It's only fitting that HealthSouth (Nasdaq: HLSH.PK ) is in the rehab business, because this company needs a lot of it. Rendered almost incapacitated by one of the larger frauds of the Bubble Era, the company is hoping to emerge phoenix-like, justifying the patience of long-suffering employees and whatever long-term investors have hung on throughout this whole mess.
To its credit, the new (and much improved) management team has already put a lot of matters to rest. A lot of money will be flowing out to resolve litigation with the SEC, shareholders, and Medicare, but at least the amounts are more or less known. The company also has restructured its debt to create what should be ample breathing room for a recovery, and there is now greater focus on more run-of-the-mill issues like containing costs and driving revenue growth.
That's not to say that HealthSouth's in the home stretch. Revenue dropped another 7% this quarter, as the company dealt with both a tough pricing environment (about 46% of revenue comes from Medicare) and lower patient volumes. Operating performance is a bit more challenging to assess; when I readjust for various items and charges, it looks like operating income was nearly cut in half. Likewise, reported operating cash flow was negative for the quarter, and adjusted EBITDA was down by about one-third.
This is the mother of all turnaround stories, though, so I don't really think quibbling over what the "real" operating numbers are is all that important. In my view, driving more admissions, firming up physician relationships, and competing more effectively with the likes of Rehabcare (NYSE: RHB ) , AmSurg (Nasdaq: AMSG ) , and United Surgical Partners (Nasdaq: USPI ) is more important.
Likewise, it's important that the company continue to make progress with the 75% Rule -- a Medicare rule that, simply put, requires a certain percentage of patients to have certain specific conditions or else the reimbursement rates are lower. And let's not forget cost control and a return to positive cash flow -- a debt restructuring bought the company time, but not an indefinite free pass.
Much about this company is still a mess -- UnitedHealth (NYSE: UNH ) it ain't. (Yes, I know, they're totally different businesses.) I believe that HealthSouth's position as the largest operator of inpatient rehab facilities is worth something -- likely something more than the stock is worth today. Just be very careful, fellow Fools --HealthSouth may indeed return from the ashes, but it could still burn the unwary.
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Stephen Simpson
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