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UV1973

This case was prepared by Research Assistant Jenny Mead under the supervision of Patricia H. Werhane, Ruffin Professor of Business Ethics, and Cindy Eddins Collier, Batten Institute Fellow, Darden Graduate School of Business Administration, and Founder and CEO, Valuations Solutions, Columbus, Ohio. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

HEALTHSOUTH (A)

Michael Vines was troubled and frustrated.1 He had worked in the asset management division at Birmingham’s HealthSouth Corporation, a Fortune 500 company, since 1997, and was increasingly alarmed at some of the accounting practices that he had witnessed. He was fairly certain that some HealthSouth accountants were moving expenses from the company’s income statement to its balance sheet so that they would not have to be deducted all at once from the company’s profits. If the expenses appeared lower than they actually were, the company’s net income would be artificially boosted. Vines knew, for example, that HealthSouth’s sponsorship of a junior league hockey team had been listed on the balance sheet as an Internet cost although it did not belong there and should have been expensed immediately. Vines had raised his concerns with his immediate supervisor, Cathy C. Edwards, and asked her to sign off on his entries, but he was becoming suspicious of her possible complicity in any financial irregularities. He was aware that in one startling December 2001 incident, after being asked by company auditors to produce an invoice for the acquisition of a Kansas facility (which Vines knew did not exist), Edwards doctored the paperwork for an existing Massachusetts facility to look like an invoice for the phantom Kansas facility.

Vines had no idea how widespread this sort of practice was within the company. Weighing on his mind, of course, were the recent scandals at and subsequent downfall of Enron Corporation. Vines had even tried to take matters into his own hands by sending an e-mail to James Lamphron, an auditor at Ernst & Young, HealthSouth’s accounting firm, complaining about what he perceived as questionable practices and suggesting that the auditor examine three particularly suspect accounts. He had not heard from the accounting firm, and assumed that the auditors were ignoring his e-mail. Vines was not an accountant; he had taken classes at a local community college and was most interested in “working with numbers and making sure everything balances at the end of the day.”2 Nonetheless, he knew enough about number crunching to be certain that many of the company’s accounting practices were questionable if not

1 Carrick Mollenkamp, “Missed Signal: Accountant Tried in Vain to Expose HealthSouth Fraud,” Wall Street

Journal, 20 May 2003, A-1. 2 Mollenkamp.

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This document is authorized for educator review use only by NAMAN DESAI, Indian Institute of Management - Ahmedabad until Jan 2019. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860

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fraudulent. Some of the company’s numbers were also suspicious, Vines thought. HealthSouth had reported an income growth of 143% from 1999 to 2000, but sales had only increased 3%. In 2001, despite an 89% increase in income, sales had only risen 8%. It all seemed inappropriate to Vines, but he just was not sure what to do. HealthSouth3

In 2002, HealthSouth was one of North America’s largest outpatient surgery, rehabilitation, and diagnostic imaging companies. The company operated over 1,800 facilities, including rehab hospital and acute-care medical centers, in all 50 states as well as the United Kingdom, Australia, Puerto Rico, Canada, and Saudi Arabia. (See Exhibit 1 for the company’s history.) HealthSouth had a worldwide staff of approximately 50,000 and worked with more than 85,000 referring physicians; its annual sales topped $4 billion. HealthSouth had contracts with Wal-Mart, Goodyear, Delta, JetBlue, and Anheuser-Busch, among other large corporations, and provided coverage for PGA of America and its various sectors (LPGA, Senior PGA), the Professional Bull Riders, 50 professional sports teams, 125 colleges and universities, and 2,500 high schools. The company had treated many high-profile athletes, including Michael Jordan, Bo Jackson, Roger Clemens, Scottie Pippen, Shaquille O’Neal, and Terry Bradshaw.

