HealthSouth Suffers a Relapse

HealthSouth (HLSH) was even sicker than some people thought.

The giant health care chain, which has been fighting for its life for nearly a year, revealed on Tuesday that it has now detected up to $4.6 billion worth of improper accounting entries in its past financial statements. Until this week, the company had estimated that its accounting fraud would total at least $1 billion less than that amount.

In its first presentation to the financial community since July, HealthSouth said that a forensic review of the company's books -- now "substantially complete" -- has uncovered $2.5 billion worth of fraudulent entries, up to $1.6 billion in non-GAAP, or generally accepted accounting principles, accounting and $500 million worth of extra goodwill. When the company first launched its review last summer, it had expected to find just $2 billion worth of fraudulent entries and $500 million in non-GAAP accounting.

Shares of HealthSouth -- which bottomed out at 8 cents last year -- tumbled 7.9% to $5.46 following the update.

Nevertheless, HealthSouth insisted this week that it is still on the mend. The company expects to generate nearly $4 billion in revenue -- and clear $650 million in EBITDA, or earnings before interest, taxes, depreciation and amortization -- this year. In the meantime, it has refinanced $355 million worth of debt that it first defaulted on last April. It is now current on all principle and interest payments to its various lenders.

"Today's financing marks an important milestone in HealthSouth's ongoing efforts to complete our restructuring," acting Chairman Joel Gordon announced on Friday. "We believe that this refinancing is a major step towards HealthSouth's recovery."

Yet the company still faces challenges. In a presentation about its different business units, HealthSouth highlighted some of the risks that lie ahead. The company's large inpatient division faces lingering reimbursement threats, and its outpatient satellite clinics are underperforming. Meanwhile, the surgery unit -- one of the company's strongest businesses -- is suffering from margin compression. And the outpatient division has seen revenues fall due to a number of facility shutdowns.