HealthSouth CEO Says Obama Plan May Prompt Sites to Close

HealthSouth Corp. (HLS) Chief Executive Officer Jay Grinney said an Obama administration plan to target rehabilitation hospitals may force him to close facilities and would cost $26 million if it were in place now.

The Birmingham, Alabama-based in-patient rehabilitation company fell $1.48, or 9 percent, to $15.02 at 4:03 p.m. in New York Stock Exchange composite trading, the lowest since Oct. 30, 2009. It’s the third straight decline after the administration recommended to Congress $7 billion in cuts to the industry. HealthSouth has about $2 billion in annual revenue.

Adoption of the proposal may force the company to shut a “limited number” of its 94 hospitals, 38 of which would comply with the plan, Grinney said. He called investors’ reaction “just irrational fear,” after Obama proposed Sept. 19 reviving a rule that hospitals show at least 75 percent of patients meet criteria for rehabilitation. The threshold is now 60 percent.

Grinney said Congressional adoption of the president’s “wrongheaded” recommendations isn’t certain. He said his industry isn’t driving increased spending for Medicare, the federal health program for the elderly and disabled.

The company estimates the proposed rule would have cost it $42 million in net operating revenue in the most recent testing period, or a loss of $26 million in earnings before interest taxes and amortization adjusted for reduced hospital-based expenses.

While saying he was “disappointed and perplexed” by the proposal, Grinney leavened his remarks by adding that demand for rehabilitative care and an industry in turmoil represents a “growth opportunity” to take customers from rivals.

Potential Cuts

Investor uncertainty over potential government spending cuts is reducing the stock, said Gary Lieberman, managing director of Wells Fargo Securities. Lawmakers must make at least $1.2 trillion in cuts by year’s end, or automatic, 2 percent spending cuts will be made to Medicare and other government programs.

“It’s probably more likely that we end up with a 2 percent across-the-board Medicare cut,” Lieberman said. “But investors are hesitant to take the risk they could see bigger, targeted cuts.”

In the worst case, Grinney said, “maybe the pie gets smaller on a one-year reset basis, but once that happens, that pie continues to grow and we’ll continue to take market share. We are the strongest provider in our space so the impact is not going to be equal across all providers.”

The bleakest scenario for HealthSouth, if Congress adopts all of the administration’s recommendations, is unlikely to happen, said A.J. Rice, a senior analyst with Susquehanna Financial Group.

To contact the reporter on this story: Carol Eisenberg in Washington at ceisenberg1@bloomberg.net

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.