HealthSouth’s charismatic founder and CEO Richard M. Scrushy (pronounced SCROO- shee), a native of Selma, Alabama, was one of the highest-paid hospital administrators in the United States. He had come from humble beginnings. At 17, he was married, had a child, and worked pumping gas at a service station. With his mother’s help, Scrushy got a job as a respiratory therapist assistant; several years later, he attended the University of Alabama at Birmingham and graduated in 1979 with a degree in respiratory therapy. After teaching at a community college and working five years as a respiratory therapist for a hospital chain, Scrushy decided that he could shake up the health care industry. His plan was to build a network of progressive outpatient surgery centers and rehab clinics, with his primary client target being the maturing Baby Boomer generation.4 He had spotted three trends that he thought augured well for starting such a company: (1) lower reimbursements for medical care, (2) an increased emphasis on rehabilitation over surgery and as a method of getting employees back to work more quickly, and (3) few brand names in the rehabilitation area of the health care industry.5 Scrushy was determined that “out of the sprawling, amorphous U.S. health care industry,” he could “carve a brand-name consumer product.” He said “I felt that we could brand heath care in 50 states, and no matter what city you were in, you could have consistent treatment.”6

3 http://www.healthsouth.com 4 Michael Tomberlin, “Scrushy’s High Profile,” Birmingham News, 23 March 2003, A-1 5 Hoover’s Online, “HealthSouth Corporation Profile,” 2003, http://www.hoovers.com. 6 Anita Sharpe, “Care Incorporated: Medical Entrepreneur Aims to Turn Clinics into a National Brand,” Wall

Street Journal, 4 December 1996, A1. D o

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Boasting to others that he wanted to create the “Holiday Inn” or “McDonald’s of health care”7 and with four friends as investors, Scrushy founded Amcare, Inc., in 1984 with $55,000, and opened its first outpatient center in Birmingham. Scrushy and his fellow investors changed the name in 1985 to HealthSouth Rehabilitation Corporation, and revenues for that year were $5 million. In 1986, HealthSouth went public; profits for that year were $1.1 million, and Scrushy earned $225,000. Its founding purpose (according to its Web site), was to establish a transitional environment between hospital and home and, in so doing, provide both outpatient rehabilitation services and the financial incentive to transition quickly. In 1990, HealthSouth had expanded to 50 outpatient locations, and by 1992, Scrushy’s pay was $1.2 million. To keep costs down and in keeping with its McDonald’s approach to health care, all HealthSouth facilities used the same floor plan and furnishings.

In 1993, HealthSouth acquired more rehab clinics from Tenet HealthCare (formerly

National Medical Enterprises) and founded physician management company MedPartners, Inc. By 1994, it had more than 250 locations, and Scrushy started a real estate investment trust, Capstone Capital Corporation. HealthSouth had $2.5 billion in acquisitions in 1995; the company had 850 facilities and 32,000 employees; Scrushy’s 1996 bonus was $8 million. With salary, bonuses, and stock options, Scrushy took home $106.8 million in 1997.8 HealthSouth’s market value in 1998 was $12 billion and in 2000, HealthSouth’s shares rose 203%, one of the top performances on the S&P 500 index. Over the years, particularly between 1999 and 2001, Scrushy had earned a profit of $77 million by selling 7.7 million shares of his company’s stock. His salary and bonuses were paid in addition to his profits from stock sales. In 2001, his salary was $4 million, his bonus $6.5 million.

To some, Richard Scrushy had changed the physical therapy industry. One Birmingham

News reporter described Scrushy’s accomplishment: “He took the idea of strengthening and stretching injured limbs and joints from cramped hospital wards and mom-and-pop companies and packaged it for Middle America.”9 By the mid-1990s, Scrushy and his company were favorites of Wall Street, and he was profiled in the Wall Street Journal, Business Week, and Fortune, among other publications. HealthSouth had consistently met or beaten earnings forecasts, much to the delight of the company’s executives and investors. (See Exhibit 2 for company’s 2001 financial information.)

Scrushy was a hands-on CEO who routinely summoned the doctors, nurses,

administrators, and case managers from the various HealthSouth clinics and hospitals to instruct them on giving faster service. He had often said, “I want all my doctors at work at 8 a.m. We’ll diagnose on Monday, operate on Tuesday and start rehabbing on Wednesday.”10 Scrushy

7 Sherri C. Goodman, Newhouse News Service, “Despite Scandal, Firm Keeping Name,” Times-Picayune, 27 April 2003, 12.

8 John Archibald, “Ex-CEO’s Property is Piled High; HealthSouth founder target of FBI Probe,” Times- Picayune, 13 April 2003, 1.

