claims
processing and payment technology, improving our charge capture
systems and continuing our proactive efforts to work with payors to
streamline payment processes and reduce reimbursement delays. We
intend to use free cash flow to reduce outstanding debt and further
strengthen our balance sheet.
o Implement Technology Initiatives. We intend to capitalize on our
strong brand identity through strategic alliances and, where
appropriate, equity participation with technology-oriented companies
offering services that we believe will benefit us, both by creating
greater efficiencies and cost savings for our operations and by
expanding the range of services we offer and public awareness of our
company. We believe that our network of over 2,000 facilities, our
volume of daily interactions with patients across the country and our
relationships with leading physicians and institutions offer these
companies immediate operational scale and exposure of a type not
available through other healthcare providers. We will seek to leverage
those assets through business affiliations that we believe will both
benefit our operations and increase stockholder value through
strategic investment activities.
RISK FACTORS
Our business, operations and financial condition are subject to various
risks. Some of these risks are described below, and readers of this Annual
Report on Form 10-K should take such risks into account in evaluating
HEALTHSOUTH or any investment decision involving HEALTHSOUTH. This section does
not describe all risks applicable to our company, our industry or our business,
and it is intended only as a summary of certain material factors. More detailed
information concerning the factors described below is contained in other
sections of this Annual Report on Form 10-K.
We Depend Upon Reimbursement by Third-Party Payors. Substantially all of
our revenues are derived from private and governmental third-party payors. In
2000, approximately 29% of our revenues were derived from Medicare,
approximately 3% from Medicaid and approximately 68% from commercial insurers,
managed care plans, workers' compensation payors and other private pay revenue
sources. There are increasing pressures from many payors to control healthcare
costs and to reduce or limit increases in reimbursement rates for medical
services. There can be no assurances that payments from government or private
payors will remain at levels comparable to present levels. In attempts to limit
federal spending, there have been, and we expect that there will continue to
be, a number of proposals to limit Medicare reimbursement for various services.
We cannot now predict whether any of these pending proposals will be adopted or
what effect the adoption of such proposals would have on HEALTHSOUTH.
Further, Medicare reimbursement for inpatient rehabilitation services is
changing from a cost-based reimbursement system to a prospective payment system
("PPS"), with the phase-in of the PPS currently expected to begin sometime in
2001. While we believe we are well-positioned and well-prepared for the
transition, we cannot be certain what effect the implementation of inpatient
rehabilitation PPS will have on us. In addition, a delay in the implementation
of inpatient rehabilitation PPS, lower than expected reimbursement rates or our
failure to successfully execute our planned response to this change could have
a material adverse effect on our financial condition or results of operations.
See this Item, "Business -- Regulation".
Our Operations Are Subject To Extensive Regulation. Our operations are
subject to various other types of regulation by federal and state governments,
including licensure and certification laws, Certificate of Need laws and laws
relating to financial relationships among providers of healthcare services,
Medicare fraud and abuse and physician self-referral.
3
The operation of our facilities and the provision of healthcare services
are subject to federal, state and local licensure and certification laws. These
facilities and services are subject to periodic inspection by governmental and
other authorities to assure compliance with the various standards established
for continued licensure under state law, certification under the Medicare and
Medicaid programs and participation in other government programs. Additionally,
in many states, Certificates of Need or other similar approvals are required
for expansion of our operations. We could be adversely affected if we cannot
obtain such approvals, by changes in the standards applicable to approvals and
by possible delays and expenses associated with obtaining approvals. Our
failure to obtain, retain or renew any required regulatory approvals, licenses
or certificates could prevent us from being reimbursed for our services or from
offering some of our services, or could adversely affect our results of
operations.
Our business is subject to extensive federal and state regulation with
respect to financial relationships among healthcare providers, physician
self-referral arrangements and other fraud and abuse issues. Penalties for
violation of federal and state laws and regulations include exclusion from
participation in the Medicare and Medicaid programs, asset forfeiture, civil
penalties and criminal penalties, any of which could have a material adverse
effect on our business, results of operations or financial condition. The
Office of Inspector General of the Department of Health and Human Services, the
Department of Justice and other federal agencies interpret healthcare fraud and
abuse provisions liberally and enforce them aggressively. See this Item,
"Business -- Regulation".
Healthcare Reform Legislation May Affect Our Business. In recent years,
many legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the healthcare
system, either nationally or at the state level. Among the proposals which are
currently being, or which recently have been, considered are cost controls on
hospitals, insurance market reforms to increase the availability of group
health insurance to small businesses, requirements that all businesses offer
health insurance coverage to their employees and the creation of a single
government health insurance plan that would cover all citizens. The costs of
certain proposals would be funded in significant part by reductions in payment
by governmental programs, including Medicare and Medicaid, to healthcare
providers. There continue to be federal and state proposals that would, and
actions that do, impose more limitations on government and private payments to
healthcare providers such as HEALTHSOUTH and proposals to increase copayments
and deductibles from patients. At the federal level, Congress has continued to
propose or consider healthcare budgets that substantially reduce payments under
the Medicare and Medicaid programs. In addition, many states are considering
the enactment of initiatives designed to reduce their Medicaid expenditures, to
provide universal coverage or additional levels of care and/or to impose
additional taxes on healthcare providers to help finance or expand the states'
Medicaid systems. There can be no assurance as to the ultimate content, timing
or effect of any healthcare reform legislation, nor is it possible at this time
to estimate the impact of potential legislation on HEALTHSOUTH. That impact may
be material to our business, financial condition or results of operations.
We Face National, Regional and Local Competition. We operate in a highly
competitive industry. Although we are the largest provider of our range of
inpatient and outpatient healthcare services on a nationwide basis, in any
particular market we may encounter competition from local or national entities
with longer operating histories or other superior competitive advantages. There
can be no assurance that such competition, or other competition which we may
encounter in the future, will not adversely affect our results of operations.
See this Item, "Business -- Competition".
We are Subject To Material Litigation. We are, and may in the future be,
subject to litigation which, if determined adversely to us, could have a
material adverse affect on our business, financial condition or results of
operations. In addition, some of the companies and businesses we have acquired
have been subject to such litigation. While we attempt to conduct our
operations in such a way as to reduce the risk that adverse results in
litigation could have a material adverse affect on us, there can be no
assurance that pending or future litigation, whether or not described in this
Annual Report on Form 10-K, will not have such a material adverse affect. See
Item 3, "Legal Proceedings".
Our Stock Price May Be Volatile. Healthcare stocks in general, including
HEALTHSOUTH's common stock, are subject to frequent changes in stock price and
trading volume, some of which may be large. These changes may be influenced by
the market's perceptions of the healthcare sector in general,
4
of other companies believed to be similar to HEALTHSOUTH, or of our results of
operations and future prospects. In addition, these perceptions may be greatly
affected not only by information we provide but also by opinions and reports
created by investment analysts and other third parties which do not necessarily
reflect information provided by us. Adverse movement in HEALTHSOUTH's stock
price, particularly as a result of factors over which we have no control, may
adversely affect our access to capital and the ability to consummate
acquisitions using our stock.
RECENT DEVELOPMENTS
From time to time, we determine to divest assets or businesses that we
have acquired which are no longer consistent with our current business
strategy. In that connection, in the first quarter of 2001, we announced that
we had entered into a letter of intent with HCA - The Hospital Company to sell
our Richmond, Virginia facility and a related outpatient surgery center to an
affiliate of HCA. In addition, we also announced that we had entered into a
letter of intent to sell substantially all of our occupational medicine center
operations to U.S. HealthWorks, Inc. In both cases, we determined that the
facilities being divested were not consistent with our current strategy and
that management resources devoted to those operations could be better utilized
in connection with our strategic businesses.
Both divestiture transactions are subject to the completion of definitive
documentation and the satisfaction of various conditions. We currently expect
that both transactions will close at or shortly after the end of the first
quarter of 2001. We expect to use the proceeds from the transactions to pay
down existing indebtedness.
INDUSTRY OVERVIEW
The United States Health Care Financing Administration ("HCFA") estimates
that national health expenditures were approximately $1.2 trillion in 1999 and
are projected to total $2.2 trillion, or 16.2% of the Gross Domestic Product,
by 2008. Within the United States, hospital and physician expenditures
traditionally account of the majority of personal healthcare spending.
Accelerating private spending growth rates in 1998 caused the share of health
spending paid by the private sector to increase for the first time since 1988,
rising from 53.8% in 1997 to 54.5% in 1998. At the same time, growth in public
sector spending for 1998 increased by 4.1%.
HCFA projects that the combination of demographic forces associated with
the aging of the baby-boomers and continued economic strength is expected to
continue to generate industry growth. The private sector in particular is
expected to continue to benefit from demographic trends, technology
improvements, and the ongoing focus on cost containment.
Outpatient and Inpatient Rehabilitation Markets
According to available information, there are approximately 35,000
inpatient rehabilitation beds and 8,000 to 9,000 outpatient rehabilitation
centers in the United States. The need for rehabilitation is expected to
continue to grow over the next few years driven by the increased percentage of
persons over 65 years of age within the general United States population, who
generally have the highest rehabilitation needs.
