Alvarez & Marsal

When federal agents raided HealthSouth’s Birmingham, Alabama, headquarters in March 2003 to investigate allegations of massive accounting fraud, many predicted that the healthcare giant would implode under the weight of the scandal. The company was initially thought to have overstated its earnings by at least $1.4 billion, but later assessments estimated the fraud at more than $4 billion. 

An A&M team of more than 20 senior professionals faced a daunting situation. Following the SEC charges and additional probes by the Department of Justice and Centers for Medicare and Medicaid Services (CMS), most of HealthSouth’s financial officers, accountants and treasurers stopped coming to work. Several pleaded guilty and began cooperating with investigators. Their departures left no “institutional memory” to help navigate the company’s finances – a tangled web that included fictitious bank accounts and over $550 million in nonexistent cash.

A&M sought to improve operations and protect value by concentrating resources in HealthSouth’s five core divisions. A&M REAS spearheaded lease renegotiations or buyouts from numerous facilities, and eliminated underperforming units. Unfavorable equipment leases and contracts were also renegotiated, while purchasing systems were standardized.

Within months, it was clear that HealthSouth was a viable business, but it still faced the very real threat of bankruptcy. Since HealthSouth had failed to make a $344 million bond payment, creditors were in a position to force a bankruptcy filing at any time. A&M took action and decided to use HealthSouth’s cash to make interest payments totaling about $60 million to creditors. The strategy, which is exceptionally rare in restructuring situations, sent a message to creditors that the underlying business was sound.

HealthSouth continued to build cash on its road to recovery. At a July 2003 stakeholders conference, the company announced its significant earnings power – estimating EBITDA at $650 million. Company officials were confident that HealthSouth could sustain its current debt service.  In October 2003 – just seven months after A&M arrived – HealthSouth was back on track and heading toward a complete recovery.