9 Russell Hubbard, “Rocket-like Ascent Tumbles Back with Crushed Investors,” Birmingham News, 13 April 2003.

10 Monte Burke, “Back to Life,” Forbes Magazine, Vol. 169,. 2, (January 21, 2002). 56. D o

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frequently visited the clinics and hospitals, primarily to check for bookkeeping irregularities and cleanliness, and was known to swipe his finger on counters and tables and, if there was any dirt or dust, wipe it on the shirt of the facility manager.11 Reimbursements, Medicare, and PPS

From the start, HealthSouth “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.”12 The company depended on reimbursements from third-party payors, primarily private and government. In 2001, HealthSouth revenue sources broke down as following:

Medicare 31.1% Medicaid 2.6% Commercial insurers, managed care plans, workers’ compensation payors, other private pay sources

66.3%

In the section called “Risk Factors,” the annual report contained a warning about payor

pressure to control health care costs and limit the amount of reimbursement. As evidence, the report cited a number of proposals to limit Medicare reimbursement for various services.

Medicare and Medicaid programs began in 1965. To make the programs palatable to the

medical establishment, the federal government promised a generous Medicare reimbursement. Under this system, providers and hospitals made a profit. In the early 1980s, Congress passed two cost-containment measures: the Tax Equity and Fiscal Responsibility Act (1982), and the Social Security Amendments (1983). In an effort to contain acute-care hospital costs, the government phased out its cost-reimbursement system and adopted a prospective payment system (PPS) based on a predetermined payment rate. The hospital could keep the difference between the cost of the medical service and the government-established price, thereby creating an incentive to reduce costs. Special hospitals, including rehabilitation facilities, were exempt from this change. However, the Balanced Budget Act of 1997, designed to promote efficiency in rehabilitation facilities, required these facilities to adopt the PPS. That system was to be phased in beginning on or after October 1, 2000. The government agency responsible for the programs, the Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration, later determined that the earliest feasible implementation date for PPS was on or after January 1, 2002. According to Monte Burke’s article in Fortune:

As the law requires, the new system would establish payment rates so that estimated payments under the PPS are 2% less than the estimated payments that

11 Burke. 12 HealthSouth 2001 Annual Report, Part I, 2. D o

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would have been paid under the existing cost-based system. This provision will result in estimated savings for Medicare beneficiaries and taxpayers of $1.5 billion over seven years.13

As the HealthSouth annual report acknowledged, the crossover to PPS would begin on

January 1, 2002. Scrushy did not seem fazed by the changeover, at least in public. He even claimed that

HealthSouth had eagerly awaited PPS rules because they would create a reimbursement system where HealthSouth’s innovative efforts in reducing the cost of inpatient rehabilitation would finally be rewarded….We believe that the new rules will enhance our 2002 results of operations as they are phased in across our inpatient rehabilitation facilities next year.14 The company’s relationship with the Medicare system had been rocky. In 1997, when

Congress cut Medicare spending by $115 billion over the following five years, HealthSouth suffered, with its 1998 net income dropping 86% to $46 million on revenues of $4 billion. It took several years and strict cost-cutting measures for the company to recover; in 2001, revenue was up 6% and profit up 16%, to $322 million. Other statistics indicated HealthSouth’s recovering financial health. The 1997 per-patient cost was $11,611; in 2001 it was $9,600 per patient. The average patient stay in 1998 was 21.5 days; in 2001 it was 17.5 days. On average, Medicare paid the company $11,200 per patient, leaving HealthSouth with $1,600 in pretax profit. Scrushy, at the start of 2002, estimated that profits would double.15

HealthSouth had specific problems with Medicare over the years. In December 1997, a

former reimbursement specialist filed suit against the company, claiming that it had overcharged Medicare and other federal health programs for equipment it had acquired through GG Enterprises (owned by Richard Scrushy, his mother, Grace, and brother Gerald).16 The government claimed that HealthSouth had paid prices above GG Enterprises’ costs and by doing so, had violated federal regulations governing sale and leaseback transactions with related businesses. Under the Medicare system, companies could not bill providers for more than the cost of products or services or for more than the price of comparable goods or services available elsewhere.17 Scrushy and HealthSouth denied any wrongdoing, but settled with the government in May 2001 with a payment of $7.9 million. Under the Qui Tam provision of the Federal Civil