Outpatient Surgery Market
Based on industry estimates, the freestanding outpatient surgery center
market is approximately $6 billion in size. There was a 75% increase in the
number of treatments in ambulatory settings (hospital outpatient, freestanding
ambulatory surgery centers and physicians' offices) from 1986 to 1996, and it
is estimated that approximately 80% of surgeries performed today can be done on
an outpatient basis. Additionally, the number of outpatient surgery cases
increased 196% from 1993 through 1999, from 2.9 million to 5.7 million cases,
due mostly to continued medical advances, which facilitated a shift of many
procedures to ambulatory settings. Growth in the market is expected to continue
during the next decade, after seeing the number of outpatient surgery centers
increase from 2,300 in 1996 to more than 2,700 centers in 1999.
5
Diagnostic Market
The diagnostic market is highly fragmented, with radiologists, hospitals
and independent organizations offering diagnostic services. It is estimated
that there are currently approximately 2,700 diagnostic centers within the
United States, an increase from approximately 1,300 centers in 1988. We expect
the diagnostics market to continue to grow over the next few years due to
increased sub-specializations, expanding geographic reach and the non-invasive
and cost-effective nature of diagnostics in general.
PATIENT CARE SERVICES
HEALTHSOUTH began its operations in 1984 with a focus on providing
comprehensive orthopaedic and musculoskeletal rehabilitation services on an
outpatient basis. Over the succeeding 16 years, we have consistently sought and
implemented opportunities to expand our services through acquisitions and
start-up development activities that complement our historic focus on
orthopaedic, sports medicine and occupational health services and that provide
independent platforms for growth. Our acquisitions and internal growth have
enabled HEALTHSOUTH to become one of the largest providers of healthcare
services in the United States. The following sections discuss the range of
services we offer in our inpatient and other clinical services and outpatient
services business segments. See Note 14 of "Notes to Consolidated Financial
Statements" for financial information concerning these segments.
Outpatient Services Segments
Our outpatient services segments, comprising our Ambulatory Services-East
and Ambulatory Services-West divisions, include our outpatient rehabilitation
facilities and occupational medicine centers, our outpatient surgery centers
and our outpatient diagnostic centers. We are the largest operator of
outpatient rehabilitation facilities, outpatient surgery centers and outpatient
diagnostic centers in the United States.
OUTPATIENT REHABILITATION SERVICES. As of December 31, 2000, we provided
outpatient rehabilitative healthcare services through approximately 1,407
locations in all 50 states and the United Kingdom, including freestanding
outpatient centers, outpatient satellites of inpatient facilities and
outpatient facilities managed under contract. This constitutes the largest
network of outpatient rehabilitation facilities in the United States. Our
outpatient rehabilitation centers offer a comprehensive range of rehabilitative
healthcare services, including physical therapy and occupational therapy, that
are tailored to the individual patient's needs, focusing predominantly on
orthopaedic, sports-related, work-related, hand and spine injuries and various
neurological/neuromuscular conditions. Continuing emphasis on containing
increases in healthcare costs, as evidenced by Medicare's prospective payment
system, the growth in managed care and the various alternative healthcare
reform proposals, has resulted in earlier discharge of patients from acute-care
facilities. As a result, many hospital patients do not receive the intensity of
services that may be necessary for them to achieve a full recovery from their
diseases, disorders or traumatic conditions. Our outpatient rehabilitation
services play a significant role in the continuum of care because they provide
hospital-level services, in terms of intensity, quality and frequency, in a
more cost-effective setting.
We believe that the key factors influencing the outpatient rehabilitation
business include cost, quality of services and outcomes achieved, convenience
for patients and referral sources, and relationships with payors and
self-insured employers. We believe that we are well-positioned to compete on
all of these factors. Our national network allows us to benefit from economies
of scale and to introduce standardized clinical protocols for the treatment of
our patients, resulting in "best practices" techniques being utilized at all of
our facilities. This has allowed us to consistently achieve demonstrable,
cost-effective clinical outcomes. In addition, we believe that our facilities
offer an attractive environment for patients and are located in convenient
proximity to referring physicians and to our target patient populations. We
believe that our national scale and our reputation for high-quality,
cost-effective services enables us to obtain national, regional and local
contracts with payors and with self-insured employers.
6
We endeavor to locate our outpatient rehabilitation centers in specific
areas where we believe there is a demand for our services. In general, we
initially establish an outpatient center in a given market, either by acquiring
an existing private therapy practice or through start-up development, and
institute our clinical protocols and programs in response to the community's
general need for services. We will then establish satellite clinics that are
dependent upon the main facility for management and administrative services.
These satellite clinics generally provide a specific evaluative or specialty
service/program, such as hand therapy or foot and ankle therapy, in response to
specific market demands. Our outpatient centers are staffed by physical
therapists, occupational therapists and other clinicians and appropriate
support personnel, depending on the services provided at a particular location,
and are open at hours designed to accommodate the needs of the patient
population being served and the local demand for services.
Outpatient rehabilitation patients are referred to our outpatient centers
by physicians. In our markets, we strive to develop and maintain relationships
with orthopaedic surgeons, neurologists and neurosurgeons, physiatrists and
other physicians who serve patients likely to need the rehabilitation services
we provide and to keep those physicians informed with respect to the scope and
quality of those services. In addition, we attempt to locate our outpatient
rehabilitation facilities in proximity to those types of physicians, in order
to provide for convenient access to them. We also market our services to
managed care payors and case management companies, as well as to self-insured
employers and professional and amateur athletic organizations which are likely
to have a large number of work-related or sports-related orthopaedic injuries.
We believe that we offer high-quality services in a cost-effective setting that
is attractive to patients, physicians and payors. In addition, at December 31,
2000, we operated approximately 113 occupational medicine centers in 29 states,
which provide cost-effective, outpatient primary medical care and related
services for work-related injuries and illnesses, work- related physical
examinations, physical therapy services and workers' compensation medical
services. Our occupational medicine centers market their services to large and
small employers, workers' compensation and health insurers and managed care
organizations. As described above, in the first quarter of 2001 we entered into
a letter of intent to sell substantially all of our occupational medicine
center operations. See this Item, "Business - Recent Developments".
OUTPATIENT SURGERY SERVICES. As of December 31, 2000, we provided
outpatient surgery services through 222 freestanding surgery centers in 40
states. This constitutes the largest network of outpatient surgery centers in
the United States. Over 80% of our outpatient surgery centers are located in
markets served by our rehabilitation facilities, enabling us to pursue
opportunities for cross-referrals between surgery and rehabilitation
facilities, as well as to centralize administrative functions.
We believe that the key factors influencing the outpatient surgery
business are physician utilization, cost and quality of services and case mix.
Physicians typically choose to perform outpatient surgical procedures in a
freestanding outpatient surgery center rather than an acute-care hospital
because of the convenience of the surgery center for themselves and for their
patients, in terms of access, scheduling and operating room turnaround time.
Like most other outpatient surgery centers, the majority of our centers are
owned in partnership with surgeons and other physicians who perform procedures
at the centers. It is critical to the success of an outpatient surgery center
that its physician partners utilize the center for a significant portion of
their procedures, and we believe that our surgery centers offer our physician
partners convenient, modern and well-equipped settings for outpatient surgery.
We also believe that our reputation in the field of orthopaedic healthcare and
the physician relationships we have developed in that area enhance our ability
to attract orthopaedic surgical procedures, which are reimbursed more favorably
than some other types of outpatient surgery.
Our surgery centers provide the facilities and medical support staff
necessary for physicians to perform non-emergency surgical procedures. Our
typical surgery center is a freestanding facility with two to six fully
equipped operating and procedure rooms and ancillary areas for reception,
preparation, recovery and administration. Each of our surgery centers is
available for use only by licensed physicians, oral surgeons and podiatrists,
and the centers do not perform surgery on an emergency basis.
Outpatient surgery centers, unlike hospitals, have not historically
provided overnight accommodations, food services or other ancillary services.
Over the past several years, states have increasingly permitted the use of
extended-stay recovery facilities by outpatient surgery centers. As a result,
many outpatient surgery
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centers are adding extended recovery care capabilities where permitted. Most of
our surgery centers currently provide for extended recovery stays. Our ability
to develop such recovery care facilities is dependent upon state regulatory
environments in the particular states where our centers are located.
Our outpatient surgery centers implement quality control procedures to
evaluate the level of care provided at the centers. Each center has a medical
advisory committee of three to ten physicians which reviews the professional
credentials of physicians applying for medical staff privileges at the center.
In order to increase volumes and margins in our outpatient surgery centers, we
focus on educating physicians as to the advantages in terms of convenience,
technology, quality of care and cost-effectiveness that we believe our surgery
centers provide and on syndicating our surgery centers to physicians who we
believe will provide us with a high volume of cases and a favorable case mix in
terms of reimbursement.
To that end, we are increasing our efforts to syndicate additional
partnership interests in our surgery centers to appropriate physicians and to
buy out physician partners who have retired, moved away from a center's service
area or otherwise do not utilize the center as a significant extension of their
practice. In addition, we believe that the geographic scope of our surgery
centers and the cost-effective nature of services performed in a freestanding
outpatient surgery center are attractive to payors, and we market our
outpatient surgery centers to those payors.
DIAGNOSTIC SERVICES. We are the largest operator of outpatient diagnostic
centers in the United States. At December 31, 2000, we operated 142 diagnostic
centers in 31 states and the United Kingdom. Our diagnostic centers provide
outpatient diagnostic imaging services, including MRI services, CT services,
X-ray services, ultrasound services, mammography services, nuclear medicine
services and fluoroscopy. Not all services are provided at all sites; however,
most of our diagnostic centers are multi-modality centers offering multiple
types of service.
