Healthcare Firm Seeks a Cure

HEALTHSOUTH Corp., which has traditionally touted its strategy as an integrated health care services provider, has moved to break itself up in the face of a supercharged controversy involving earnings shortfalls, Medicare reimbursements, and a barrage of lawsuits. The firm said it would spin off its highly profitable outpatient surgery centers in a tax-free deal while keeping its rehabilitation business – which is at the center of the Medicare problem – and its diagnostic unit. The company said that an apparent reduction in Medicare payments for rehab patients would cause earnings to come in lower than expected. The announcement triggered a host of investor lawsuits. There may be a question of whether HEALTHSOUTH can pull off the spin-off as a tax-free deal. It must convince the IRS that there is a valid business purpose for the breakup. Robert Willens, a managing director and corporate tax expert at Lehman Brothers, says he is not aware of any spin-off that cleared the IRS based on a change in government reimbursements. However, he notes that spin-offs by regulated companies to foster growth of subsidiaries by getting them away from government restraints have passed the tax test. A HEALTHSOUTH news release stated that the surgery centers would have greater growth opportunities as an independent company and “ready access to the equity and debt markets,” while physicians who were reluctant to team up with the integrated business might find an independent surgery operation more attractive. “Getting access to capital is generally a good business purpose,” Willens notes, “if you can show that your access is improved through a separation. They have to have an imminent need for capital and they must have concrete plans to raise the capital. But if some bankers tell them they can raise capital more efficiently if they were separated, that should work.”