13 “Medicare to Establish New Payment System for Rehabilitation Hospitals,” Centers for Medicare & Medicaid

Services Office of Public Affairs, November 2, 2000. 14 “HealthSouth Releases 2002 Earnings Guidance,” PR Newswire, December 12, 2001. 15 Burke, 56. 16 Under the federal government’s False Claims Act, an individual can sue a company if he or she believes that

the company is defrauding the government. 17 Mark Taylor, “Another One Pays Up: HealthSouth Settles Medicare Fraud Charges in Whistleblower Case,”

Modern Healthcare, 31, 22, (May 28, 2001): 10. D o

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False Claims Act,18 the ex-employee who had filed the suit received $1.5 million of the settlement.

Although the lawsuits did not become public until the spring of 2002, in 1998 and 1999,

several ex-employees, again under the Qui Tam provision, as well as some patients filed additional lawsuits claiming that some unlicensed personnel were performing physical therapy on patients and that HealthSouth was billing for nonexistent one-on-one therapy. An employee in an Alabama HealthSouth facility claimed that, despite being unlicensed, he had treated patients and that Medicare had been billed as though a licensed physical therapist had administered the treatments. Several ex-employees in Texas filed a similar lawsuit. In a Florida case, a patient claimed that he had been treated for back pain by a HealthSouth facility maintenance worker. The Justice Department joined in several of the lawsuits. Scrushy called these lawsuits “hogwash” and “baseless.”19 Surgery Centers By far the most profitable arm of HealthSouth was its surgery centers, which were partnerships with surgeons. HealthSouth usually owned 50% or more of each partnership. In the role of managing partner, the company provided facilities, staff, and administrative services. The surgeon partners (anywhere from 10 to 50 in each partnership) had a minority interest and received a percentage of the clinic’s profits. Each partnership carried the HealthSouth logo. By 1996, some of the centers were performing outpatient surgeries for procedures as complicated as hip replacements and brain surgery.20 In 2002, there were 203 outpatient surgery centers, approximately 900,000 annual surgical cases, more than 3,500 physician partners in the centers, and annual surgery center revenues of $1 billion.21

18 Qui Tam is a provision of the Federal Civil False Claims Act that allows private citizens to act as “private

attorneys general” in the effort to prosecute government procurement fraud. Qui Tam provides that, for specific actions, a portion of the penalty shall go to the persons who bring such actions and the remainder of the penalty will go to some other institution. U.S. recoveries for Qui Tam cases totaled $7.8 billion as of the end of 2003. For more information see http://www.quitam.com.

19 Associated Press, “Justice Department to Join in Suits Against HealthSouth,” Associated Press Newswires, March 21, 2002

20 Sharpe. 21 Evan Perez and Ann Carrns, “Surgery Partners of HealthSouth Mull Bailing Out,” Wall Street Journal, 8

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Competitors

In 2001, HealthSouth was second among its various competitors.

Company Revenue ($ millions)

Net Income ($ millions)

Net Profit Margin (%) Employees

Tenet Healthcare**† $12,053.00 $ 643.0 5.3% 106,900 HealthSouth 4,380.5 294.2 4.6% 51,537 Sun Healthcare 2,075.2 (69.1) -- 36,000 AmSurg 202.3 14.9 7.4% 845 Horizon Health* $ 127.7 $ 6.8 5.3% 1,369 * August 2001 figures ** May 2001 figures †Although larger, Tenet Healthcare had spun off most of its rehabilitative facilities, and owned primarily hospitals. In 2002, the company came under the scrutiny of the Federal government for fraudulent Medicare billing practices and unnecessary surgeries.