We believe that the key factors influencing the diagnostic center business
are quality of service, turnaround time, relationships with referring
physicians and patient convenience. In our diagnostic centers, we attempt to
obtain the services of the best available radiologists to provide high-quality
interpretations and to provide modern, well-maintained equipment and
well-trained technicians. We attempt to locate our diagnostic centers in areas
which are convenient for physicians and patients and to focus on prompt
performance of diagnostic procedures and turnaround of interpretation reports.
In addition, we believe that the reputation and relationships we have
established with physicians through our outpatient rehabilitation and
outpatient surgery services help us market our diagnostic services to those
physicians and others.
Our diagnostic centers provide outpatient diagnostic procedures performed
by experienced radiological technicians. After the diagnostic procedure is
completed, the images are reviewed by radiologists who have contracted with us.
Those radiologists prepare a report of the test and their findings, which are
then delivered to the referring physician. Our diagnostic centers are open at
hours designed to accommodate the needs of the patient population being served
and the local demand for services.
Because many patients at our rehabilitative healthcare and outpatient
surgery facilities require diagnostic procedures of the type performed at our
diagnostic centers, we believe that our diagnostic operations are a natural
complement to our other services and enhance our ability to market those
services to patients and payors.
OUTPATIENT SERVICES MANAGEMENT. Our outpatient services are managed by
local market managers, who are responsible for all outpatient services in
particular local markets, and regional market leaders, who are responsible for
overseeing the market managers in particular regions. The market leaders report
to division presidents responsible for our Ambulatory Services--East and
Ambulatory Services--West divisions. This management approach, introduced in
September 1999, replaced an earlier system which had separate,
corporate-office-based management teams for each line of business. The new
structure puts significant authority for operations, development and managed
care contracting decisions in the hands of experienced managers who are
positioned to respond to particular local and regional demands, trends and
opportunities, with a full range of centralized corporate support resources
backing them up. We believe that this approach allows us to better leverage our
comparative regional advantage in terms of market share, relationships with
payors, physicians and referral sources, and local market knowledge and
experience.
8
INTEGRATED SERVICE MODEL STRATEGY. Our ISM strategy is an integral part of
our outpatient operations. In major markets, we seek to provide an integrated
system of healthcare services, including, as appropriate, outpatient
rehabilitation services, outpatient surgery services and outpatient diagnostic
services, offering payors the convenience of dealing with a single provider for
multiple services and enhancing cross-referral opportunities among our
facilities. The ISM also includes inpatient rehabilitation services in
appropriate markets. We have implemented our ISM in over 180 of our markets,
and intend as our long-term goal to expand the model into the 300 largest
markets in the United States.
Inpatient and Other Clinical Services Segment
Our inpatient and other clinical services segment includes the operations
of our inpatient rehabilitation facilities and medical centers, as well as the
operations of certain other clinical services which are managerially aligned
with our inpatient services. During the year ended December 31, 2000, our
inpatient rehabilitation facilities achieved an overall utilization, based on
patient days and available beds, of 79.6%. In measuring patient utilization of
our inpatient facilities, various factors must be considered. Due to market
demand, demographics, start-up status, renovation, patient mix and other
factors, we may not treat all licensed beds in a particular facility as
available beds, which sometimes results in a material variance between licensed
beds and beds actually available for utilization at any specific time. We are
generally in a position to increase the number of available beds at such
facilities as market conditions dictate.
INPATIENT REHABILITATION FACILITIES. At December 31, 2000, we operated 120
inpatient rehabilitation facilities with 7,696 licensed beds in the continental
United States, representing the largest group of affiliated proprietary
inpatient rehabilitation facilities in the nation, as well as a 71-bed
rehabilitation hospital in Australia and a 17-bed rehabilitation facility in
Puerto Rico. Our inpatient rehabilitation facilities provide high-quality
comprehensive services to patients who require intensive institutional
rehabilitation care.
We believe that the key factors influencing the inpatient rehabilitation
services business are cost and quality of care, clinical outcomes,
relationships with payors, case managers, discharge planners and referral
sources, and reimbursement rates. We believe that our reputation for quality of
care and cost-effectiveness positions us well with payors and others to compete
for patients. In addition, we believe that the economies of scale that we enjoy
and the standardized clinical protocols that we utilize enable us to operate
our inpatient rehabilitation facilities in a cost-effective manner that we
expect will benefit us when the current cost-based Medicare reimbursement
system for inpatient rehabilitation services is replaced by the new PPS system,
which is expected to phase in sometime in 2001. See this Item, "Business --
Regulation". Further, we believe that our strategy of joint venturing our
rehabilitation hospitals with nearby tertiary-care hospitals, where appropriate
opportunities exist, enables us to enhance our clinical and research
activities, to obtain various support and ancillary services from the
acute-care hospitals without duplication of resources, and to provide a more
coordinated continuum of care for the constituencies served by those acute-care
hospitals.
Inpatient rehabilitation patients are typically those who are experiencing
significant physical disabilities due to various conditions, such as head
injury, spinal cord injury, stroke, certain orthopaedic problems and
neuromuscular disease. Our inpatient rehabilitation facilities provide the
medical, nursing, therapy and ancillary services required to comply with local,
state and federal regulations, as well as accreditation standards of the Joint
Commission on Accreditation of Healthcare Organizations (the "JCAHO") and the
Commission on Accreditation of Rehabilitation Facilities. All of our inpatient
rehabilitation facilities utilize an interdisciplinary team approach to the
rehabilitation process and involve the patient and family, as well as the
payor, in the determination of the goals for the patient. Internal case
managers monitor each patient's progress and provide documentation of patient
status, achievement of goals, functional outcomes and efficiency.
In certain markets, our rehabilitation hospitals may provide outpatient
rehabilitation services as a complement to their inpatient services. Typically,
this opportunity arises when patients complete their inpatient course of
treatment but remain in need of additional therapy that can be accomplished on
an outpatient basis. Depending upon the demand for outpatient services and
physical space constraints, the
9
rehabilitation hospital may establish the services either within its building
or in a satellite location. In either case, the clinical protocols and programs
developed for use in our freestanding outpatient centers are utilized by these
facilities.
A number of our rehabilitation hospitals were developed in conjunction
with local tertiary-care facilities, including major teaching hospitals such as
those at Vanderbilt University, the University of Missouri and the University
of Virginia. In addition to those facilities so developed by us, we have
entered into or are pursuing similar affiliations with a number of our
rehabilitation hospitals which were obtained through our major acquisitions.
Inpatient rehabilitation patients have typically been discharged from an
acute-care setting. Accordingly, we focus on marketing our services to
acute-care hospital discharge planners and to case managers utilized by payors
and case management companies, who are typically influential in determining
appropriate post-acute treatment settings for their patients. In addition, we
market our services to physiatrists, neurologists, neurosurgeons, orthopaedic
surgeons and other physicians involved in the care and referral of patients
suited for inpatient rehabilitation.
MEDICAL CENTERS. At December 31, 2000, we operated five medical centers
with 1,125 licensed beds in four geographic markets, including one facility
managed under contract. These facilities provide general and specialty medical
and surgical healthcare services, emphasizing orthopaedics, sports medicine and
rehabilitation. We acquired our medical centers as outgrowths of our
rehabilitative healthcare services. Often, patients require medical and
surgical interventions prior to the initiation of their rehabilitative care. In
each of the markets in which we have acquired a medical center, we had
well-established relationships with the medical communities serving each
facility. Following the acquisition of each of our medical centers, we have
provided the resources to improve upon the physical plant and expand services
through the introduction of new technology. We have also developed additional
relationships between these facilities and certain university facilities,
including the University of Miami, Auburn University and the University of
Alabama at Birmingham. Through these relationships, the influx of celebrity
athletes and personalities and the acquisition of new technology, all of our
medical centers have improved their operating efficiencies and enhanced census.
Each of our medical center facilities is licensed as an acute-care
hospital, is accredited by the JCAHO and participates in the Medicare
acute-care prospective payment system. See this Item, "Business -- Regulation".
As described above, in the first quarter of 2001 we entered into a letter
of intent to sell our Richmond, Virginia medical center and a related surgery
center. See this Item, "Business - Recent Developments".
Other Patient Care Services
In some markets, we provide other patient care services, including
physician services and contract management of hospital- based rehabilitative
healthcare services. We evaluate market opportunities on a case-by-case basis
in determining whether to provide additional services of these types, which may
be complementary to facility-based services we provide or stand-alone
businesses. These services are included within our business segment with which
they are most closely aligned in the particular local market.
MARKETING
We market our services to patients, payors, physicians, case managers and
other referral sources through a combination of national, regional and local
strategies. We believe that these strategies have allowed us to develop a
strong corporate brand identity, and have enabled us to focus our marketing
efforts on particular demographic factors and competitive strengths in local
and regional markets.
We develop a local marketing plan for each facility based on a variety of
factors, including population characteristics, physician characteristics and
incidence of disability statistics, in order to identify specific service
opportunities. Facility-oriented marketing programs are focused on increasing
the
10
volume of patient referrals to the specific facility and involve the
development of ongoing relationships with area schools, businesses and
industries, as well as physicians, health maintenance organizations and
preferred provider organizations.
