HealthSouth Completes $170 Million Acquisition After Rocky Quarter

HealthSouth Corporation (NYSE: HLS) has completed its $170 million acquisition of CareSouth Health System Inc., expanding its home health and hospice footprint and furthering its strategy of building integrated post-acute services that span inpatient and at-home settings.

The CareSouth acquisition was finalized less than a week after HealthSouth announced its third quarter 2015 financial results. While the numbers were not stellar across the board, company leaders highlighted positive results in the home health arena and emphasized that the CareSouth acquisition should feed that success.

In particular, HealthSouth is creating a referral stream between its inpatient rehabilitation facilities (IRFs) and home health business unit, Encompass. HealthSouth acquired the privately held Encompass for about $750 million in 2014.

During the third quarter of 2015, HealthSouth’s home health agencies received 1,671 admissions from HealthSouth IRFs, which is an approximate 50% increase year-over-year, CFO and Executive Vice President Douglas E. Coltharp told analysts.

“The opportunity for clinical collaboration between our business segments will expand with the acquisition of CareSouth which will add 14 markets overlapping with HealthSouth IRFs,” he added. “Upon completion of the CareSouth acquisition, we will have a home health presence in 71 of our 120 IRF markets for an approximately 59% overlap.”

Overall, the CareSouth acquisition adds 45 new locations.

The Encompass acquisition helped HealthSouth grow revenue, which increased 30% to $778.6 million from a year prior. But higher costs led to rough results overall for Q3.

The company lowered its per-share earnings estimate for the year from the $2.11 to $2.17 per share range to $1.94 to $1.99.

The IRF segment was a cost driver. Issues included a problem with one Medicare Administrative Contractor’s claim denial patterns. HealthSouth and other providers contacted the Centers for Medicare & Medicaid Services (CMS), and the agency said it would work with the MAC to resolve the issue, executives on the earnings call said.

However, the situation contributed to a sequential increase of nearly $4 million, or 21%, in prepayment denials that led to incremental bad debt expense, said President, CEO and Director Jay F. Grinney.

Other headwinds came from higher labor costs and growth in Medicaid and managed care, which reimburses at a lower rate than Medicare and other payors.

While the quarter was “disappointing,” Grinney said he is optimistic about 2016.

Changes to the employee health plan, new staff recruitment, and the advantages to be accrued though the CareSouth acquisition and others should make it a “very good year,” he said.

Written by Tim Mullaney