Teamwork & Philanthropy

“Teamwork” appeared to be Scrushy’s mantra; he commissioned and had installed “Pulling the Wagon,” a $100,000 stainless-steel statue that symbolized teamwork and cooperation in front of HealthSouth’s new corporate headquarters, opened in 1997. Sculpted by California artist Aristides Demetrious and measuring 12 × 11 × 32 feet, the statue was based on a stick figure drawing that Scrushy had sketched years previously. The framed original sketch was hung in the corporate offices before it was turned into posters that were hung on the walls of the more than 1,800 HealthSouth facilities in the United States and abroad.

Dubbed by some in the community the “Donald Trump of Birmingham,” Scrushy gave

generously to Birmingham’s schools, charities, and churches. In 2001, he established the Richard M. Scrushy Foundation, with assets of $13 million, which gave to charities such as the Briarwood Christian School, the Scrushy-Striplin baseball field (called “the Scroosh” by fans) at Birmingham-Southern College, the library in Vestavia Hills (a suburb of Birmingham), a University of Alabama/Birmingham building, the local science museum, and a campus of Jefferson State Community College. Many of the buildings bore his name. Scrushy was a regular churchgoer, a member of the Mountaintop Community Church in Birmingham. Some of his charitable gifts included $600,000 toward the $11.5 million cost of Mountaintop’s new building. After a tornado hit the area in 1998, Scrushy donated $250,000 to the clean-up efforts. In 1998, Scrushy was appointed to the Board of the American Red Cross and he immediately made a $230,000 donation; HealthSouth gave $23,309. The HealthSouth Foundation donated $36,000 to the American Sports Medicine Institute (the library is named for Scrushy). Scrushy was also a trustee of the University of Alabama system.

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In 1997, Scrushy entertained George H.W. Bush and showed him the vast HealthSouth network in Birmingham. That same year, the company moved into its new headquarters, “a $38 million Palladian-style building with a dazzling fountain and gleaming sculptures. Scrushy had personally chosen every detail, big and little.”22 HealthSouth had had a good year, with a March BusinessWeek ranking as one of the best performers in the S&P 500 and a $1.6 billion deal for Horizon/CMS Healthcare Corp. Scrushy later sold a part of it for $1 billion. In November 1997, “Scrushy exercised options and sold four million HealthSouth shares for $93.3 million—a windfall he said could be used in a bid for a pro sports team.”23

Throughout these years, both HealthSouth and Scrushy gave generously to politicians, mostly conservative Republicans but also some Democrats. One newspaper said that Scrushy “has been a required stop for scores of Alabama politicians on the fundraising trail.”24 From 1990 until 2003, Scrushy himself had donated $43,000 to a variety of candidates. In 2001–02, HealthSouth employees and company-connected political action committees gave almost $199,000 to politicians and political causes.

In short, HealthSouth was the crown jewel of business for both Birmingham and

Alabama; both the city and the state could not claim any other company—or any other CEO—as large and powerful (and generous) as HealthSouth and Richard Scrushy.

Scrushy Beneath the Surface

As generous as Scrushy appeared to outsiders, Vines knew that the company CEO had a very different reputation within HealthSouth headquarters. Some considered him standoffish and unapproachable, rarely mingling with employees and often using a private back entrance to the company building that took him directly to his penthouse office. Even to outsiders, Scrushy could be fierce in his displeasure. “He dismissed analysts who disappointed him, threaten[ed] to cut off access to reporters who wrote stories he didn’t like, and spent time and energy going after those who insulted him.”25 In 1998, irritated by anonymous negative postings on the HealthSouth Internet message board, Scrushy hired a private detective to track down the culprit, who was then fired from his loading dock job at the University of Pennsylvania Medical Center.

There was also criticism about the makeup of the company’s board, with many of its

members among Scrushy’s close friends. “Over the years, shareholders had complained that HealthSouth was run like a personal fief[dom] of Mr. Scrushy, with many investments in ventures that stood to be profitable for him and other executives and directors.”26 As an example,

22 Jerry Underwood, “Hard Reality Hits Scrushy Wonderland,” Birmingham News, 20 April 2003. 23 Underwood. 24 Mary Orndorff, “Scrushy, PAC Gave Generously to Politicians,” Birmingham News, 23 March 2003. 25 Tomberlin. 26 Simon Romero and Reed Abelson, “HealthSouth Officials Seek to Cut Deals with the U.S.,” New York Times,