Our larger-scale marketing activities are focused more broadly on efforts
to generate patient referrals to multiple facilities and the creation of new
business opportunities. These activities include the development and
maintenance of contractual relationships or national pricing agreements with
large third-party payors, such as CIGNA, United Healthcare or other national
insurance companies, with national HMO/PPO companies, such as First Health and
Multiplan, with national case management companies, such as INTRACORP and
Crawford & Co., and with national employers, such as Delta Airlines,
Georgia-Pacific Corporation, Federated Department Stores, Goodyear Tire &
Rubber and Winn-Dixie.
We also carry out broader programs designed to further enhance our name
recognition and association with amateur and professional athletics. Among
these is the HEALTHSOUTH Sports Medicine Council, headed by Bo Jackson and
involving other well-known professional and amateur athletes and sports
medicine specialists, which is dedicated to developing educational programs
focused on athletics for use in high schools. We have ongoing relationships
with the Professional Golfers Association, the Senior Professional Golfers
Association, the Ladies Professional Golf Association, the Southwestern
Athletic Conference, and other professional and amateur sports organizations,
as well as numerous universities, colleges and high schools to provide sports
medicine coverage of events and rehabilitative healthcare services for injured
athletes. In addition, we have established relationships with or provided
treatment services for athletes from some 40-50 professional sports teams, as
well as providing sports medicine services for Olympic and amateur athletes. In
1996, HEALTHSOUTH and the United States Olympic Committee established the
Richard M. Scrushy/HEALTHSOUTH Sports Medicine and Sport Science Center at the
USOC's Colorado Springs campus.
We maintain a Web site at www.healthsouth.com, which provides information
on the company, health information, targeted information and services for
physicians and patients, links to our Securities and Exchange Commission
filings and press releases, a facility locator and links to other relevant
information, as well as other specialized Web sites. We believe that our Web
sites enhance consumer and physician awareness of our services and locations
and access to those services, as well as providing a valuable resource for
health information related to the services that we provide.
We are a national sponsor of the United Cerebral Palsy Association and the
National Arthritis Foundation and support many other charitable organizations
on national and local levels. Through these endeavors, HEALTHSOUTH and its
employees are able to support charitable organizations and activities within
their communities.
SOURCES OF REVENUES
Most of our revenues come from non-governmental revenue sources. The
following table sets forth the percentages of our revenues from various sources
for the periods indicated:
YEAR ENDED YEAR ENDED
SOURCE DECEMBER 31, 1999 DECEMBER 31, 2000
------ ------------------- ------------------
Medicare ...................... 33.0% 29.0%
Commercial (1) ................ 40.3 43.1
Workers' Compensation ......... 11.5 12.0
All Other Payors (2) .......... 15.2 15.9
----- -----
100.0% 100.0%
===== =====
- ------------------
(1) Includes commercial insurance, HMOs, PPOs and other managed care plans.
(2) Medicaid is included in this category, representing approximately 2% of
1999 revenues and 3% of 2000 revenues.
See this Item, "Business -- Regulation -- Medicare Participation and
Reimbursement" for a description of certain of the reimbursement regulations
applicable to our facilities.
11
COMPETITION
Our rehabilitation facilities compete on a local, regional and national
basis with other providers of specialized services such as sports medicine and
work hardening, and specific concentrations such as head injury rehabilitation
and orthopaedic surgery. The competition faced in each of these markets is
similar, with variations arising from the number of healthcare providers in the
particular area. The primary competitive factors in the rehabilitation
components of our inpatient and outpatient business segments are quality of
services, projected patient outcomes, charges for services, responsiveness to
the needs of the patients, community and physicians, and ability to tailor
programs and services to meet specific needs of the patients. Competitors and
potential competitors include hospitals, private practice therapists,
rehabilitation agencies and others. Some of these competitors may have greater
patient referral support and financial and personnel resources in particular
markets than we do. We believe that we compete successfully within the
marketplace based upon our reputation for quality, competitive prices, positive
rehabilitation outcomes, innovative programs, clean and bright facilities and
responsiveness to needs.
Our surgery centers compete primarily with hospitals and other operators
of freestanding surgery centers in attracting physicians and patients and in
developing new centers and acquiring existing centers. The primary competitive
factors in the outpatient surgery business are convenience, cost, quality of
service, physician loyalty and reputation. Hospitals have many competitive
advantages in attracting physicians and patients, including established
standing in a community, historical physician loyalty and convenience for
physicians making rounds or performing inpatient surgery in the hospital.
However, we believe that our national market system and our historical presence
in many of the markets where our surgery centers are located enhance our
ability to operate these facilities successfully.
Our diagnostic centers compete with local hospitals, other multi-center
imaging companies, local independent diagnostic centers and imaging centers
owned by local physician groups. We believe that the principal competitive
factors in the diagnostic services business are price, quality of service,
ability to establish and maintain relationships with managed care payors and
referring physicians, reputation of interpreting physicians, facility location
and convenience of scheduling. We believe that our diagnostic facilities
compete successfully within their respective markets, taking into account these
factors.
Our medical centers are located in four urban areas of the country, all
with well established healthcare services provided by a number of proprietary,
not-for-profit, and municipal hospital facilities. Our facilities compete
directly with these local hospitals as well as various nationally recognized
centers of excellence in orthopaedics, sports medicine and other specialties.
Because our facilities enjoy a national and international reputation for
orthopaedic surgery and sports medicine, we believe that our medical centers'
level of service and continuum of care enable them to compete successfully,
both locally and nationally.
We potentially face competition any time we initiate a Certificate of Need
project or seek to acquire an existing facility or Certificate of Need. See
this Item, "Business -- Regulation". This competition may arise either from
competing national or regional companies or from local hospitals or other
providers which file competing applications or oppose the proposed Certificate
of Need project. The necessity for these approvals serves as a barrier to entry
and has the potential to limit competition by creating a franchise to provide
services to a given area. We have generally been successful in obtaining
Certificates of Need or similar approvals when required, although there can be
no assurance that we will achieve similar success in the future.
REGULATION
The healthcare industry is subject to regulation by federal, state and
local governments. The various levels of regulatory activity affect our
business activities by controlling our growth, requiring licensure or
certification of our facilities, regulating the use of our properties and
controlling the reimbursement we receive for services provided.
Licensure, Certification and Certificate of Need Regulations
Capital expenditures for the construction of new facilities, the addition
of beds or the acquisition of existing facilities may be reviewable by state
regulators under a statutory scheme which is sometimes referred to as a
Certificate of Need program. States with Certificate of Need programs place
limits on the
12
construction and acquisition of healthcare facilities and the expansion of
existing facilities and services. In such states, approvals are required for
capital expenditures exceeding certain amounts which involve inpatient
rehabilitation facilities or services or outpatient surgery centers. Most
states do not require such approvals for outpatient rehabilitation,
occupational health and diagnostic facilities and services.
State Certificate of Need statutes generally provide that, prior to the
addition of new beds, the construction of new facilities or the introduction of
new services, a state health planning designated agency must determine that a
need exists for those beds, facilities or services. The Certificate of Need
process is intended to promote comprehensive healthcare planning, assist in
providing high quality healthcare at the lowest possible cost and avoid
unnecessary duplication by ensuring that only those healthcare facilities that
are needed will be built.
Typically, the provider of services submits an application to the
appropriate agency with information concerning the area and population to be
served, the anticipated demand for the facility or service to be provided, the
amount of capital expenditure, the estimated annual operating costs, the
relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. Whether
the Certificate of Need is granted is based upon a finding of need by the
agency in accordance with criteria set forth in Certificate of Need statutes
and state and regional health facilities plans. If the proposed facility or
service is found to be necessary and the applicant to be the appropriate
provider, the agency will issue a Certificate of Need containing a maximum
amount of expenditure and a specific time period for the holder of the
Certificate of Need to implement the approved project.
Licensure and certification are separate, but related, regulatory
activities. Licensure is usually a state or local requirement, and
certification is a federal requirement. In almost all instances, licensure and
certification will follow specific standards and requirements that are set
forth in readily available public documents. Compliance with the requirements
is monitored by annual on-site inspections by representatives of various
government agencies. All of our inpatient rehabilitation facilities and medical
centers and substantially all of our surgery centers are currently required to
be licensed, but only the outpatient rehabilitation facilities located in
Alabama, Arizona, Kentucky, Maryland, Massachusetts, New Hampshire, New Mexico
and Rhode Island currently must satisfy such a licensing requirement. Most
states do not require diagnostic and occupational medicine facilities to be
licensed.
Medicare Participation and Reimbursement
In order to participate in the Medicare program and receive Medicare
reimbursement, each facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating to, among other
things, the type of facility, its equipment, its personnel and its standards of
medical care, as well as compliance with all state and local laws and
regulations. All of our inpatient facilities, except for our St. Louis head
injury center, participate in the Medicare program. Approximately 1,178 of our
outpatient rehabilitation facilities currently participate in, or are awaiting
the assignment of a provider number to participate in, the Medicare program.
All of our surgery centers are certified (or awaiting certification) under the
Medicare program. Diagnostic and occupational health facilities are not
certified by the Medicare program. Our Medicare-certified facilities, inpatient
and outpatient, undergo annual on-site Medicare certification surveys in order
to maintain their certification status. Failure to comply with the program's
conditions of participation may result in loss of program reimbursement or
other governmental sanctions. We have developed our operational systems to
attempt to assure compliance with the various standards and requirements of the
Medicare program and have established ongoing quality assurance activities to
monitor compliance.
