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Breathing Life Into HealthSouth


HealthSouth Corp. (HLSH), the once-prominent company laid low by the alleged crimes of its flamboyant founder, Richard M. Scrushy, is one of those places a certain kind of ambitious would-be chief executive gets excited about. In the past 30 months, a key bondholder threatened to push it into bankruptcy. The company was charged with Medicare fraud, investigated by the Securities & Exchange Commission, and sued by investors. Its accounting was a shambles. Oh, and the nationwide chain of rehabilitation and surgical facilities continued to rely on Medicare for 45% of its revenues, even as new guidelines that would cut into its business were enacted.

What's not to love about a job like that?

That's how Jay Grinney, a 53-year-old former HCA Inc. executive who took over last May, feels, anyway. But then, he's also the kind of person who chose to work part-time shoveling out pens at a turkey farm while his classmates at St. Olaf College in Northfield, Minn., sorted books in the library. "I just like tackling things other people don't want to touch," he says with a grin.

Of course, Grinney also came to HealthSouth with the conviction that if he could stave off doom, the $3.8 billion company would be at the nexus of two powerful trends: the aging of the baby boomers -- which should create more demand for the physical therapy and rehab services that HealthSouth offers -- and the overall push by Medicare and HMOs to move patients out of traditional hospitals and into the kind of lower-cost specialty centers that HealthSouth operates. And while HealthSouth was nowhere near as profitable as it appeared under Scrushy, whose trial on 58 criminal charges connected to the alleged accounting fraud began on Jan. 25, the company was still generating some $600 million in cash flow amid all the turmoil. "I really believed that if we could deal with all of these rocks in the road, this company was sitting in the sweet spot of where health care is moving," Grinney says.

DEATH WATCH

One reason he's so sure is that he had worked for years as an administrator in hospitals, the same institutions from which HealthSouth was taking business. After earning an MBA and a master's degree in health administration from Washington University in St. Louis in 1981, Grinney joined Houston's Methodist Hospital as a management trainee. Nine years later, he jumped to Columbia Healthcare Corp. (HCA); soon he was in charge of two dozen hospitals and had developed a reputation as a meticulous administrator and tough negotiator. When talks with a Houston hospital that Columbia was hoping to acquire broke down, Grinney bought land next door to build a competing facility in its shadow. "Jay always has a Plan B," notes Mike Snow, a former HCA executive who is now HealthSouth's chief operating officer.

After Columbia merged in 1994 with what was then called Hospital Corporation of America, Grinney continued his ascent and within two years was overseeing about 100 hospitals. In that position he had to deal with increasingly contentious decisions about which facilities to spin off or sell after the merger, and he was privy to the company's negotiating strategy as it settled its own Medicare billing scandal in 2002. But friends say Grinney believed that as a former Columbia exec, he had risen as far as he could. "I think he knew that the next CEO was going to come from the HCA side," says longtime friend William Remington. So despite warnings from some friends and family, he headed to HealthSouth.

With the company on death watch, Grinney jumped right into the bondholder dispute, working out a settlement that cost HealthSouth $49 million. In early January, he agreed to end the Medicare fraud suit with a $325 million payment. That leaves an SEC probe, private investor suits, and negotiations for a new credit line. While Grinney and his predecessor, interim CEO Robert P. May, have closed nearly 300 unprofitable rehab and diagnostic centers, nearly one-fifth of HealthSouth's total, analysts say dozens more could go. And almost two years after federal authorities raided company headquarters in March, 2003, HealthSouth still hasn't been able to file an audited financial statement; Grinney says it will be another year before the company can give timely quarterly reports.

As if all of that weren't trouble enough, the company faces some daunting challenges to its basic businesses. For one, the propensity of medical-equipment makers to provide easy financing means that more orthopedic surgeons and other specialists now have the equipment to perform their own MRIs -- a test that they previously outsourced to companies like HealthSouth. Even worse, while Medicare's general thrust is toward independent rehabilitation facilities such as HealthSouth's, a new billing guideline restricts the types of patients who can be admitted. Those recovering from a single hip replacement, for example, are now being steered toward nursing homes.

This change alone could shave HealthSouth's cash flow by $118 million over the next three years, according to Balaji Gandhi, an analyst at Pacific Growth Equities LLC. "No matter what they do, the Medicare changes are going to make it difficult for them to grow revenues," he says. Grinney hopes to offset those losses by moving HealthSouth into the services he believes will be in great demand in coming years, such as skilled nursing and home health care.

And one day, when the Scrushy trial is over and HealthSouth's legal problems are behind it, Grinney hints he may change the company's name. If he could sell HealthSouth's palatial headquarters, sitting on 74 acres overlooking Birmingham, Ala., he would do that too. But so far, no other local company can afford it.

By Dean Foust in Birmingham, Ala.


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