24 March 2003, 1. D o

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HealthSouth partnered with his wife’s clothing company to sponsor the Junior Miss America program. Indeed, Scrushy had bankrolled wife Leslie’s lingerie company, Uppseedaisees, which donated proceeds to a charity benefiting female farmers and gave an annual “Hostess Award” rewarding Junior Miss contestants who dreamed up “the most imaginative slumber party.”27

Scrushy did not skimp in his personal life. He owned many mansions, yachts, and several

airplanes, and enjoyed the company of celebrities, whether it was playing golf with Michael Jordan, dining with Warren Buffett, or attending the Grammy Awards with Celine Dion and high-powered music executive Tommy Mottola. One of Scrushy’s best friends was Jason Hervey, the child actor from “The Wonder Years,” who had been hired as senior vice president of media and communications. Hervey produced the company’s “Go For It” roadshow, which emphasized good health practices, particularly for children and teenagers. Scrushy was particularly tuned in to entertainment ventures. He had plans for expanding the “Go For It” concept, with a stage show at Orlando’s Universal Studios and a series of concerts. In 2000, HealthSouth had plans to build a state-of-the-art production studio at its corporate headquarters, but those plans fell through. In the 1980s, Scrushy had a band, “Dallas County Line,” and even in the 1990s occasional played in his new band, “Proxy,” which consisted mostly of his HealthSouth management team, including CFO Bill Owens and assistant vice president Fielding Pierce. Scrushy himself sang and played the keyboard. In 2001, Scrushy and HealthSouth created GFI Enterprises LLC to promote and sign music groups to major recording contracts. As part of GFI, Scrushy hired a music producer to create a girl band, “3rd Faze,” to sing songs of the Britney Spears ilk. Following Up and Following Through As he pondered the situation, Michael Vines was uncertain what to do. Should he follow up on his e-mail to Ernst & Young (which he had sent from home, since it was common knowledge that employee e-mails were monitored) or consider himself to have fulfilled his responsibility to act with integrity? If he did follow through on this situation and insist that someone in authority respond to his concerns, could he claim that he had indeed acted with integrity?

27 Greg Schnedier, “Scrushy’s Sterling Image Tarnished,” Washington Post, 9 April 2003, E1. D o

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Exhibit 1

HealthSouth History at a Glance 1984 Scrushy and four coworkers found Amcare Inc. and open its first outpatient center

in Birmingham.

1985 Amcare becomes HealthSouth Rehabilitation Corporation. Annual revenue is $5 million.

1986 In September, HealthSouth first sells stock to the public. Profits for 1986 reported at $1.1 million. Scrushy’s pay that year: $225,000.

1990 HealthSouth expands to 50 outpatient locations.

1992 Scrushy’s pay tops $1.2 million.

1993 HealthSouth becomes the largest provider of rehabilitative services after acquiring rehab clinics from Tenet Healthcare.

Scrushy and others found MedPartners Inc., a physician management company. MedPartners did really well until 1998, when a merger deal collapsed. Scrushy hired new CEO who transformed company into CareMark RX Inc. Scrushy sold his shares (valued at $6 million) in 2000.

1994 Number of HealthSouth locations rises to 250. Scrushy and Michael Martin start Capstone Capital Corp., a real estate investment trust in Birmingham, as a vehicle to buy health care real estate. Scrushy serves as chairman and recruits his banker, John McRoberts of AmSouth Bank to run it. Company buys 13 HealthSouth facilities in 1994 for $58 million. Market value at its peak is $900 million. Capstone goes public in June 1994. In 1998, Nashville’s Healthcare Realty Trust buys the company.

Marinda Productions forms. “Richard and Jason” radio show, with Richard Scrushy and Jason Hervey.

1995 HealthSouth announces nearly $2.5 billion in acquisitions that would give the company more than 850 facilities and more than 32,000 employees.

1996 Scrushy’s bonus: $8 million.

1997 Scrushy’s country band, “Dallas County Line,” releases self-titled album with songs such as “Honk if You Honky Tonk” and “You’re Too Good Looking to Still Be Looking.”

21 Century Health Ventures, an investment company, is founded by Scrushy and former CFO Michael Martin. Fund receives a $10 million commitment from HealthSouth.