As a result of the Social Security Act Amendments of 1983, Congress
adopted a PPS to cover the routine and ancillary operating costs of most
Medicare inpatient acute-care hospital services. Under this system, the
Secretary of Health and Human Services has established fixed payment amounts
per discharge based on diagnosis-related groups ("DRGs"). With limited
exceptions, reimbursement received by an acute-care hospital for Medicare
inpatients is limited to the DRG rate, regardless of the number of services
provided to the patient or the length of the patient's hospital stay. Under
acute-care
13
PPS, a hospital may retain the difference, if any, between its DRG rate and its
operating costs incurred in furnishing inpatient services, and is at risk for
any operating costs that exceed its DRG rate. Our medical center facilities are
generally subject to acute-care PPS with respect to Medicare inpatient
services.
The acute-care PPS program has been beneficial for the rehabilitation
segment of the healthcare industry because of the economic pressure on
acute-care hospitals to discharge patients as soon as possible. The result has
been increased demand for rehabilitation services for those patients discharged
early from acute-care hospitals. Freestanding inpatient rehabilitation
facilities have been exempt from PPS, and inpatient rehabilitation units within
acute-care hospitals have been eligible to obtain an exemption from PPS upon
satisfaction of certain federal criteria. As discussed below, freestanding
inpatient rehabilitation facilities and hospital-based inpatient rehabilitation
units are to be placed under a PPS currently expected to be phased in beginning
later in 2001.
Currently, 17 of our outpatient centers are Medicare-certified
Comprehensive Outpatient Rehabilitation Facilities ("CORFs") and 983 are
Medicare-certified rehabilitation agencies or satellites. Additionally, we have
certification applications pending for two CORF sites and 176 rehabilitation
agency sites (including satellites.) Through December 31, 1998, CORFs were
reimbursed reasonable costs (subject to certain limits) for services provided
to Medicare beneficiaries, and outpatient rehabilitation facilities certified
by Medicare as rehabilitation agencies were reimbursed on the basis of the
lower of reasonable costs for services provided to Medicare beneficiaries or
charges for such services. Outpatient rehabilitation facilities which are
physician-directed clinics, as well as outpatient surgery centers, are
reimbursed by Medicare on a fee screen basis; that is, they receive a fixed
fee, which is determined by the geographical area in which the facility is
located, for each procedure performed. From January 1, 1999, CORFs and
rehabilitation agencies are reimbursed on a fee screen basis as well. Our
outpatient rehabilitation facilities submit monthly bills to their fiscal
intermediaries for services provided to Medicare beneficiaries, and we file
annual cost reports with the intermediaries for each such facility.
Our inpatient facilities (other than the medical center facilities) either
are not currently covered by PPS or are currently exempt from PPS, and are
currently cost-reimbursed, receiving the lower of reasonable costs or charges.
Typically, the fiscal intermediary pays a set rate based on the prior year's
costs for each facility. Annual cost reports are filed with our fiscal
intermediary and payment adjustments are made, if necessary.
As part of the Balanced Budget Act of 1997, Congress directed the United
States Department of Health and Human Services to develop regulations that
would subject inpatient rehabilitation hospitals to a PPS, which was expected
to be phased in beginning April 2001, and to be fully implemented by April
2003. The Act required that the rates must equal 98% of the amount of payments
that would have been if the PPS had not been adopted. More recently, the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
amended the requirements of the Balanced Budget Act to require that rates for
federal fiscal year 2002 must equal 100% of the amount of payments that would
have been made if the PPS had not been adopted and to allow inpatient
rehabilitation facilities to elect to transition immediately to full PPS
reimbursement in their first cost reporting year beginning after the effective
date of PPS implementation, instead of having PPS phased in over three cost
reporting years, as originally required. Final regulations implementing
inpatient rehabilitation PPS have not yet been released, and the United States
Department of Health and Human Services has announced that it intends to delay
the scheduled April 1, 2001 implementation date to a later date that has not
yet been determined. In addition, the Act requires the establishment of a PPS
for hospital outpatient department services, effective for services furnished
beginning in 1999. Regulations implementing that requirement became effective
August 1, 2000. We do not expect those regulations to have a material effect on
us.
In June 1998, the Health Care Financing Administration issued proposed
rules setting forth new payment classifications which would significantly
change Medicare reimbursement for outpatient surgery centers. However, these
proposed rules have not been promulgated in final form, and we cannot currently
predict when final rules, if any, will be adopted or the content or effect on
our operations of those rules.
Over the past several years an increasing number of healthcare providers
have been accused of violating the federal False Claims Act. That Act prohibits
the knowing presentation of a false claim to
14
the United States government. Because HEALTHSOUTH performs thousands of similar
procedures a year for which it is reimbursed by Medicare and there is a
relatively long statute of limitations, a billing error or cost reporting error
could result in significant civil or criminal penalties.
Relationships with Physicians and Other Providers
Various state and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts and investment
relationships. These restrictions include a federal criminal law prohibiting
(a) the offer, payment, solicitation or receipt of remuneration by individuals
or entities to induce referrals of patients for services reimbursed under the
Medicare or Medicaid programs or (b) the leasing, purchasing, ordering,
arranging for or recommending the lease, purchase or order of any item, good,
facility or service covered by such programs (the "Fraud and Abuse Law"). In
addition to federal criminal sanctions, violators of the Fraud and Abuse Law
may be subject to significant civil sanctions, including fines and/or exclusion
from the Medicare and/or Medicaid programs.
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services issued regulations describing
compensation arrangements which are not viewed as illegal remuneration under
the Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 Safe Harbor
Rules create certain standards ("Safe Harbors") for identified types of
compensation arrangements which, if fully complied with, assure participants in
the particular arrangement that the OIG will not treat that participation as a
criminal offense under the Fraud and Abuse Law or as the basis for an exclusion
from the Medicare and Medicaid programs or an imposition of civil sanctions.
In 1992, regulations were published in the Federal Register implementing
the OIG sanction and civil money penalty provisions established in the Fraud
and Abuse Law. The regulations provide that the OIG may exclude a Medicare
provider from participation in the Medicare Program for a five-year period upon
a finding that the Fraud and Abuse Law has been violated. The regulations
expressly incorporate a test adopted by three federal circuit courts providing
that if one purpose of remuneration that is offered, paid, solicited or
received is to induce referrals, then the statute is violated. The regulations
also provide that after the OIG establishes a factual basis for excluding a
provider from the program, the burden of proof shifts to the provider to prove
that it has not violated the Fraud and Abuse Law.
The OIG closely scrutinizes healthcare joint ventures involving physicians
and other referral sources. In 1989, the OIG published a Fraud Alert that
outlined questionable features of "suspect" joint ventures, and has continued
to rely on such Fraud Alert in later pronouncements. We currently operate 23 of
our rehabilitation hospitals and many of our outpatient rehabilitation
facilities as limited partnerships or limited liability companies
(collectively, "partnerships") with third-party investors. Six of the
rehabilitation hospital partnerships involve physician investors and 17 of the
rehabilitation hospital partnerships involve other institutional healthcare
providers. Eight of the outpatient partnerships currently have a total of 21
physician limited partners, some of whom refer patients to the partnerships.
Those partnerships which are providers of services under the Medicare program,
and their limited partners, are subject to the Fraud and Abuse Law. A number of
the relationships we have established with physicians and other healthcare
providers do not fit within any of the Safe Harbors. The 1991 Safe Harbor Rules
do not expand the scope of activities that the Fraud and Abuse Law prohibits,
nor do they provide that failure to fall within a Safe Harbor constitutes a
violation of the Fraud and Abuse Law; however, the OIG has indicated that
failure to fall within a Safe Harbor may subject an arrangement to increased
scrutiny.
Most of our surgery centers are owned by partnerships, which include as
partners physicians who perform surgical or other procedures at such centers.
On November 19, 1999, the Department of Health and Human Services promulgated
rules setting forth additional Safe Harbors under the Fraud and Abuse Law (the
"1999 Safe Harbors"). Included in the 1999 Safe Harbors is a Safe Harbor which
would protect payments to investors in ambulatory surgery centers who are
surgeons who refer patients directly to the center and perform surgery
themselves on referred patients as an extension of their practices (the "ASC
Safe Harbor"). Under the ASC Safe Harbor, ownership in a freestanding
ambulatory surgery center will be protected if a number of conditions are
satisfied. Included in those conditions is a requirement that each investor be
either (a) a surgeon who derived at least one-third of his medical practice
income for
15
the previous fiscal year or twelve-month period from performing procedures on
the list of Medicare-covered procedures for ambulatory surgery centers or (b)
not in a position to make or influence referrals to the center, nor provide
items or services to the center, nor an employee of the center or of any
investor. In addition, if all physician investors are not members of a single
specialty, at least one-third of the Medicare-eligible ambulatory surgery
procedures performed by each physician investor for the previous fiscal year or
previous twelve-month period must be performed at the center in which the
investment is made. Since a subsidiary of HEALTHSOUTH is an investor in each
partnership which owns a surgery center and provides management and other
services to the surgery center, our arrangements with physician investors do
not fit within the specific terms of the ASC Safe Harbor. In addition, because
we do not control the medical practices of our physician investors or control
where they perform surgical procedures, it is possible that the quantitative
tests described above will not be met, or that other conditions of the ASC Safe
Harbor will not be met. Accordingly, while the ASC Safe Harbor is helpful in
establishing the principle that a physician investor's interest in a surgery
center partnership should be considered as an extension of the physician's
practice and not as a prohibited financial relationship, there can be no
assurance that such ownership interests will not be challenged under the Fraud
and Abuse Law. We believe, however, that our arrangements with physicians with
respect to surgery center facilities should not fall within the activities
prohibited by the Fraud and Abuse Law.