Scrushy’s pay that year: $106.8 million. D o

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Exhibit 1 (continued)

1998 Congressional cuts in Medicare spending have a devastating effect on

HealthSouth. Net income for the year dropped 86% to $46 million on revenues of $4 billion. Richard Scrushy imposes strict cost-cutting measures: a hiring freeze, cuts in his own salary, and sales of less-profitable parts of the company, including the occupational medicine business and a 200-bed hospital.1

Scrushy becomes interim CEO of MedPartners, which was imploding after a series of miscues and a failed merger. HealthSouth’s market value reaches $12 billion.

Scrushy and his wife, Leslie, form Marin Properties LLC, a real estate development company.

1999 Scrushy buys $25 million in HealthSouth shares and hires a lawyer to file defamation lawsuits against people posting unflattering messages on a Yahoo! bulletin board.

MedCenterDirect.com is founded (online sales of hospital supplies). HealthSouth bought $174 million worth of supplies, then bought 6.4 million shares of the company. Eventually, HealthSouth and UBS Warburg (its investment company) put $5 million into the company.

2000 HealthSouth stock becomes one of the top performers in Standard and Poor’s 500 Index when its shares rise 203%.

Upseedaisees, women’s clothing and apparel company (specializing in pajamas) is started by Richard and Leslie Scrushy.

2001 HealthSouth pays $7.9 million to settle allegations it overbilled Medicare for equipment bought from G.G. Enterprises, a company owned by Scrushy’s family members.

Source Medical Solutions (health care technology systems) is founded. Scrushy owns 10% of shares at one point; eventually donates them to the HealthSouth Sports Medicine Foundation.

2002 GG Enterprises (computer supply company) is founded. Owned by Scrushy family members. Sells millions of dollars of computer equipment to HealthSouth.

1 Monte Burke, “Back to Life,” Forbes Magazine 169 no. 2 (January 21, 2002) 56. D o

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Exhibit 2

HealthSouth Financial Information

Income Statement

Year Revenue

($ millions) Net Income ($ millions)

Net Profit Margin

Employees

Dec 01 $4,380.5 $ 202.4 4.6% 51,537

Dec 00 4,195.1 278.5 6.6% 53,216

Dec 99 4,072.1 76.5 1.9% 51,260

Dec 98 4,006.1 46.5 1.2% 51,901

Dec 97 3,017.3 330.6 11.0% 56,281

Dec 96 2,436.5 220.8 9.1% 36,410

Dec 95 1,556.7 78.9 5.1% 26,427

Dec 94 1,127.4 53.2 4.7% 18,423

Dec 93 482.3 6.7 1.4% 14,562

Dec 92 $ 407.0 $ 29.7 7.3% 7,243

2001 Year-End Financials

Debt Ratio 79.1%

Return on Equity 5.3%

Cash ($ mil.) 276.6

Current Ratio 4.84

Long-Term Debt ($ mil.) 3,005.0

Shares Outstanding (mil.) 391.7

Dividend Yield 0.0%

Dividend Payout 0.0%

Market Value ($ mil.) 5,804.7

Stock History

Year Stock Price ($) P/E Per Share ($)

FY High

FY Low

FY Close

High Low Earns. Div. Book Value

Dec 01 18.49 11.25 14.82 36 22 0.51 0.00 9.69

Dec 00 17.50 4.75 16.31 25 7 0.71 0.00 9.11

Dec 99 17.75 4.56 5.38 99 25 0.18 0.00 8.31

Dec 98 30.81 7.69 15.44 280 70 0.11 0.00 8.13

Dec 97 28.94 17.75 27.75 32 20 0.91 0.00 7.99

Dec 96 19.88 13.50 19.31 36 25 0.55 0.00 4.75

Dec 95 16.19 8.19 14.56 46 23 0.32 0.00 4.77

Dec 94 9.84 5.84 9.11 33 19 0.30 0.00 3.12

Dec 93 6.59 3.03 6.31 29 13 0.23 0.00 2.54

Dec 92 9.31 3.81 6.59 37 15 0.25 0.00 2.52

Source: http://hoovers.com

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