Some of our diagnostic centers are owned or operated by partnerships which
include radiologists as partners. While such ownership interests are not
directly covered by the Safe Harbor Rules, we do not believe that such
arrangements violate the Fraud and Abuse Law because radiologists are typically
not in a position to make or induce referrals to diagnostic centers. In
addition, our mobile lithotripsy operations are conducted by partnerships in
which urologists are limited partners. Because such urologists are in a
position to, and do, perform lithotripsy procedures utilizing our lithotripsy
equipment, we believe that the same analysis underlying the ASC Safe Harbor
should apply to ownership interests in lithotripsy equipment held by
urologists. In addition, we believe that the nature of lithotripsy services
(i.e., lithotripsy is only prescribed and utilized when a condition for which
lithotripsy is the treatment of choice has been diagnosed) makes the risk of
overutilization unlikely. There can be no assurance, however, that the Fraud
and Abuse Law will not be interpreted in a manner contrary to our beliefs with
respect to diagnostic and lithotripsy services.
While several federal court decisions have aggressively applied the
restrictions of the Fraud and Abuse Law, they provide little guidance as to the
application of the Fraud and Abuse Law to our partnerships. We believe that our
operations are in compliance with the current requirements of applicable
federal and state law, but no assurances can be given that a federal or state
agency charged with enforcement of the Fraud and Abuse Law and similar laws
might not assert a contrary position or that new federal or state laws, or new
interpretations of existing laws, might not adversely affect relationships we
have established with physicians or other healthcare providers or result in the
imposition of penalties on HEALTHSOUTH or particular HEALTHSOUTH facilities.
Even the assertion of a violation could have a material adverse effect upon our
business, results of operations or financial condition.
The so-called "Stark II" provisions of the Omnibus Budget Reconciliation
Act of 1993 amend the federal Medicare statute to prohibit the making by a
physician of referrals for "designated health services" including physical
therapy, occupational therapy, radiology services or radiation therapy, to an
entity in which the physician has an investment interest or other financial
relationship, subject to certain exceptions. Such prohibition took effect on
January 1, 1995 and applies to all of our partnerships with physician partners.
On January 9, 1998, the Department of Health and Human Services published
proposed regulations (the "Proposed Stark Regulations") under the Stark II
statute and solicited comments thereon. On January 4, 2001, the Department of
Health and Human Services published final regulations relating to part of the
Stark II statute (the "Phase I Final Stark Regulations") and announced its
intention to publish a second, "Phase II" set of regulations covering the
remainder of the statute and responding to comments received on the Phase I
Final Stark Regulations at some unspecified future date. The Phase I Final
Stark Regulations, which differ substantially in many respects from the
Proposed Stark Regulations, have a specified effective date of January 4, 2002;
however, recent actions by the new Administration have suspended the effective
date of all regulations that had not yet gone into effect pending its review.
We cannot currently predict whether this suspension will have the effect of
delaying
16
the January 4, 2002 date. In addition, a number of states have passed or are
considering statutes which prohibit or limit physician referrals of patients to
facilities in which they have an investment interest. In response to these
regulatory activities, we have restructured most of our partnerships which
involve physician investors to the extent required by applicable law, in order
to eliminate physician ownership interests not permitted by applicable law. We
intend to take such actions as may be required to cause the remaining
partnerships to be in compliance with applicable laws and regulations,
including, if necessary, the prohibition of physician partners from referring
patients. We believe that this restructuring has not adversely affected and
will not adversely affect the operations of our facilities.
Ambulatory surgery is not identified as a "designated health service"
under Stark II, and we do not believe the statute is intended to cover
ambulatory surgery services. The Phase I Final Stark Regulations expressly
clarify that the provision of designated health services in an ambulatory
surgery center is excepted from the referral prohibition of Stark II if payment
for such designated health services is included in the ambulatory surgery
center payment rate.
Our lithotripsy units frequently operate on hospital campuses, and it is
possible to conclude that such services are "inpatient and outpatient hospital
services" -- a category of designated health services under Stark II. The
legislative history of the Stark II statute indicates that the statute was not
intended to cover the provision of lithotripsy services by physician-owned
lithotripsy providers under contract with a hospital. However, the Phase I
Final Stark Regulations indicate that lithotripsy services provided at a
hospital would constitute "inpatient and outpatient hospital services" and thus
would be subject to Stark II. Based upon the Phase I Final Stark Regulations
and the associated commentary by the Health Care Financing Administration, we
believe that the operations of our lithotripsy partnerships, to the extent that
they involve designated health services, either fall within exceptions
contained in the Phase I Final Stark Regulations or, depending on the
particular situation, might be restructured to comply with them before the
effective date of the Phase I Final Stark Regulations. To the extent
practicable, we intend to take such steps as may be required to cause such
partnerships to be in compliance. If we are required to terminate any of these
relationships, we believe such action will not adversely affect our operations.
In addition, physicians frequently perform endoscopic procedures in the
procedure rooms of our surgery centers, and it is possible to construe such
services to be "designated health services". While we do not believe that Stark
II was intended to apply to such services, if that were determined to be the
case, we intend to take steps necessary to cause the operations of our
facilities to comply with the law.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"). HIPAA, among other things, amends existing crimes and
criminal penalties for Medicare fraud and enacts new federal healthcare fraud
crimes. HIPAA also expands the Fraud and Abuse Law to apply to all federal
healthcare programs, defined to include any plan or program that provides
health benefits through insurance that is funded by the federal government.
Under HIPAA, the Secretary of the Department of Health and Human Services (the
"Secretary") may exclude from the Medicare program any individual who has a
direct or indirect ownership or control interest in a healthcare entity that
has been convicted of a healthcare fraud crime or that has been excluded from
the Medicare program. HIPAA directs the Secretary to establish a program to
collect information on healthcare fraud and abuse to encourage individuals to
report information concerning fraud and abuse against the Medicare program and
provides for payment of a portion of amounts collected to such individuals.
HIPAA mandates the establishment of a Fraud and Abuse Program, among other
programs, to control fraud and abuse with respect to health plans and to
conduct investigations, audits, evaluations, and inspections relating to the
delivery of and payment for healthcare in the United States.
HIPAA prohibits any person or entity from knowingly and willfully
committing a federal healthcare offense relating to a "health care benefit
program". Under HIPAA, a "health care benefit program" broadly includes any
private plan or contract affecting interstate commerce under which any medical
benefit, item, or service is provided to any individual. Among the "federal
health care offenses" prohibited by HIPAA are healthcare fraud and making false
statements relative to healthcare matters.
17
Any person or entity that knowingly and willfully defrauds or attempts to
defraud a healthcare benefit program or obtains by means of false or fraudulent
pretenses, representations or promises, any of the money or property of any
healthcare benefit program in connection with the delivery of healthcare
services is subject to a fine and/or imprisonment. In addition, HIPAA provides
that any person or entity that knowingly and willfully falsifies, conceals or
covers up a material fact or makes any materially false or fraudulent
statements in connection with the delivery of or payment of healthcare services
by a healthcare benefit plan is subject to a fine and/or imprisonment.
HIPAA further expands the list of acts which are subject to civil monetary
penalties under federal law and increases the amount of civil penalties which
may be imposed. HIPAA provides for civil fines for individuals who retain an
ownership or control interest in a Medicare or Medicaid participating entity
after such individuals have been excluded from participating in the Medicare or
Medicaid program. HIPAA further provides for civil fines for individuals who
offer inducements to Medicare or Medicaid eligible patients if the individuals
know or should know that their offers will influence the patients to order or
receive items or services from a particular provider, practitioner or supplier.
In addition, HIPAA mandates, for all healthcare providers, standardization
in the use, storage, and transfer of electronically transmitted healthcare data
and also requires that healthcare providers, payors and clearinghouses adopt
detailed new procedures for ensuring the privacy and security of individually
identifiable health information. In August 2000, the Department of Health and
Human Services published final regulations adopting standards for electronic
transactions and for code sets to be used in those transactions. Those
regulations have a specified effective date of October 16, 2002 for most
providers, including us. In December 2000, the Department released final
regulations establishing standards for the privacy of individually identifiable
health information. The final privacy regulations, which differ substantially
from previously proposed regulations, impose significant limitations on the use
and disclosure of individually identifiable health information by providers,
including us, as well as payors and clearinghouses. The final regulations are
currently scheduled to take effect in April 2003. The final privacy regulations
have been significantly criticized by many parts of the healthcare industry,
and further changes in such regulations or delays in their implementation are
possible.
Compliance with the HIPAA privacy and electronic standards regulations
will require significant changes in current information and claims processing
practices utilized by healthcare providers, including us. It is not possible at
this time to estimate the cost of such compliance. However, we have taken steps
intended to ensure that we will comply with the applicable regulations by their
respective effective dates, and we believe that we will be able to do so
without a material adverse effect on our business, financial condition or
results of operations.
We cannot predict whether other regulatory or statutory provisions will be
enacted by federal or state authorities which would prohibit or otherwise
regulate relationships which we have established or may establish with other
healthcare providers or the possibility of materially adverse effects on its
business or revenues arising from such future actions. We believe, however,
that we will be able to adjust our operations so as to be in compliance with
any regulatory or statutory provision that may be applicable. See this Item,
"Business -- Patient Care Services" and "Business -- Sources of Revenues".
INSURANCE
Beginning December 1, 1993, we became self-insured for professional
liability and comprehensive general liability. We purchased coverage for all
claims incurred prior to December 1, 1993. In addition, we purchased underlying
insurance which would cover all claims once established limits have been
exceeded. It is the opinion of management that as of December 31, 2000, we had
adequate reserves to cover losses on asserted and unasserted claims. In the
fourth quarter of 2000, we formed an offshore captive insurance subsidiary to
which we expect to transition the administration of our self-insurance
programs.
In connection with our October 1997 acquisition of Horizon/CMS Healthcare
Corporation, HEALTHSOUTH assumed responsibility for handling Horizon/CMS's open
professional and general liability claims. We have entered into an agreement
with an insurance carrier to assume responsibility for the majority of open
claims. Under this agreement, a "risk transfer" converted Horizon/CMS's
self-insured claims to insured liabilities consistent with the terms of the
underlying insurance policy.
18
EMPLOYEES
As of December 31, 2000, we employed approximately 53,216 persons, of whom
34,427 were full-time employees and 18,789 were part-time or per diem
employees. Of the above employees, 863 (including 39 part-time or per diem
employees) were employed at our headquarters in Birmingham, Alabama. Except for
approximately 93 employees at one rehabilitation hospital (about 16% of that
facility's workforce), none of our employees are represented by a labor union.
We are not aware of any current activities to organize our employees at other
facilities. Management considers the relationship between HEALTHSOUTH and its
employees to be good.
ITEM 2. PROPERTIES.
HEALTHSOUTH's executive offices occupy a headquarters building of
approximately 200,000 square feet in Birmingham, Alabama. The headquarters
building was constructed on a 73-acre parcel of land owned by HEALTHSOUTH
pursuant to a tax retention operating lease structured through NationsBanc
Leasing Corporation. Substantially all of our outpatient rehabilitation and
occupational medicine operations are carried out in leased facilities. We own
45 of our inpatient rehabilitation facilities and lease or operate under
management contracts the remainder of our inpatient rehabilitation facilities.
We also own 80 of our surgery centers and 41 of our diagnostic centers and
lease or operate under management arrangements the remainder. We constructed
our rehabilitation hospitals in Florence and Columbia, South Carolina,
Kingsport and Nashville, Tennessee, Concord, New Hampshire, Dothan, Alabama,
Columbia, Missouri, and Charlottesville, Virginia on property leased under
long-term ground leases. The property on which our Memphis, Tennessee
rehabilitation hospital is located is owned in partnership by HEALTHSOUTH and
Methodist Healthcare-Memphis Hospitals. We own four of our medical center
facilities and manage one under contract. We currently own, and from time to
time may acquire, certain other improved and unimproved real properties in
connection with our business. See Notes 5 and 7 of "Notes to Consolidated
Financial Statements" for information with respect to the properties we own and
certain related indebtedness.
In management's opinion, our physical properties are adequate for our
needs for the foreseeable future, and are consistent with our expansion plans
described elsewhere in this Annual Report on Form 10-K.
19
The following table sets forth a listing of our primary domestic patient
care services locations (including both facilities owned or leased by
HEALTHSOUTH and facilities under management agreements or similar arrangements)
at December 31, 2000:
INPATIENT
REHABILITATION OCCUPATIONAL OUTPATIENT
FACILITIES MEDICAL MEDICINE REHABILITATION SURGERY DIAGNOSTIC
STATE (BEDS)(1) CENTERS (BEDS)(1) CENTERS CENTERS(2) CENTERS CENTERS
- ----- ---------------- ------------------- -------------- ---------------- --------- -----------
Alabama ...................... 7 (374) 2 (538) 3 36 7 5
Alaska ....................... 3 7 1 1
Arizona ...................... 4 (243) 7 32 4 2
Arkansas ..................... 5 (283) 1 23 2
California ................... 3 (197) 27 58 50 3
Colorado ..................... 1 (64) 1 34 4 6
Connecticut .................. 1 34 5
Delaware ..................... 6 1
District of Columbia ......... 1 1
Florida ...................... 10 (661) 1(281) 8 130 19 8
Georgia ...................... 1 (50) 4 42 4 11
Hawaii ....................... 11 2
Idaho ........................ 2 1
Illinois ..................... 1 (39) 1 50 8 6
Indiana ...................... 4 (208) 3 10 4 1
Iowa ......................... 1 5 2 1
Kansas ....................... 4 (244) 30 1
Kentucky ..................... 2 (80) 2 7 6
Louisiana .................... 4 (267) 3 8 2 3
Maine ........................ 2 (125) 2 8
Maryland ..................... 2 (117) 30 5 13
Massachusetts ................ 10 (764) 1 63 1 2
Michigan ..................... 1 (30) 1 15
Minnesota .................... 15 2
Mississippi .................. 13 3 1
Missouri ..................... 2 (160) 2 58 8 6
Montana ...................... 4 1
Nebraska ..................... 1 6
Nevada ....................... 2 (130) 21 3 1
New Hampshire ................ 2 (74) 8
New Jersey ................... 1 (142) 63 3 2
New Mexico ................... 1 (61) 6 1 1
New York ..................... 1 45 2
North Carolina ............... 41 10 1
North Dakota ................. 2
Ohio ......................... 3 39 8 2
Oklahoma ..................... 3 (153) 1 23 5 3
Oregon ....................... 30 2
Pennsylvania ................. 15 (1,147) 4 81 6 12
Rhode Island ................. 2 2
South Carolina ............... 4 (256) 18 2 3
South Dakota ................. 2 1
Tennessee .................... 6 (350) 42 6 4
Texas ........................ 16 (1,084) 1 (106) 4 123 19 26
Utah ......................... 1 (89) 2 9 3 2
Vermont ...................... 1 2
Virginia ..................... 2 (90) 1 (200) 6 41 1 5
Washington ................... 17 56 4 1
West Virginia ................ 4 (214) 4 1
Wisconsin .................... 9 4
Wyoming ...................... 2
- ------------------
(1) "Beds" refers to the number of beds for which a license or certificate of
need has been granted, which may vary materially from beds available for
use.
(2) Includes freestanding outpatient centers and their satellites, outpatient
satellites of inpatient rehabilitation facilities and outpatient
facilities managed under contract.
20
In addition, at December 31, 2000, we operated six diagnostic centers and
one outpatient rehabilitation center in the United Kingdom, one 71-bed
rehabilitation hospital in Australia and one 17-bed inpatient rehabilitation
facility in Puerto Rico, as well as numerous locations in various states
providing other services. We also provided occupational medicine services at
four industrial plants in Canada. See this Item, "Business -- Recent
Developments", for a description of pending divestiture transactions.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, HEALTHSOUTH may be subject, from
time to time, to claims and legal actions by patients and others. We do not
believe that any such pending actions, if adversely decided, would have a
material adverse effect on our financial condition. See Item 1, "Business --
Insurance" for a description of our insurance coverage arrangements.
From time to time, we appeal decisions of various rate-making authorities
with respect to Medicare rates established for HEALTHSOUTH facilities. These
appeals are initiated in the ordinary course of business. Management believes
that adequate reserves have been established for possible adverse decisions on
any pending appeals and that the outcomes of currently pending appeals, either
individually or in the aggregate, will have no material adverse effect on
HEALTHSOUTH's operations.
SECURITIES LITIGATION
HEALTHSOUTH was served with various lawsuits filed beginning September 30,
1998 purporting to be class actions under the federal and Alabama securities
laws. Such lawsuits were filed following a decline in our stock price at the
end of the third quarter of 1998. Seven such suits were filed in the United
States District Court for the Northern District of Alabama. In January 1999,
those suits were ordered to be consolidated under the case style In re
HEALTHSOUTH Corporation Securities Litigation, Master File No. CV98-O-2634-S.
On April 12, 1999, the plaintiffs filed a consolidated amended complaint
against HEALTHSOUTH and certain of our current and former officers and
directors alleging that, during the period April 24, 1997 through September 30,
1998, the defendants misrepresented or failed to disclose certain material
facts concerning our business and financial condition and the impact of the
Balanced Budget Act of 1997 on our operations in order to artificially inflate
the price of our common stock and issued or sold shares of such stock during
the purported class period, all allegedly in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Certain of the named
plaintiffs in the consolidated amended complaint also claim to represent
separate subclasses consisting of former stockholders of Horizon/CMS Healthcare
Corporation and National Surgery Centers, Inc. ("NSC") who received shares of
HEALTHSOUTH common stock in connection with our acquisition of those entities
and assert additional claims under Section 11 of the Securities Act of 1933
with respect to the registration of securities issued in those acquisitions.
Another suit, Peter J. Petrunya v. HEALTHSOUTH Corporation, et al., Civil
Action No. 98-05931, was filed in the Circuit Court for Jefferson County,
Alabama, alleging that during the period July 16, 1996 through September 30,
1998 the defendants misrepresented or failed to disclose certain material facts
concerning our business and financial condition, allegedly in violation of
Sections 8-6-17 and 8-6-19 of the Alabama Securities Act. The Petrunya
complaint was voluntarily dismissed by the plaintiff without prejudice in
January 1999. Additionally, a suit styled Dennis Family Trust v. Richard M.
Scrushy, et al., Civil Action No. 98-06592, has been filed in the Circuit Court
for Jefferson County, Alabama, purportedly as a derivative action on behalf of
HEALTHSOUTH. That suit largely replicates the allegations originally set forth
in the individual complaints filed in the federal actions described in the
preceding paragraph and alleges that the current directors of HEALTHSOUTH,
certain former directors and certain officers of HEALTHSOUTH breached their
fiduciary duties to HEALTHSOUTH and engaged in other allegedly tortious
conduct. The plaintiff in that case has forborne pursuing its claim thus far
pending further developments in the federal action, and the defendants have not
yet been required to file a responsive pleading in the case.
We filed a motion to dismiss the consolidated amended complaint in the
federal action in late June 1999. On September 13, 2000, the magistrate judge
issued his report and recommendation, recommending that the court dismiss the
amended complaint in its entirety, with leave to amend. The plaintiffs objected
21
to that report, and we responded to that objection. On December 20, 2000,
without oral argument, the court issued an order rejecting the magistrate
judge's report and recommendation and denying our motion to dismiss. We
believed that the December 20, 2000 order failed to follow the standards
required under the Private Securities Litigation Reform Act of 1995 and Rule
9(b) of the Federal Rules of Civil Procedure, and we filed a motion asking the
court to reconsider that order or to certify it for an interlocutory appeal to
the United States Eleventh Circuit Court of Appeals. Oral argument on that
motion was held on March 2, 2001, and the court denied that motion on March 12,
2001. Accordingly, we filed our answer to the consolidated amended complaint on
March 26, 2001. We believe that all claims asserted in the above suits are
without merit, and expect to vigorously defend against such claims. Because
such suits remain at an early stage, we cannot currently predict the outcome of
any such suits or the magnitude of any potential loss if our defense is
unsuccessful.
CERTAIN HORIZON/CMS LITIGATION
On October 29, 1997, we acquired Horizon/CMS through the merger of a
wholly owned subsidiary of HEALTHSOUTH into Horizon/CMS. Horizon/CMS is
currently a party, or is subject, to certain material litigation matters and
disputes, which are described below, as well as various other litigation
matters and disputes arising in the ordinary course of its business.
Michigan Attorney General Litigation Regarding Long-Term Care Facility In
Michigan
Horizon/CMS learned in September 1996 that the Attorney General of the
State of Michigan was investigating one of its skilled nursing facilities. The
facility, in Howell, Michigan, was owned and operated by Horizon/CMS from
February 1994 until December 31, 1997. As widely reported in the press, the
Attorney General seized a number of patient, financial and accounting records
that were located at this facility. By order of a circuit judge in the county
in which the facility is located, the Attorney General was ordered to return
patient records to the facility for copying. Horizon/CMS advised the Michigan
Attorney General that it was willing to cooperate fully in the investigation.
The facility in question was sold by Horizon/CMS to Integrated Health Services,
Inc. on December 31, 1997.
On February 19, 1998, the State of Michigan filed a criminal complaint
against Horizon/CMS, four former employees of the facility and one former
Horizon/CMS regional manager, alleging various violations in 1995 and 1996 of
certain statutes relating to patient care, patient medical records and the
making of false statements with respect to the condition or operations of the
facility (State of Michigan v. Horizon/CMS Healthcare Corp., et al., Case No.
98-630-FY, State of Michigan District Court 54B). The maximum fines chargeable
against Horizon/CMS under the counts alleged in the complaint (exclusive of
charges against the individual defendants, some of which charges may result in
indemnification obligations for Horizon/CMS) aggregate $69,000. Horizon/CMS
denies the allegations made in the complaint and expects to vigorously defend
against the charges. The litigation continued at the pretrial hearing phase for
over a year, including numerous adjournments, and Horizon/CMS is still awaiting
a decision by the court as to which, if any, charges may be brought to trial.
Because of the preliminary status of this litigation, it is not possible to
predict at this time the outcome or effect of this litigation or the length of
time it will take to resolve this litigation.
Lawsuit by Former Shareholders of Communi-Care, Inc. and Pro Rehab, Inc.
On May 28, 1997, Continental Medical Systems, Inc. ("CMS"), a Horizon/CMS
subsidiary acquired in 1995, was served with a lawsuit styled Kenneth Hubbard
and Lynn Hubbard v. Rocco Ortenzio, Robert A. Ortenzio and Continental Medical
Systems, Inc., No. 3:97 CV294MCK, filed in the United States District Court for
the Western District of North Carolina, Charlotte Division, by the former
shareholders of Communi-Care, Inc. and Pro Rehab, Inc. seeking damages arising
out of certain "earnout" provisions of the definitive purchase agreements under
which CMS purchased the outstanding stock of Communi-Care, Inc. and Pro Rehab,
Inc. from such shareholders. The plaintiffs allege that the manner in which CMS
and the other defendants operated the companies after their acquisition
breached its fiduciary duties to the plaintiffs, constituted fraud, gross
negligence and bad faith and a breach of their employment agreements with the
companies. As a result of such alleged conduct, the plaintiffs assert that
22
they are entitled to damages in an amount in excess of $27,000,000 from CMS and
the other defendants. Some of the plaintiffs' claims were dismissed by order of
the court in September 1999. Horizon/CMS believes, based upon its evaluation of
the legal and factual matters relating to the plaintiffs' assertions, that it
has valid defenses to the plaintiffs' remaining claims and, as a result,
intends to vigorously contest such claims. Horizon/CMS has also filed various
counterclaims against the plaintiffs. Because this litigation remains at a
procedurally early stage, HEALTHSOUTH cannot now predict the outcome or effect
of such litigation or the length of time it will take to resolve such
litigation.
EEOC Litigation
In March 1997, the Equal Employment Opportunity Commission filed a
complaint against Horizon/CMS alleging that Horizon/CMS had engaged in unlawful
employment practices in respect of Horizon/CMS's employment policies related to
pregnancies. Specifically, the EEOC asserted that Horizon/CMS's alleged refusal
to provide pregnant employees with light-duty assignments to accommodate their
temporary disabilities caused by pregnancy violated Sections 701(k) and 703(a)
of Title VII, 42 U.S.C. (section)(section) 2000e-(k) and 2000e-2(a). In this
lawsuit, the EEOC sought, among other things, to permanently enjoin
Horizon/CMS's employment practices in this regard. The trial court granted
summary judgment in favor of Horizon/CMS on one count and dismissed the other
count after a jury trial. The EEOC appealed the summary judgment ruling to the
United States Court of Appeals for the Tenth Circuit, but did not appeal the
dismissal of the other count. On July 31, 2000, a three-judge panel of the
Court of Appeals reversed the summary judgment and remanded the case for trial
on the sole remaining count. The matter has not yet gone to trial.
Texas Nursing Facility Litigation
In July 1996, Horizon/CMS was sued in a lawsuit styled Lexa A. Auld,
Administratrix of Martha Hary, Deceased v. Horizon/CMS Healthcare Corporation
and Charles T. Maxvill, D.O., No. 48- 165121, 48th Judicial District Court,
Tarrant County, Texas. The case involved injuries allegedly suffered by a
resident of the Heritage Western Hills nursing facility in Fort Worth, Texas.
Horizon/CMS tendered the claim to its insurance carrier, which accepted
coverage with a reservation of rights and provided a defense through the
carrier's selected counsel in Dallas, Texas. The case went to trial on October
29, 1997, and on November 7, 1997, the jury rendered a verdict in favor of the
plaintiff in the amount of $2,370,000 in compensatory damages and $90,000,000
in punitive damages. On February 20, 1998, the court reduced the jury's verdict
and entered a judgment in the amount of approximately $11,237,000. On August
24, 2000, the Texas Supreme Court upheld the trial court's damage award, as
reduced, and remanded the case for a final recalculation of interest. All
damages in this case less Horizon/CMS's self-insured retention of $250,000 were
covered by insurance.
In addition, Horizon/CMS is the defendant in a case styled Cecil Fuqua, as
Executor of the Estate of Wyvonne Fuqua, Deceased, v. Horizon/CMS Healthcare
Corporation, Civil Action No. 4-98-CV- 1087-Y, United States District Court for
the Northern District of Texas, Fort Worth Division. This case likewise
involved injuries allegedly suffered by a resident at the Heritage Western
Hills nursing facility. Horizon/CMS tendered the claim to its insurance
carrier, which accepted coverage and provided a defense through the carrier's
selected counsel. In October 2000, the court issued a sanctions order
effectively preventing Horizon/CMS from raising any defense as to liability in
the matter, and in February 2001, the jury returned a verdict against
Horizon/CMS for actual damages totaling approximately $2,765,000 (plus 10% per
annum prejudgment interest) and $310,000,000 in punitive damages. Horizon/CMS
has filed various post-judg